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Markets offer a way around the messy problem of natural resource management

As the squeeze on natural resources continues to grow in coming years and decades, resource management will hinge on the ability to balance demand and supply while adhering to environmentally-conscious targets.

Economic value creation sans environmental damage is a myth. Across all the anthropogenic activities in urban and the rural settings, we see environmental damage emerging from energy and water use for productive purposes. Businesses, national governments and international treaties have attempted to address such challenges through a variety of policy mechanisms such as command-and-control, cap-and-trade and market-based mechanisms. The command-and-control mechanisms needs a higher degree of compliance with the environmental norms and as such a greater effort to test, monitor and disclose the environmental discharges. Market-based mechanisms are explicit in its intent of creating a tradable commodity that gets generated through a well-defined process as a specific economic value is associated with the intended transactions. Burden of compliances is less in such instruments.

Market-based mechanisms exist in air-quality, electricity generation and to some extent in the water sector. Let’s start with what we see in the renewables energy sector in India. About a decade ago, several regulators imposed specific renewable portfolio obligations (RPO) on the electricity distribution utilities. The mandate created an opportunity for a market for tradeable units, representing generated renewable energy, to be bought and sold between utilities exceeding and falling short of their RPO targets. The launch of renewable energy certificates (RECs) as the basis of such a trading platform effectively helped create low-carbon generation while moving away from compliance.

During the calendar year 2019, the India Energy Exchange, one of the trading platforms for RECs, reported 6.3 million RECs traded in the market that represents 6.3 billion kilowatt-hours of generation– 0.4% of the total 1.389 trillion kilowatt-hour of electricity used in the country. Compliance of RPOs is getting better in the country with the increased volumes noticed since its inception.

Going beyond the numbers, what needs to be assessed is whether the RECs as a market-based mechanism helped the renewable energy sector in any way. Several experts in this field feel that the RECs indeed helped create investor confidence in this sector who otherwise were wary of the RPO compliances and any political economy that might play out in favor of non-compliance.

Other successful examples from India include the launch of energy savings certificates through a regulatory mechanism notified by the Bureau of Energy Efficiency. During the first cycle of the ‘perform-achieve-trade (PAT)’ mechanism, the effort culminated in approximately 1.3 million ESCerts (equivalent to 1 metric ton of oil) traded on the exchange. PAT represents a regulator-defined target to save energy by the designated consumers and an opportunity for the overachievers to trade the surplus credits with the underachievers. As such this market-based mechanism was a good success story as well, which was a result of specific regulatory process. Internationally, emissions trading system in the European Union covers 45% of EU’s greenhouse gas emissions and identified as a big success given the EU’s regulatory directive to be followed by the member states.

A key take-away from the trading platforms discussed so far is the existence of a regulatory framework. Amongst several other advantages of such trading platforms, a summary list of advantages would include – monitoring of the commodity that is traded (renewable energy generated, energy savings achieved), clear understanding of the baseline consumption and the targets to reduce consumption, clear path forward to comply – a must for a business continuity, clear business opportunities for the service providers and most importantly documented environmental protection. In certain instances, voluntary trading mechanisms have worked but with lesser volumes traded amongst the market-players.

Given the success and experience from the energy sector, it is an appropriate time to explore resource conservation in the water sector. Before we get into the possible market-based structures, it is important to understand nuances related to ownership of water as a natural resource. Water is a common resource with the governments acting as its custodians. Cascade of priority in the water use in India includes drinking water first, then irrigation, and industrial use towards its end. This prioritization also must be seen from the lens of who pays for such resources? Drinking water is charged on a normative basis by the city managers with a few exceptions of volumetric pricing where metering is available; irrigation water is supposed to be provided at very low cost with preferences offered to co-management of water amongst groups and the industrial (and commercial) water consumption is charged the highest.

This sequence is logical and equitable in more than one way given the post-consumption environmental burden of the end-uses as industrial pollution load from the industries higher compared to the other sectors. Water allocations need to be assessed through the lens of Hardin’s tragedy of commons; an epic theorization of management of common and natural resources which implies better benefits accrued to those who manage the resources better; as conserving the natural resources create a sustained availability of the same for future .

The pricing of water is notional and the variability of the resource being available or not is immense. This is best understood by the farming communities primarily dependent on rain-fed agriculture. The Australian example of creating a water market through a rational allocation of water resources and its trading is a globally recognized structure. Such examples, if implemented in India, could lead to the farming community to develop alternative revenue models. Transactions related to the allocations can be explored amongst the farmers and the industries. Other opportunities offered through the trading of entitlements rest among large gated communities and even individual households. A less water consuming washing machine and low-flow showerheads can offer water savings to be traded between the users or with bulk water providers directly.

That said, the real challenge in the water resources management rests within the realms of how we penalize the polluters. India follows the polluters-pay principles but compliance to the discharge norms vary and we still do not have a robust measurement and reporting mechanism that shows real-time pollution loads entering the natural environment.

The Maharashtra Water Resources Regulatory Authority put out a draft regulations targeted at creating tradable wastewater reuse certificates (WRCs) generated by designated consumers. The WRCs process as suggested in the draft; similar to the ESCerts; involves setting targets for the industries and large corporations to recycle and reuse water, and create a trading mechanism amongst the over and under-achievers of the reuse targets. In one fell swoop, the move puts an economic value for reused water based on its quality parameters, links this mechanism with prospective water allocations amongst the industrial zones, and most importantly, creates alternative sources of water through established symbiotic relationships amongst farmers, urban consumers and industries. Additionally, the WRC concept can also lead to real-time measurement and compliance checks of pollution loads.

Such options are possible given the digital era that we all work in, where IOT metering – be it for energy or water – and the immutable distributed ledgers can offer robust trading platforms. Moreover, as governments would benefit from reduced pollution loads entering the environment; governments can act as buyers of such environmental credits. All of this is possible through a regulatory push offered in the water sector to create a market and carry out equitable allocation of water resources to the vulnerable communities.

Views expressed in the post are personal.

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