Climate Change Summit Paris 2015

The 2015 United Nations Climate Change Summit is underway in Paris now. At the previous summit in Copenhagen in 2009, it was agreed to control carbon emissions to the point that the temperature rise is below 2 degrees celsius. There were no legally binding agreements signed by the participating nations. A carbon trading system was proposed and global carbon trading market was stated as one of the goals of the COP15 summit.  

Controlling global warming by reducing carbon emissions is important to sustain life on this planet. High levels of pollution have made cities in China inhabitable and people have to wear face masks on their daily commute to work. The rate at which plant and animal species become extinct has increased post the advent of the industrial age.  Studies are showing that human productivity  is decreasing in nations having heavy increases in temperature. 

In the run up to the Climate Summit 2015, America has pledged that by 2025 it will cut its greenhouse-gas emissions by 26-28% below 2005 levels. South Korea says that by 2030 its emissions will be 37% below where they would be if the recent upward trend in emissions were projected forward. 

What makes it difficult to get countries to a consensus on emissions reduction is the fact that the cost at face value of sustainable environmentally friendly business practices is more than that of more polluting practices. However, the recent advances in technology have made this argument turn on its head. As we had noted earlier on this blog, rising cost of coal imports and inflation in India have increased the costs of coal based thermal power plants to a point where wind energy is competitive without subsidies and solar power has come very close to break-even. The indirect benefits of a cleaner power source are also many, primary one being the healthier life of the citizens of the country.

Apart from this, carbon trading to offset the emissions is also gaining ground around the world. The revenue from taxing the emissions is used to fund environmentally friendly energy sources. I think it would be advisable to target areas where eco friendly technologies have reached free market pricing and have agreements on the use of these technologies. For example, electric cars, high speed rail, nuclear and wind power are some of the technologies that are at market potential and there should be agreements on the use of these technologies and their increased adoption. Instead of focusing on how much to reduce the emissions, the discussions have to now move to how to reduce emissions since several environmentally friendly alternatives are available which are competitive on the free market.

A global market for trading carbon offsets could be a good idea and carbon credits could potentially become an international currency. The price of a carbon credit would be low in a country which pollutes less and high in a country which pollutes more. Industries could purchase carbon credits from such countries that pollute less and get a license to pollute to that extent. The money earned by selling a carbon credit would be invested in developing eco friendly technologies and solutions. The carbon credit system could be internationally regulated and have a single controller such as the United Nations. The UN could then set quantitative targets on how much emissions are permissible over a given span of time and enforce it with a fine (carbon tax) on industries that don't have the required carbon credits. An Agreement on such a carbon cap and trading system should be the aim of the 2015 Climate Summit in Paris.

Guest Lecture on Business Ethics by Mr. Folker Mittag

Today we had a guest lecture on business ethics by Mr. Folker Mittag, who is associated with the Caux Initiatives for Business. The guest lecture was organized as a discussion and there were ideas exchanged between the students and the guest, Mr. Folker Mittag. I will try to highlight the important points from this discussion in this blog post.

To do ethical business, we have to listen to our conscience, and identify the actions which are right by our conscience. A person who does not follow ethics in professional life will not be able to do so in their personal life as well. There are no short cuts in business and businesses that take short cuts close down sooner or later.

In order to inculcate a culture of ethical behavior, the top management has to set the role model for the employees of the organization.  If the top management is corrupt, you cannot expect the employees to follow ethical behavior in their business dealings. The values of the organization have to guide the behavior of the employees of the company. The mission statement for Toyota states - "Do that which is good for the community, do that which is good for the employees and do that which is good for the company. The profits have to be re-invested for future growth." A primary profit motive with efforts and funds dedicated for corporate social responsibility and a values driven organization could also be acceptable ethically. 

Whistle blowers have a first duty onto themselves to take necessary steps to curb unethical practices within the organization. They need to notify the top management and all stakeholders concerned within the organization and take all possible measures to stop the unethical practices before they go public with their disclosure of business malpractices.

Customers too should choose companies that deal ethically. They should not deal with companies known for malfeasance. Costs should not be reduced if that means doing unethical business. Even in ethical business, sometimes it may be right to charge a customer higher if they do not understand the true effort and time that goes into the product and make unreasonable demands from the producer. Cutting corners to deliver the product or service is termed unethical.

Where are the bottlenecks to growth in India right now?

So this is the question on my mind - given the situation that India is in right now, where should we be investing the limited funds available to us? The situation being that government budget is constrained by the fact that the fiscal deficit should not be more than 5% of GDP. With the Goods and Services Tax coming up next year, there will be revenue sharing between center and states and the budget of the Central Government will be constrained even further. At present the government is finding it hard to implement the recommendations of the 7th pay commission. The manufacturing sector is lagging as government is not undertaking major projects (such as new dams, nuclear reactors, smart grids, etc.) at this stage and this is showing in corporate earnings of the industrial companies. The economy is in a dismal state right now.

The Goods and Services tax is expected to be a friendlier tax regime than the present VAT which suffers from 2 important drawbacks: 1. Cascading taxation and 2. Inability to tax imports on par with the domestic production. With the states sharing the revenue from the single GST tax regime, the Center will have to delegate increasing responsibilities to states than done previously. This would also open up the opportunities for state level debt and state government bonds similar to the central government bonds. A constitutional amendment will be required to enable the states to collect the GST.

The Congress had brought the GST bill in Parliament in UPA2 regime but were not able to bring the states on consensus on a common tax rate and so the bill was stalled. Now the BJP has been able to bring the states to consensus on the GST tax rate and the Congress is blocking the GST bill in Rajya Sabha.

The second factor that can boost the economy is Foreign Direct Investment in critical sectors such as power (nuclear reactors, smart grids, etc.) and transportation (high speed rail). These are very attractive sectors commercially and corporations in Japan and USA provide debt financing at low interest rates for such environmentally friendly projects. For example, Japan has offered to finance the the first bullet train in India, having a cost of $15 billion, at a 1% interest rate.  There are a lot of opportunities in the nuclear power sector after the India and USA reached a joint agreement on development of civilian nuclear power (Link to September 2015 story).  GE-Hitachi had started discussions on building nuclear power plants in India (Link to February 2015 story).  These deals are stalled right now.

Generating more nuclear power will help reduce our dependence on coal imports for generation of electricity. This could potentially solve the persistent power deficit problem in this country and make power production immune to supply side shocks from high price of coal and natural gas when the Rupee depreciates.

The FDI regime in India can be changed from limited FDI (49-50% in most sectors) to 100% FDI with a caveat that the business has to support local jobs. This has been implemented in multi brand retail where we have seen Walmart set up stores in India and source large amounts of their merchandise locally. USA has similar FDI norms where car manufacturers have to manufacture at least half of their cars in USA. I believe this would make the FDI route more attractive for businesses and multi national corporations.

I think these factors can significantly improve the growth prospects of the Indian economy at this point of time.

On The Problems Facing Africa

Read this story in The Economist today discussing the problems faced by an industrializing Africa. I think the story has a few problems in its analysis. The problem that Africa is facing is one of skipping the industrial phase of development and moving to the services phase seen in developed economies with out moving enough people from rural to the urban centers. 

The story suggests the exchange rate fluctuations are not helping boost exports to support the industrialization of Africa. On the one hand, Africa is a commodities exporter and the commodity exports drive up the exchange rates. The story suggests such high exchange rates don't support manufacturing exports. 

I think there is a problem here. Strong currencies make input costs lower and all major industrialized economies in the world today, be it Germany, China or USA, are following a strong currency policy. No doubt, they are commodity importers net-net. Even for Africa, if they are exporting some commodities, they will be importing others they don't have, such as maybe oil or copper. 

A strong currency would thus make African economies much more competitive. Not only would that reduce the input costs, but also increase the domestic buying power and improve the quality of life. A stable currency such as a pegged currency would attract a lot of capital investments from manufacturing companies who benefit from the stable macroeconomics and low un-certainities. 

All in all, Africa could try a managed currency regime like China did over last 20 years with free investment environment, to attract large capital investments to benefit from the local abundance of commodities.

http://www.economist.com/news/middle-east-and-africa/21677633-there-long-road-ahead-africa-emulate-east-asia-more-marathon?cid1=cust/ednew/n/bl/n/2015115n/owned/n/n/nwl/n/n/n/n