Photo: Reuters
Photo: Reuters

Opinion | Energy efficiency and climate change

Up to half of current global annual emissions could be reduced through more efficient use of energy in kitchens, residential buildings and transport

The impact of climate change is being felt by everybody and everywhere. Extreme weather conditions, air pollution, crop failure, biodiversity losses, and much more are affecting both human health and natural wealth. More than 70% of India’s population is exposed to outdoor air pollution, which has contributed to one in eight deaths and has reduced the average life expectancy of Indians by nearly two years. The cost of not addressing global warming today would far exceed the expense of addressing it in the future.

Energy production and consumption remains the largest contributor of global carbon emissions and greenhouse gas. Our understanding of how best to manage the climate change agenda is still evolving. Is the global warming agenda best addressed through carbon-pricing reforms or other policy interventions aimed at improving energy efficiency, and promoting social and community green initiatives? Carbon pricing has attracted more attention in recent years, as it goes to the source of the problem and puts a price on carbon pollution as a means of bringing down emissions. It shifts energy investments towards cleaner options by making fossil fuels more expensive relative to low-carbon fuels, and renewable energy. Although global investments in renewable energy has increased rapidly in recent years, its share in the global stock of energy is still very small.

It is estimated that nearly 70% of the global carbon emissions could be reduced by increasing energy efficiency. Most countries are more advanced on renewable energy compared to energy efficiency. Many quick wins on energy efficiency that have been overlooked in the past can be given a bigger seat at the table, including energy efficiency in the kitchen, residential buildings, industries, transport, utilities, and energy labelling. Besides carbon-pricing reforms, a package of additional interventions is needed to internalize externalities that are much more significant in developing countries compared to advanced countries and play an import role in increasing energy efficiency (see Frances Stewart and Ejaz Ghani, 1991, How Significant Are Externalities For Development?, World Development). Increasing energy efficiency is also a prerequisite for most developing countries for preparing them to move towards more expensive energy system needed to deal with carbon capture and storage, and other technology solutions.

Has India improved energy efficiency? Yes. Its energy intensity has declined during the last decade. China’s energy intensity is roughly 1.5 times that of India. While we may instinctively rank energy efficiency across countries, the trends within countries are hard to add up. The aggregate energy efficiency trends comprise spatial and industrial developments in energy usage. Cities and urban settings increase energy efficiency and reduce the cost of electricity use per output level because of denser customer bases and more efficient plant sizes for local energy producers. However, large industrial enterprises in India are moving away from cities and opening plants in rural areas to remain competitive. Empirical analysis of manufacturing enterprises in India shows that average electricity consumption is much higher in rural regions compared to urban regions. Small and medium-sized enterprises have the most difficult time as their modest plant scale does not justify extensive investments in self-provision power generation capacity, and their higher levels of operation make them more vulnerable to uncertainty than larger enterprises.

Rising spatial disparities in energy efficiency within India is a worrying trend (see Ejaz Ghani, A.G. Grover and W.R. Kerr, Spatial Dynamics Of Electricity Usage In India, World Bank Policy Research Working Paper No. 7055). Developed states in India have improved energy efficiency. But electricity usage per unit of output is twice the level in lagging states compared to leading states. Whether India’s structural and spatial transformation will exacerbate or alleviate energy efficiency is important for issues ranging from reducing power blackouts to stemming rising pollution levels. How developing countries manage industrialization, urbanization and infrastructure investments will have vital environmental implications.

Is energy, labour, or capital a bigger constraint to growth in India? A comparison of energy distortion with distortions in labour, capital and land markets shows that land and building access is a bigger constraint for enterprises than energy access. Land and building costs per unit of output are rising for all sectors of Indian manufacturing. This trend is in sharp contrast to the broad-based declines in energy usage per unit of output. Land and building usage per output unit for the organized sector is two to three times larger than electricity usage per output level, and for the informal sector, land and building usage tends to be 5-10 times larger than electricity usage. This is not to say that India cannot make substantial improvements upon its current energy position.

There remains a huge potential for energy efficiency gains in most industries, ranging from 46-88% in textile industry, to 43-94% in paper and pulp industry, to 51-92% in iron and steel industry. Energy efficiency gain policy will need to go beyond industries and enter our kitchen, buildings and transport. Energy policy will also need to focus much more on rural regions that are the future drivers of growth. Energy outages are common in rural areas, where unreliable energy supply forces firms to invest in self-generation capacity.

Thanks to a rapidly rising middle class, developing countries have raised their ambitions for a faster and greener growth. The younger population in the developing world compared to an ageing population in the developed world has increased the demand for less polluted kitchens, electric vehicles and energy-efficient technologies. Up to half of global annual emissions could be reduced through more efficient use of energy in kitchens, residential buildings and transport. Improved energy efficiency is a win-win for everybody. Energy-efficiency planning is prevalent globally, but the quality of targets and specifications could be improved. There is a big market potential for scaling up energy efficiency through green mortgage, green bonds, tax incentives, credit lines with banks for energy efficiency activities, and public private partnerships in energy sector investments.

Ejaz Ghani is lead economist at the World Bank.

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