Discussions on this issue generally take either an ethical or an economic perspective, with very few considering the politics of climate change negotiations. Yet, that perspective is particularly important for India, because the costs of climate change are so high for it.

By some measures India has the most to loose from climate change. This is not surprising given the country’s vast rural population, overwhelmingly dependent on natural weather patterns. Intuitively, India should therefore not only be acting forcefully to help its population adapt, it should be encouraging all developed economies to tackle climate change convincingly. Yet, India has resisted calls for binding emission cuts that would spur other countries to follow and has also avoided taking a lead role in negotiations on the issue.

Such resistance can perhaps be explained by the fact that western policymakers have seldom acknowledged the vulnerability of the developing world. Nor have their policy proposals, including Kyoto, included substantive provisions for helping vulnerable countries adapt. In the absence of assistance on adaptation, India has little incentive to participate in global mitigation efforts. Instead, India’s approach reflects the advice of economist Thomas Schelling that given their limited ability to adapt, “the best way for developing countries to mitigate global warming is through economic growth.”

We are presented, therefore, with a dilemma. In the long run, India would benefit from a collective response to global warming. But in the short term and with no agreement on a post-Kyoto framework, a unilateral strategy of high emissions growth would be more beneficial. Both parties in this situation would benefit from cooperating, but cooperation is hindered both by trust and the asymmetrical cost of cooperation.

The Case for Engagement

Such cooperation could be pursued for two reasons. The first is merely existential – anything that triggers a collective mitigation response from the developed world helps India. But a more compelling argument is political – by not participating in negotiations India risks the creation of a framework that does not reflect its concerns (see Why India Must Act).

There are unmistakable signs that this will happen, particularly with American business lobbying for a “global framework” that prevents balkanization of regulation, reduces operational uncertainty and prevents dilution of their competitive advantages. Last year the American Congress proposed legislation to tax imports from countries that do not restrict carbon emissions. Early this year, the European Commission too announced it was considering import taxes for carbon-heavy imports, triggering the prospects of a trade war with China and India.

There are useful parallels here to study from the incorporation in 1995, of the TRIPS agreement. The TRIPS Agreement came into being when the US, Europe, Japan, and Canada (known then as “the Quad”) decided to create a new international framework encompassing intellectual property. Rather than attempt to modify the GATT, they instead created the World Trade Organization, and forced developing countries to accept the TRIPS agreement, along with two others. Since developing countries did not participate in negotiations, their concerns were not reflected therein – a bias that has not been adequately corrected since despite the Doha Declaration on TRIPS and the currently stalled Doha “development” round. The lesson is simple – it is better to establish a favorable international policy, rather than try to change such a policy after the fact.

The Case for Disengagement

If the case for engagement is strong, the case for waiting for action by others is even stronger, though less obvious. Arguments for not participating in negotiations lie in the dynamics of bargaining power – and how participation in negotiations affects that power.

Agreement in international negotiations occurs not because there is an economic or ethical case for it. Rather, it is based on quid pro quo. Countries that loose from the agreement join a treaty when they are appropriately compensated by those that gain.

So, who looses and who gains from climate change?

The economic models of Nordhaus & Boyer estimate the economic cost of global warming will be highest for India, Africa, and Europe. In comparison, Russia will receive a mild boost to its GDP, while the impact on America and China is expected to be relatively low. This explains why Europe and Africa are enthusiastic for a collective response. It also explains why America did not join Kyoto – because the treaty did not compensate it sufficiently for the economic costs of carbon mitigation.

This suggests it may be smart for India not to participate in ongoing negotiations just yet. As a country that looses from climate change and benefits directly from a collective response to it, India’s case for any compensation is weak. India’s bargaining power derives not from its ability for give-and-take, but rather from the world’s desire to include it in a future treaty. The moment India indicates a desire to participate in those negotiations it weakens its own bargaining power.

A Middle Path: Free Riding on China

How then is India to proceed? One option, perhaps, may be to free ride on China’s negotiations with the US. China is the counter-point to the US within the developing world – it looses little from climate change, yet its involvement is essential to the success of any future treaty. Therefore, China is much better positioned to bargain for compensation (e.g. technology transfer, R&D financing, or adaptation assistance), and should therefore be at the vanguard of negotiating a climate treaty with the US and EU.

There is still much India can do, as it reiterates the principle of “common but differentiated responsibility.” For instance, India needs to lead efforts to reframe the issue of climate change as one of adaptation, not mitigation (which is a Euro-centric view). It also should work closely with major emerging economies to define a collective bargaining position for the developing world in return for participation in a climate change treaty. Not only would such bargaining improve the potential outcome in favor of the developing world, it would also support and reflect India’s political rise and ability to convene.

Conclusion

A climate change treaty that binds India to mitigating action is no longer an option but a virtual certainty. Such a treaty will become fact either through negotiation or through unilateral measures by the developed world. To avoid lockout, India must have a strategy for addressing such negotiations.

Current disagreement between India on the one hand and Europe and the US on the other is unlikely to be resolved till a new treaty addresses the dilemma faced by India. That will essentially involve payments from winners of the agreement, to the loosers. Some of the elements of such a payment system are already in place, such as Kyoto’s Adaptation Fund, but they must be substantially expanded. Domestically, India should continue to cherry-pick and implement initiatives that are domestically economically viable to reduce emissions growth. But at the international level, India’s best strategy for negotiations may simply to promote China as a collective bargainer and signal its own resistance to bargaining – a signal which up to a point will strengthen India’s position.

That said, the field is not well understood, with a lot of hype reminiscent of the dotcom bubble. Two articles today shed a skeptical light on the sector.

In an oped titled “Global Warming, Inc.“, the Wall Street Journal takes a skeptical view of the alternative energy industry, arguing that the hiring by Kleiner Perkins of Al Gore suggests the industry does not really have an economically sustainable model, and remains dependent on government subsidies:

Nope, but then again alternative energy has never fit the usual venture model. Jack Biddle, co-founder of Novak Biddle Venture Partners, says there’s a reason few start-up companies try to build commercial jetliners. “Large, complex systems with slow deployment cycles do not play to venture’s strengths. The whole idea with venture-backed companies is speed, speed, speed.” Mr. Biddle says the size and complexity of energy systems “make 787s look like tinker toys. You need lots of capital, lots of time, lots of people.”

Which leads us to suspect that maybe Mr. Gore has been hired by Kleiner Perkins for more than his technological knowhow, investment acumen, or global vision. His new partners may have hired him for the more prosaic task of getting 60 Senate votes to keep those taxpayer greenbacks coming.

In a separate article, CNET asks why First Solar stands alone (for background, read how its stock went from $20 to $220 in one year)? Among the many conclusions, is one relevant to this discussion:

Patient Investors. John Walton, of the Walton family fortune, was an early investor and stuck by the company through the very difficult early years. Interestingly, Myers noted that none of the big solar success stories have been emerged from the usual Silicon Valley path of being fostered along and funded by VCs, which usually want a return after five years or so. Instead, these companies have taken years to incubate.

When the dotcom bubble burst, all the venture capitalists needed a new place to park their money. Luckily, climate change happened and cleantech became the new dotcom (see chart, and this post on evolution of the issue). But these articles suggest that venture capital may have to tweak its model, to accommodate longer innovation cycles, if it is to truly address the issue (of energy efficiency and use), rather than simply make use of subsidies. It also means that public policy will continue to be important, and developing countries risk being left out of the innovation cycle, if they are not aggressive in encouraging innovation in the sector.

Update: Separately, Cleantech.com reports (also on CNET) that OPEC nations have put up USD 750 million for a cleantech venture fund.

And what does this have to do with peace?

Last year, the prize was awarded to Yunus and the Grameen Bank, recognizing the need for poverty alleviation for lasting peace. Never mind that the link between microfinance and poverty alleviation is tenous at best, I cheered nonetheless because Yunus has made other significant contributions, not least of which is to prove that the poor can be part of an economic cycle.

But now, in trying to ride the climate change bandwagon, the Nobel Committee is going too far. It is turning itself into a follower of what is cool in the development community. Last year was microfinance, this year climate change, next year who knows.

I have another candidate pair for the Peace Prize - Paul Wolfowitz and Donald Rumsfield. Through their combined arrogance and incompetence these two turned Iraq into a mess. But in the process, they have set back America’s intervetionist foreign policy decisevly. No longer will, or can, the US act alone in the world. Surely, that is an outcome worth celebrating, even if it was not the intended one.

They deserve the prize no less than Al Gore. Certainly, he did much to highlight climate change and his movie made a lot of money. So perhaps he deserves the Academy Award for “most politically savvy film”. But the Nobel?

This year’s choice for the Prize bodes ill for the world. Maybe the Nobel Committee could not find any real peace makers and champions. Perhaps it is a sign that the world is sliding into chaos - in the Middle East, Burma, and elsewhere, and that democracy is so out of favor that even the Nobel Committee dare not celebrate it. Or perhaps, the Nobel Committee couldn’t be bothered to really go out there and look at who’s really doing the work. It would much rather just sit in Stockholm and bask in the glory of whoever the world has already embraced in any given year.

Yet, affluent countries press the poor to accept a very different approach. They urge the developing countries to strike a “balance” between development and climate-change mitigation. Their argument is that the industrialized countries are unable, or unwilling, to reduce their own greenhouse-gas emissions on the scale required for limiting climate change within a certain range. Therefore, according to this line of reasoning, developing countries should curb their rising greenhouse-gas emissions, even at the cost of slowing down development.

The proposal fails to meet the tests of efficiency as well as equity. By slowing development, the proposal would undermine the efforts of poorer countries to build up a capacity to adapt to climate change. It would increase the vulnerability of developing countries to the impacts of climate change. It is thus a deeply flawed response to climate change. 

Any future agreement on climate change must fully conform to the framework convention, which correctly reflects the relationship between climate change and sustainable development.

Ambassador Dasgupta, in spite of his substantive insights on climate change policy negotiation, has mistaken ethics for politics. Any future agreement on climate change must confirm - not to the framework convention - but to what rich and poor countries agree to give and take. Mr. Dasgupta repeats the standard Indian line of “common but differentiated responsibility”, but the sad irony is that standing on a pedestal and reading the principles of the UNFCCC will neither solve the problem (of climate change) that threatens the poor, nor offer the poor any say in a solution that eventually develops.

Indeed, this should now be abundantly clear to everyone in view of the climate change meeting hosted by the US this week. The Bush administration is asking all participants to provide information on their internal mitigation targets. Further, the US Congress is contemplating - and will eventually impose - penalties on countries that do not mitigate emissions.

With the US willing to wield the stick the time for the poor to try and shape any future agreement may already be past. This is reminiscent of the creation of the WTO and TRIPS agreements which were forced down the throats of poor countries. It suggests India would do well to move quickly to preempt such moves by the US through aggressive engagement with Australia, Japan, China, and the EU - in order to ensure its own needs (of adaptation and compensation) are incorporated in any framework. But one can be certain that discussing ethics, equity, and efficiency will not win the day.

The Bush administration will offer a variety of diplomatic carrots this week to encourage China, India, Brazil and other large developing nations to join a global effort to reduce greenhouse-gas emissions, which are warming Earth’s atmosphere. Meanwhile, the U.S. Congress is working on what amounts to a stick: an economic penalty that could be imposed on goods imported from developing nations if those nations don’t move to curb carbon dioxide and other related emissions by 2020.

An unusual coalition-including major utilities, labor unions and some environmental groups-are backing a proposal in Congress to punish U.S. trading partners that don’t take greenhouse-gas reduction actions. It would be part of a U.S. cap-and-trade system that proposes to cap carbon-dioxiode emissions and then gives U.S. companies allowances to emit based on a declining scale over time. The allowances could be traded. 

The proposal would require countries that don’t act to reduce emissions by 2020 to compensate for the energy in certain goods exported to the U.S. by buying “international reserve allowances” from the U.S. The allowances would be imposed on imports of…goods that require a lot of energy to make.

The proposal, which assumes the U.S. would begin restricting its emissions by 2012, has been endorsed by the International Brotherhood of Electrical Workers, the AFL-CIO and several other labor unions.

There are two things interesting about this report. First, there is now clearly enough momentum within the US for climate change action that domestic legislation will take place. More important, lobby groups (such as labor unions) will ensure that such legislation gets extended to the international arena, so some form of post-Kyoto framework is not a certainty. Unfortunately, by clinging desperately - and for far too long - to their ethical stance on climate change, India and other developing nations seem to have missed the opportunity to shape that international framework, loosing a great opportunity for bargaining on trade and technology transfer (see previous post on IEB, or here). They must now face the consequences.

Nations usually enter treaties to help themselves, not others. In 1987, the US pushed hard for the Montreal Protocol, which restricted ozone-depleting chemicals. It did so not out of altruism but after a cost-benefit analysis convinced President Ronald Reagan that the US would gain far more than it would lose. Bans on ozone-depleting chemicals were not burdensome for US companies. By contrast, developing nations strongly resisted the protocol. They demanded and received a large side payment from the rich nations.

These side payments are not unusual. When a group of nations needs the co-operation of another nation in some area of international relations, and that nation does not gain through the proposed agreement, then some kind of payment or exemption is typically arranged. With its explosive emissions growth, China is by far the world’s biggest problem for climate change. Like it or not, the only way for other nations to ensure Chinese co-operation is through a special inducement, such as cash or extra emissions rights…

The debate about climate change has finally produced an understanding that the world as a whole would benefit from an emissions control agreement. The next stage is to recognise that a warmer planet presents much greater problems for some countries than others; that emissions controls would cost some nations much more than others; and that no nation is going to spend a lot in return for a little.

It is time for the world to take steps to pay China for its participation in an agreement. The richer US is unlikely to receive such payment or even to ask for it. Even so, we fear that if the world does not persuade the US that it has more to gain than to lose from a deal on climate change, an effective agreement will prove to be impossible.

This perspective, however, presents a huge dilemna for India. Climate change is a much greater problem for India than for other countries. Yet, emissions controls would also cost India much more than others. In essence, India stands on the loosing side of both issues - the cost of climate change, and the cost of climate change action. India should be pushing for international action on climate change, yet it stands to loose significantly by adopting stringent emission standards.

How is this contradiction to be solved? India can ask for monetary compensation - yet if it wants or needs climate change action more than others  it has a weak bargaining position. Ethical concerns notwithstanding, it will not be compensated any more than it benefits other rich countries. But there is a way out if one sees that India’s emissions pose not a current but future threat to the global environment. Simultaneously, climate change is very much a current threat to India, that must be adapted to now.

This means India needs to take adaptive action now, and mitigating action in the future. Nevertheless, to spur other major polluters into action, India must establish a roadmap for increasing emission regulations, while being compensated not directly for migitation, but for adaptation. In this manner, the rich countries pay mostly to reduce their own and China’s emissions now, while India signals its moral and practical commitment to the international process - thus encouraging US action.

I have previously discussed why India must embrace climate change action and push for an international treaty, on the IEB and Pragati. An upcoming article will discuss further what India’s negotiating strategy needs to be.

The publication has much else to keep you preoccupied too, with pieces on China, Africa, and domestic politics - all surrounding themes of strategic affairs, economic policy and governance. Head over for your copy.

I have been a long-time supporter of India’s policy of staying away from Kyoto’s binding targets. Recent research I’ve conducted over the past month, however, has shown me the futility of that view. While we may be right about not causing climate change, we will suffer nonetheless. So it behooves the government to do something about it. Which is to say nothing of the fact that climate change is an excellent opportunity - to profit and change our wasteful ways. So, “it is time the Indian government moved beyond posturing, and did something.”

I did some research that presents insights into how climate change as an issue has evolved. But its even more revealing to understand how such ideas get studied, reported, and adopted. Long, technical, and interesting only for geeks, so read at your own risk.

The Diffusion of Innovations

But first, I would ask that you familiarize yourself with the diffusion of innovations theory (Wikipedia), and introduce yourself to the S-curve. The basic theory, presented in 1962 by Everett Rogers, is that the adoption of new innovations or ideas follows a bell-curve, consisting of innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%). This translates into an S-shaped cumulative adoption curve.

While the theory probably has critics, such S-shaped curves have been empirically. Consider, for example, the adoption rate of various products by American households (Source: Federal Reserve of Dallas). All innovations follow a somewhat S-shaped curve, with the only difference being the rate of adoption.

The Evolution of Climate Change

What does any of this have to do with climate change? Well, I was interested in how climate change went from being not really important, to being the defining issue of our time. Just when and how did this happen?

For the answer I looked at three factors: the number of academic paper citations on the issue, the number of news articles, and investment by venture capital (VC) firms in cleantech. For the first two, I relied on Google Scholar and Google News respectively, searching for the keywords (”global warming” “climate change”). For VC investment, I turned to the Cleantech Venture Network and this graph. The results follow.

Evolution of Climate Change (I): Academia

Let us start with how the idea evolved within academia. I was fairly certain that the number of academic papers published would show a gradual, then a sudden rise towards the early part of this decade. But the beauty of the results surprised even me (see figure below). As expected, academic paper citations for saw a dramatic rise in 1997, then again around the year 2000.

Let us, however, be clear about what we are seeing here. While this looks like an S-shaped cumulative adoption curve, this is actually the first half of (what should eventually be) a bell curve (the plot is for papers published per unit of time). If you plot this as a cumulative, what this means is we are still at the lower half of the S-shaped adoption curve, and the rate of growth of papers published is positive.

Evolution of Climate Change (II): Media

Now, lets add news reports published. Here is what we get.

Again, we see a rise in news reports, though this time it occurs later - around 2003-04. This too, should eventually become a bell curve.

Evolution of Climate Change (II): Venture Capital in Cleantech

The cleantech industry is currently booming, with billions flowing in through venture capital. Some describe it as the next bubble. So, how has VC investment expanded? See figure 3, below, and you realize that it took off in 2004-05.

Conclusion

Now, if we put this all together, this kind of proves how ideas become mainstream. A few interesting points.

• If you thought that Al Gore and ‘An Inconvenient Truth’ (2006), were ahead of the curve and somehow contributed to mainstreaming the issue, you’re wrong. Mainstream media had already adoped the issue in 2004. Gore just caught the wave at the right time.
• There is a time lag between when issues are discussed by academics and when they are accepted more widely. Climate change started gaining currency amongst academics in 2000 - these were the ‘innovators’. It began to gather momentum in media in 2003. The ‘early majority’ (VC funds) finally started pouring money into cleantech in 2004-05.

What can we expect now? Academic paper citations will start to drop, as early as late this year. News articles will continue to increase, possibly for another 1-2 years, before dropping. As for VC investment, it is anybody’s guess. The attraction of cleantech as an investment is closely linked to the policy environment as well as the oil price. If both remain favorable, expect VC investment to stay up, though slow down in growth from its heyday.

• It may be high season for patent reform in the US. According to the IHT, Democratic control of Congress, pressure to control healthcare costs, and lobbying by the high-tech industry for weaker patent legislation and protection from frivolous patent infringement suits might finally overturn the stranglehold of big pharma on the debate. This is important if you believe the patent system is restricting pharma innovation and affordability. So perhaps CPTech should be working with MS (Microsoft), not MSF.
• Ranbaxy, the largest Indian drugmaker, is likely to bid for the generics unit of Merck, Germany. The deal could potentially be about US$ 6 billion, which would explain why Ranbaxy shares have fallen 25% since Ranbaxy announced its intentions.
• Climateer Investing left a comment on a previous post, providing the link to the recent Lehmann Brothers report, The Business of Climate Change. Climateer also has a link to the press release for the UBS report Climate Change: Beyond Whether (though I did not find the report itself).