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India announced the National Action Plan on Climate Change (NAPCC) in 2008, marking the start of genuine efforts to tackle global warming through the development of ambitious national policies. One aspect of NAPCC is drawing particular interest, both within India and abroad: the Perform, Achieve and Trade (PAT) scheme, launched in April 2011. As an energy-saving certification scheme, PAT is a revolutionary measure aiming to increase energy efficiency within the industrial sector.

In this issue of Monthly Asian Focus, we ask Sasanka Thilakasiri, Associate Fellow at TERI (The Energy and Resources Institute, India), about the unique features of PAT, the energy-saving results that can be expected, and the reaction of Indian industry to the scheme.

Related links
- The Energy and Resources Institute (TERI)

April 2011

India's Innovative Action towards Climate Change Mitigation:
PAT Scheme


Sasanka Thilakasiri
(Associate Fellow, Earth Science and Climate Change Division, The Energy and Resources Institute (TERI))


PAT: an energy-saving measure targeting key industrial sectors

--- India has continued to take domestic actions for climate change mitigation. The “Perform, Achieve and Trade (PAT)” scheme launched in April 2011 has attracted significant attention as an innovative mechanism for improving energy efficiency in the industrial sector. What are the main features of PAT and what makes it unique?

Thilakasiri:
The PAT scheme is an energy-intensity based certificate trading scheme which will be applied to over 700 facilities across nine targeted sectors. The sectors which have been classified as “designated consumers” include: Cement, Fertiliser, Iron & Steel, Paper & Pulp, Railways and Thermal Power Plant (facilities with an energy consumption in excess of 30000 metric tons of oil equivalent (MTOE) per year for these sectors), as well as Chlor-Alkali (facilities in excess of 12000 MTOE), Aluminium (facilities in excess of 7500 MTOE) and Textiles (facilities in excess of 3000 MTOE).

The scheme is unique in many ways, in particular that it is one of the first mandatory energy pricing schemes to emerge from a developing country. While much uncertainty still surrounds the state of the international negotiations and the implications that this has on the future of carbon markets, the government of India is still fully committed to implementing PAT given the energy security and cost saving benefits. Technically, PAT is also unique as it is based on energy savings (with tradable units known as ESCerts) and not consumption-based allowances as per the EU-ETS. It includes some upstream large power stations in addition to the mainly downstream facilities, and being based on energy efficiency, it allows both production and consumption to be addressed without the risk of double counting.

The target setting is likely to be done through use of several performance bands based on historical performance within each of the sectors. Each band will have an improvement target to achieve and will involve a degree of comparative benchmarking. Such performance-based benchmarking is an ambitious undertaking and would involve a good degree of fairness for all facilities as well as rewarding early action. Possibly what makes PAT even more remarkable is that, for all intents and purposes, it is a type of sectoral crediting mechanism, which to date has failed to get much traction around the world within existing and planned market mechanisms. Being mandatory in nature it is not even a softer form of sector no-lose target, but rather entails mandatory target setting and benchmarking. It represents an innovative step in advancing project-based crediting mechanisms in a manner that builds upon intra-sector commonalities.

How effective will the scheme be at saving energy and reducing emissions?

--- To what extent do you expect that the PAT mechanism can help save energy and reduce emissions in India?

Thilakasiri:
The scheme has significant potential to save energy and ultimately, to reduce emissions in India. While it is an intensity-based scheme which could see overall emissions still rise based on growth in production output, the certificates are issued ex-post and based on actual MTOE saved. Making the translation to GHG reductions is relatively straight forward yet requires careful consideration of utilising the right IPCC emissions factors and accounting standard. In terms of actual potential, there exists enormous opportunity for energy savings within the nine designated sectors. An assessment done in 2010 by Camco estimated that the designated consumer facilities, based on best performances within each sector and using 2008 as a base year, could have annual savings of 22.6 MTOE, which is around 4% of total primary energy consumption (Camco 2010). Beyond such empirical assessments, the scheme’s introduction will likely help inform a legislative framework which could indirectly place a price on carbon through the greater energy efficiency measures that are enacted, and should lead to significant savings and reductions. Such high-level policy direction will help create a greater culture of energy conservation within the industrial sector and enable a positive competitive environment towards greater energy efficiency that should translate into even greater reductions.


MRV is the key to PAT's success

--- What are the key mechanisms and institutional structure necessary to oversee the implementation and progress of PAT mechanism?

Thilakasiri:
There are a number of essential components in designing the institutional structure and implementation of PAT that need to be carefully considered to ensure the success of the scheme. The target setting in accordance with the performance bands is a novel feature and strikes a good balance between bottom-up facility level targets which are more accurate, and standardised benchmarking which would have reduced administrative costs. However it does present challenges in striking a balance between scheme ambitions and achieving a good level of acceptability and buy-in from participants. Leveraging upon sector and industrial associations would help during the process of target setting. Other design features that might need to be considered include possible restricted banking provisions to help maintain price stability and market liquidity, as well as possible government interventions to help manage supply and demand.

Central to the scheme’s success is how its MRV (Measure, Report, Verify) provisions are established and implemented. Ensuring that the efficiency measures are real, transparent, additional, permanent and holding entities accountable in a manner that is cost effective will be a key challenge. Establishing measuring protocols, standardised reporting templates and auditing procedures either by the government or an external third party would need to both ensure stringency yet not create too great an additional financial burden. The government of India would also need to give careful consideration on how PAT interrelates with other policy instruments such as the planned renewable energy certificates. In addition, if any possible linking is to be considered with external carbon markets, the MRV provisions would need to be consistent as well as avoiding any double counting with, for example, the CDM.


The reaction of industry

--- How do industries in India respond to this kind of policy to promote energy saving?

Thilakasiri:
The 2001 Energy Conservation Act has created a culture of energy conservation within the India business community over the last decade, with the act providing a mandate for energy efficiency measures to be enacted through the Bureau of Energy Efficiency (BEE). Since 2007 the designated consumers have already had mandatory requirements to conduct energy audits and many large companies disclose energy metrics in annual reports. Energy security and energy costs play a big role in shaping industrial policy and corporate social responsibility imperatives. The competitive advantages and positive cost benefits of taking on energy efficiency measures are becoming more and more apparent as highlighted each year by the Carbon Disclosure Project. Hence from a technical point of view, many of the facilities would have the capability to track the necessary measures. Concerns do however exist on how much of an additional administrative burden the scheme may impose with regards to cost and stringency. In addition stakeholder consultations have raised industry concerns relating to the financing and long payback periods of implementing energy efficiency measures, the price of ESCerts being too low to result in acceptable paybacks, inadequate access to the suppliers of energy efficient technologies, as well as a possible lack of recognition for early action (though this could be addressed in the manner that the targets are set for individual facilities). Despite this, industry generally tends to prefer longer term price signals and certainty through legislative interventions. The PAT scheme may create some initial hurdles as companies get used to the scheme. However, if there is flexibility and some leniency during the initial phases with the aim of eventually tightening the scheme as familiarity grows, and if there is adequate consultation in the target setting process, then there is no reason why the scheme would not receive strong participation from all entities.


India's role in international negotiations

--- As India has been taking significant domestic actions towards climate change mitigation, what do you think of India’s role in the international negotiation process towards a post-2012 climate regime?

Thilakasiri:
Being a major emerging economy as a non-Annex I nation under the Convention, India has no mandatory obligation to take on any form of binding targets. Despite this, the government of India acknowledges it has a role to play in global mitigation efforts in line with the principle of common but differentiated responsibility and respective capability (CBDR). As such India took on the voluntary target of reducing its carbon intensity by 20% to 25% from 2005 following COP15. In the reemphasis that was placed on bottom-up actions at COP15, such domestic actions like the PAT scheme will be a crucial component of achieving collective global reductions and is but one example of how India is taking proactive steps towards combating climate change. As mentioned above the PAT scheme is an innovative venture and highlights one of the ways that India is showing leadership in various elements of the negotiations. In line with such active domestic policies that all stem from the eight national missions of the National Action Plan on Climate Change (NAPCC), India was very proactive within the negotiations, and will continue to play a lead role in the area of MRV and ICA (International consultation and analysis). India has continually stated that it is willing to move forward on international MRV of its supported NAMAs (Nationally Appropriate Mitigation Actions) and at COP16 the country was instrumental in defining the frameworks for both that and ICA of unsupported NAMAs. India is undertaking actions that would require a strong level of MRV to ensure their own domestic success like the PAT scheme, so it is not surprising that this is an area in which India will continue to play a lead role in the remaining months towards the next COP in Durban and shows how such MRV and ICA frameworks should be articulated in line with the principles of CBDR. Given PAT’s role as an innovative market mechanism, it is also worth paying attention to the role that India will likely play in informing new market mechanisms as it explores possible bilateral offset mechanisms and continues in an active capacity in advancing the reforms of the CDM and programmatic CDM.

--- Thank you very much.




About "Monthly Asian Focus: Observations on Sustainability"

Until 2010, IGES has released “Top News on the Environment in Asia” on a yearly basis. For over 12 years since its establishment of IGES in 1998, “Top News” has collected and organised information about environmental issues and policy trends in the region.

In January 2011, IGES launched the new web-based series "Monthly Asian Focus: Observations on Sustainability" in which leading environmental experts deliver their take on latest trends of sustainable Asia.

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