parikh and subir gokarn _1993_climate change and india's energy policy options new perspectives...

8/7/2019 Parikh and Subir Gokarn _1993_Climate change and India's energy policy options New perspectives on sectoral CO

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This paper presents an analysis of COPemissions in the Indian economy andexamines the implications of alternativepolicies to reduce them. This analysisgoes beyond the conventionalapproaches of looking at energy supplystructure and end-uses of energy. In-stead, it examines flows of energy inthe economy of India through a 60-sector input-output model. The authorsshow that direct emissions of CO2 arehighest in the electricity sector fol-lowed by iron and steel, road and airtransport, and coal tar. If a similaranalysis by final demand is carried out,incorporating both direct and indirectemissions, the highest emitting sectoris construction, followed by food crops,road and air transport, and so on. Thisindicates that, in addition to energyefficiency, improving constructionefficency could also lead to CO, sav-ings (by using less energy-intensivematerials or by making optimal use ofthem). It is also shown, by generatingalternative energy policy scenarios,that if India saves energy from coalrather than from imported oil to reduceCOP emissions, then savings foregoneare more than Rs 5634 million for only10% of energy saving. Sectoral priori-ties also change. To save coal, the pow-er sector, iron and steel, coal tar, etcwill require attention. To save oil, trans-port, refinery and fertilizers will requireattention. Similar arguments are madefor substitution of coal by oil and gas.Additional costs of Rs 10 billion wouldbe incurred for 10% substitution of coalby oil and gas as compared to thecontinued on page 277

276

Climate change andIndias energy policyoptionsNew perspectives on sectoral CO2emissions and incremental costs

Jyoti Parikh and Subir Gokarn

Global negotiations on climate change have generated considerableinterest among environment policy makers, economists, atmosphericscientists and various other interested parties. There are four majorgreenhouse gases (GHGs): carbon dioxide (CO,), methane (CH,),chlorofluorocarbons (CFCs), and nitrous oxides (N,O). Among these,CO2 receives the most attention, because:

COZ emissions can be most reliably estimated from the energybalances of each country because they are directly related to energyconsumption and cement manufacturing.COZ is the most important greenhouse gas emitted by the developedcountries in terms of magnitude (as well as radiative forcing).Increases in CO2 emissions are measured regularly and globalemission levels for CO2 are increasing more rapidly than, say,methane.

For these reasons, various authors have carried out analyses of thepossibilities of reducing CO* emissions at global and national levels.

While global approaches highlight the policy direction and themagnitude of the efforts required, Blitzer et al have pointed out thatthe possibilities of GHG emission reduction needs to be discussed usingcountry-level models with sufficient structural detail. Their model forEgypt shows that if Egypt curtailed GHG emissions in 20 years by 20%over base year CO* production levels, it would reduce the GDP growthrate by 3.13%. A reduction of 40% would slow GDP growth by 32.4%.Alternatives at country-level depend inter aliu on:l Energy resources and technologies used (ie coal, oil, gas, hydro or

nuclear).l Development patterns (whether agrarian, industrial or service-

oriented economy).India and China are considered to be major players in global climate

0959-3780/93/030276-l 6 0 1993 Butterworth-Heinemann Ltd


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BSource: Estimation of Greenhouse Gas Emis-sions and Sinks, OECD, Paris, August 1991;%oufce: Input-Ouput Transactions T&/es of theIndian Economy, Central Statistical Organisa-tion. Government of India. New Delhi. 1990: foroil resources, 656 billion cubic metres are alsoavailable. HSD = high-speed diesel; LDO = lightdiesel oil; FO = fuel oil; LSHS = low-sulphurheavy stockcontinued from page 276current policy of substituting oil andgas with coal. This article offersanother Interpretation of the notion ofincremental costs though comparisonof two alternative developmentstrategies.The authors are with the Indira GandhiInstitute of Development Research, Gen.Vaidya Marg, Goregaon (East), Bombay400 065, India.

The authors are grateful to the RockefellerFoundation, in particular to Mr KennethPrewitt, for funding this project. They alsoacknowledge valuable discussions withProfessor Richard Eckaus, MIT, USA; Pro-fessor M.G.K. Menon, Professor KiritParikh and J.P. Painuly, IGIDR, Bombay;Dr Jayant Sathaye, LBL, USA; and Profes-sor N.S.S. Narayana, ISI, Bangalore. Theyare grateful to Mr Abheek Barua for hisexcellent research assistance. Mr SubrataRana also assisted during the initialphases of the study.This article is an edited version of a paperpresented at the Indo-British Symposiumon Climate Change, New Delhi; theNational Symposium on Environment andDevelopment: A Scientific Approach,Meerut, UP; the Physical ResearchLaboratory, Ahmedabad; the Workshop onthe Economics of Global Warming Issuesfor Developing Countries, Bellagio; and theECOTECH seminar during the Earth Sum-mit at Rio de Janeiro. The authors aregrateful to all those who commented onthese presentations, thus improving thefinal version of this article.

C.R. Blitzer, Richard S. Eckaus, SupriyaLahiri , and Alexander Meeraus, Thepotential for reducing carbon emissionsfrom increased efficiency: A generalequilibrium methodology, Proceedings ofthe Workshop on Economic/Energy/Environmental Modeling for Climate PolicyAnalysis, MIT, Washington, DC, 1991.A.J. Mathur, The greenhouse effect inIndia: Vast opportunities and constraints,in M.J. Grubb et al, Enecqy Policies andthe Greenhouse Effect, L&l II, TechnicalOptions and Countrv Studies, Dartmouth,AidershotIRoyal ln&tute of InternationalAffairs, London, 1991.3J. Sathaye and A. Ketoff, CO2 emissionsfrom major developing countries: Bettercontinued on page 278

Climate change and Indias energy policy optionsTable 1. Fossil-fuel consumption and carbon emissions in India.

GJ/tonneTC/GJbTC/tonneConsumption (1983-64), 10 tonnesResources, 1O6 tonnes

Coal (tonnes)210.0260.546121.3186 000

OilHSDlLDO FOlLSHS44 380.020 0.0210.88 0.7914.125 5.6756

change because of their likely increase of CO;? emissions due toincreases in income and level of population. Moreover, both depend oncoal. Several authors, for example Mathur* and Sathaye and Ketoff,have carried out COz accounting exercises by considering energy supplyand energy end-use activities such as manufacturing steel, fertilizers,cement, and so on. While this simple and quick method could show thatIndias emissions in 1985-86 were 115 million tonnes and will rise to 615million tonnes by 2025, it is not adequate to give policy guidance or toassess the impacts on the economy of alternative emission reductionpolicies, which may depend not only on technologies but also on fuelsubstitution, fuel consumption, patterns of development, etc. IndirectCO* emissions can also impact substantially. Thus, an overall economy-wide exercise can provide additional insights and policy guidance. Thisarticle reports on such an exercise, using the input-output table for theyear 1983-84 that was used for the Seventh Plan, 1985-90.

India and global negotiations for climatic changeA case study of India is of particular interest, because India may be themost populated country in the world by 2025 and its GHG emissionsmay rise substantially. Despite the fact that in 1986 it emitted only 0.2tonnes per capita of fossil CO* (compared to 5.4 tonnes per capita in theUSA), it is the sixth largest CO2 emitter in the world. Parikh et aZ4 haveshown that, to accommodate even a modest rise of emissions by onlyIndia and China, the developed countries would have to reduce theirGHG emissions by 30% by 2025, to keep global emissions in 2025 at thesame level as in 1986. Indias emissions are projected to increasefourfold compared to 1986, but even then would be only 0.36 tonnes percapita below the world average of 1.2 tonnes per capita in 1986.

There is yet another concern about Indias future fossil CO2 emissions(Table 1). Indias major energy source is coal, with resources of morethan 186 billion tonnes, compared to production of 221 million tonnes in1990-91. Proven coal resources are estimated at 56 billion tonnes, whileoil and gas resources are only 756 million tonnes and 686 billion cubicmetres respectively. Thus, coal will continue to provide more than 60%of Indias energy needs. Coal has the highest CO;! emission coefficientper primary Giga Joule (GJ). Coal in India has nearly 35% ash content.Standard Indian coal is calibrated to have 20.9 GJ per tonne ascompared to the United Nations standard coal at 29.7 GJ/tonne. Thisdifference in the Indian energy data system has not been kept in viewand has created confusion in international data systems.

Thus, the combination of high population, coal predominance inenergy-use and high potential growth due to currently low income levelscauses concern about Indias carbon emissions in international circles.

On the other hand, Indias viewpoint is different. From its perspec-tive, Indias fossil-based carbon emissions were only 115 million tonnes

GLOBAL ENVIRONMENTAL CHANGE September 1993 277


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Climate change and Indias energy policy options4.5 r43.5

2.5

1.5

Figure 1. Per capita CO2 emissions 1by world regions (from fossil fuels andcement). 0.5Source: Trends 90: A Compendium ofData on Global Change, Oak RidgeNational Laboratories, Nashville, TN, o1990.

-0

-or

2.1:

---

I turope anaAmerica Ocearla

Debtors

1.2 World average ___t__t0.66 ICredItor

Latin America Asia- AfricaJapan

in 1985 compared to 5.4 billion tonnes for the world and 1.3 billiontonnes for the USA. Even in 2025, its total emissions are likely to beonly 0.6 billion tonnes - a per capita emission of 0.36 tonnes comparedto a world average of 1.2 tonnes per capita. These emissions would notbe a problem if the developed countries present and past use of fossilfuels had not resulted in an excessive build-up of CO* in the atmos-phere. India has to tackle basic problems of health and nutrition andneeds to work on basic environmental problems such as increasingaccess to safe drinking water and sanitation and reducing the use ofbio-fuels which harm the health of women and children. Under thePolluter pays principle, those above the world average should paymoney to those below the world average (see Figure 1). Under certainconditions, a tradeable emission quotas system is recognized as econo-mically efficient in allocating resources to the reduction of CO2 emis-sions. Debtor countries who find it costly to reduce CO2 emissions willtransfer resources to creditor countries by purchasing emission rights.Creditors can then use these resources according to their own priorities.This is the best option in international negotiations. However, until suchan international system is in place, there are possibilities for othercountries to invest in India to reduce CO;? emissions in those projectswhich are of interest to India while others can claim credit for thereductions in CO2 emissions. These are known as offsets in othercountries. This may be a second-best solution from the viewpoint of thecreditor countries. Offsets lack the flexibility of the tradeable quotasystem because the transfer of resources from debtors to creditors isrestricted to emission-reducing investment, and funds may not be

continued from page 277 directed towards the environmental priority of their choice (eg drinkingunderstanding the role of energy in the water). However, such measures may be negotiated even bilaterally by,long term, The Energy Journal, Vol2,No 1, 1991, pp 161-196. say, one of the EC countries in response to the CO2 emissions-reduction4J. Parikh, Kiri t Parikh, Subir Gokarn, J.P. policy of the EC.Painuly, Bibhas Saha and Vibhooti Shukla, Regardless of these negotiation issues, the structure of Indias CO2Consumption Patterns: The Driving Forceof Environmental Stress, Indira Gandhi In- emissions is of interest to policy analysts in India and elsewhere. We tryMute of Development Research, Bom- to quantify emissions here by economic sector, using the input-outputbay, India, 1991. approach described in the next section.

278 GLOBAL ENVIRONMENTAL CHANGE September 1993


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Climate change and Indias energy policy optionThe base case input+mtput exerciseThe transformed commodity flow matrix for the Indian economy5generates a technology coefficient matrix simply by dividing eachcolumn, representing all inputs into a given activity divided by the levelof output of that activity. These coefficients are conventionally express-ed in value of input/unit value of output. In the present exercise, for coaland petroleum refining activities, all inputs other than coal and pet-roleum products are interpreted as value of input/tonne of carbonequivalent. In the case of coal and petroleum product inputs into theseactivities, the coefficients are interpreted as tonnes of carbonequivalent/tonne. Similarly, coal and petroleum product inputs into allother activities are interpreted as tonnes of carbon equivalent/unit valueof output. Other technical details are given in Appendix 1.

The conventional solution to the input-output system is representedby:

X = [I - A]-F (1)Where X is a (60 x 1) vector representing levels of output of eachactivity; A is a (60 x 60) matrix containing input usage coefficients foreach activity; and F is a (60 x 1) vector representing the final demandfor each commodity. F is the sum of vectors C, Z, G and E-M,representing private consumption, gross investment (gross fixed capitalformation + changes in stocks), government consumption and netexports (exports - imports) respectively.

For any row i (i = l-60) of the (I - A)- matrix, the jth elementrepresents the combined direct and indirect requirement of commodity ito satisfy one unit of final demand for commodity j. We have two rowsin the (I - A)-l matrix (i = 8, 26) denominated in terms of tonnes ofcarbon emissions. Representing these rows as CE and CEP (carbonemissions from coal and petroleum products, respectively), we derivethe following measure of total (direct + indirect) carbon emissionsarising from the satisfaction of each component of the final demandvector F:

TCEi ~ TCEi + TCEPi = pi (CEi Fi) + (CEPi Fi) (2)where TCEi is total carbon emissions attributed to the ith element of thefinal demand vector F, TCEi is total carbon emissions attributed to theith element of F from direct + indirect coal usage; TCEpi is total carbonemissions attributed to the ith element of F from direct + indirectpetroleum product usage; CEci is the ith element of the coal row of the (I- A)- matrix; CZ!?i is the ith element of the petroleum products row ofthe (Z-A)- matrix; and Fi is the ith element of the final demand vectorF.

Ci CEci Fi = r = total carbon emissions from coal.xi CEPi Fi = XP = total carbon emissions from petroleum.

Further,PCEi = TCEiICi TCEi (3)

where PCEi is the share of the ith sector in total carbon emission. Note%put-Output Transactions Tables of the that this exercise is carried out for carbon generated from productionIndian Economy, Central Statistical Orga- activities only. Carbon emitted from direct consumption of fuels (egnisation (CSO), Government of India, New private transportation) is not accounted for. These, however, constituteDelhi, 1990. a relatively small proportion of total carbon emissions.



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Climat e change and Ind ias energy policy optio ns

3ou--l

Figure 2. Direct carbon emissions inIndia by sector, 1983-84.Source: Model results by J. Parikh and S.Gokarn.

38

26

24

8

6

Iron and steel Coal tar Hotels Cotton textiles

The next section analyses the picture for unit carbon emissions bysector, and percentage distributions of carbon emissions across sectorsfor the 1983-84 technology coefficient matrix and final demand vector.

Discussion of results: base case 1983-84Direct carbon emissions by sectorIt can be seen in Figure 2 that electricity is the largest sector, and isresponsible for 28 million tonnes, or 33%, of all carbon emissions fromfossil fuels. The second largest sector is iron and steel, with a 9.8% shareof the total. Other transport, excluding railways, accounts for only 8.6%of emissions. This is in contrast to the developed countries, whereemissions from power and transport are comparable. Coal tar used inroad buildings is the next largest (8.1%). Non-metallic materials (4.5%)which include glass, pottery, asbestos and so on, railways, cement,hotels and fertilizers all contribute similar amounts (roughly 4-5%each). Hotels and restaurants also include a wide variety of informalunits, such as tea shops and sweet shops. Fertilizer production excludesfuel for feedstock because its use for feedstock does not contribute tocarbon emissions. Emissions from cement include fuel-use as well asCO* emitted by the process of cement manufacturing. Together withcotton textiles (2.5%), these ten sectors account for 82% of totalemissions.



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Climate change and Indias eplergy policy options6

Figure 3. Carbon emission coeffi-cients, India, 1983-84.Source: Model results by J. Parikh and S.Gokarn.

Direct and indirect carbon emission coefficientsSo far, our results have been similar to those which could have beenobtained from some of the conventional methods. However, it is herethat the input~utput approach gives considerable further insights bytracing fuel flows across sectors through all the elements of the [I-A]-matrix. For example, to run a power plant for a whole year, coal isrequired as fuel. However, to produce and transport coal, further fuel isneeded. Similarly, fuel may also be needed to produce output of othersectors of the economy, used as inputs in the power plants. Theseindirect requirements change the original patterns considerably. Onehas to be careful in interpreting the indirect requirements to avoiddouble (or multiple) counting. However, what this emphasizes is thatthe associated carbon emissions are an essential part of a sectorsactivity, and need to be considered as an integral part of performing thatactivity. The direct and indirect carbon emission coefficients for all 60sectors are listed in Appendix 2. It can be seen in Figure 3 thatelectricity coefficient increases from 3.47 tonnes per Rs 1000 (frommatrix A) to 4.89 tonnes (from matrix [l--A]-). The cement coefficientalso goes up from 2.18 tonnes to 2.95 tonnes. Due to its large transportrequirements, the iron and steel sector moves from fifth to third placeand its coefficient goes up from 0.92 to 2.22 tonnes. Once indirectemissions are accounted for, many major sectors in Figure 4 significant-ly increase the emission of carbon - paper (0.94 to 1.89); fertilizers (0.6to 1.8); and inorganic chemicals (0.26 to 1.82). Non-metallic mineralsincrease from 1.2 to 1.8 tonnes.This analysis stresses the importance of indirect emissions. However,to estimate emissions in the economy, these coefficients should bemultiplied only by the final demand and not by the gross output vector.Otherwise, there would be double counting.It must be emphasized that the direct coefficients described aboverefer to the production of goods or services by each sector (tonnes ofcarbon/unit of output), whereas the indirect coefficients refer to thefinal (as opposed to the intermediate) demand satisfied by the product

GLOBAL ENVIRONMENTAL CHANGE September 1993

0 L

4.89

InorganIc chemlcais

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Climate change and Indias energy policy options

Figure 4. Percentage share in totalcarbon emissions, India, 1983-84.Source: Model results by J. Parikh and S.Gokarn.

16

8-

6-

4-

2-

o- Construction Other cotton Foodtransport textlIes products

Food crops Hotels Electricity Wool IRailway

of each sector (tonnes of carbon/unit of final demand satisfied). As thedenominators are different, the two are not comparable. The compari-sons made in this discussion are intended to highlight the differentperspective that one gets about carbon emissions when the indirectcoefficient becomes the basis of analysis.

These sectors, along with their ratios of total to direct emissions, aregiven in Appendix 2, which shows values for all 60 sectors of theinput-output table. Extremely high ratios of total to direct emissionscan be seen in cash crops, animal husbandry, wool and synthetics,printing and publishing, petroleum products, machinery for food,textiles and electronics and other transport equipment. Most of all,construction has a very large indirect component. Some of the service-oriented activities which will increase in volume in future are com-munication, trade, medical and education, each of which has notinsignificant indirect emissions.

Thus, the conventional approaches in the literature could gainsubstantial additional insights if the indirect emissions are studied indetail. As is shown in the next section, a very different picture emergeswhen we obtain emissions by final demand. Appendix 3 gives definitionsof major sectors in Indias input-output table.Emissions by final demandInsights given by emissions by final demand (the vector F) lead tointeresting policy conclusions.



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C&mate change and Indias energy policy optionsSector& shares. Figure 4 shows that as much as 22% of the emissions inthe economy are attributable to the construction sector, which is thedestination of energy-intensive materials such as iron and steel, cement,bricks, non-metallic minerals like glass, concrete and asbestos andwood. Much electricity goes into energy-intensive materials for con-struction to provide infrastructure for a growing economy (see defini-tions in Appendix 3). The second most carbon-emitting basic need is inthe food crop sector (8.6%). As yet, agriculture in India is notenergy-intensive. Moreover, food processing is listed as a separate finaldemand. Other transport, including personal and public transport, isthe third largest (6%). (Goods and materials transported for construc-tion or food production or processing are already included in thoseactivities.) Hotels, cotton textiles, electricity and food processingaccount for roughly 5% each. Together with wool and synthetics(3-S%), trade (3.7%) dan railways (3.1%), the ten sectors account for67% of emissions by final demand.When one compares direct sectoral emissions to final activitiesemissions, one is struck by a major alternative policy conclusion.Optimization of construction methods is as important a policy measureas improving energy efficiencies, which is the most common policyprescription for reducing COZ emissions. In a growing economy, theneed for infrastructure is very large, and alternative methods ofconstruction should be considered side by side with energy-efficiencymeasures for CO* reduction.Structure of final demand. The structure of final demand is also ofinterest (see Figure 5). Of the total emissions due to constructionactivity, understandably its investment component, rather than privateand government consumption, accounts for the largest share - 19% ofthe total 22%. Food crops and food processing emissions are essentiallydue to private consumption, with some amounts due to seeds, stock andexports. Emissions attributable to the export component are higher inthe road and air transport and hotels and restaurants sectors than in theother sectors.Energy policy scenariosSo far we have seen the relationships between the structure of Indianeconomy and CO;! emissions as they are captured in the input-outputmatrix of 1983-84. We have seen which are the largest emitting sectors.After inverting the matrix, we also saw which final demand sectors arethe most CO2 emitting. How do these structural details help toformulate policy for COZ reduction? That is, given the structure of thesystem, how will it respond to external policies such as reducing COZemissions? We consider two types of policies for reducing COZ emis-sions:l Reducing use of either coal or oil by conservation of the same amountof useful energy, so as to highlight the difference between these twoconservation alternatives.l Substituting oil for coal, a fuel with higher CO2 emissions than oil,keeping the same energy use in the economy.It is assumed that these policies can be effected without affecting thelevels of production. Undoubtedly, it will take some time before the



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Figure 5. Carbon shares from finaldemand, India, 1983-84.Source: Model results by J. Parikh and S.Gokam.

#zB Prwate consumption!SSl Govt consumption

I8 -

6-

4-

2-

o- C

lizzz3InvestmentKXB Net exports

:onstructlonI Other 1transport j textiles / products /Food crops Hotels E!ectricity WOO!

changes are made, and some think that, for this reason, a simulation ofscenarios for, say, the year 2000 or beyond is necessary. However, thiscompounds two uncertainties - the accuracy with which the scenario for2000 can be constructed and the accuracy with which the effects ofpolicies can be captured. To avoid being diverted into another exerciseof generating scenarios for the future, we consider the followingproblems in the base year itself, 1983-84, assuming these policies workinstantly. What can we learn about the effects of CO2 reductionpolicies? This question is addressed for two separate policies - energyconservation of coal and oil and energy substitution of coal with oil.Energy conservation and CO, reductionEnergy conservation has been a goal of Indias energy policy for sometime. Several organizations have been established. One of these is thePetroleum Conservation Research Association (PCRA) under theIndian Oil Corporation, which is the oil refinery and distributionagency. This represents the priority for energy conservation, whereconserving oil/products is seen as saving precious and scarce domesticoil resources which cater for only 50% of consumption, and the foreignexchange required to purchase the remaining 50% at internationalprices.

However, conserving coal is not one of the major goals of Indiasenergy policy. Since coal generates more CC& per GJ than other energyresources, saving coal for the sake of global warming would require ashift in Indias energy conservation policy.



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Climate change and Indias energy policy optionsTable 2. Comparison of base case with energy savings from coal and oil.

Base CaseTonnage (million tonnes)Coal 121.3HSDlLDO 14.13FOlLSHS 5.6Emissions (million tonnes)Coal 66.2HSDILDO 12.43FO/LSHS 4.43Total 83.06Value (million Rs)Coal 24 260

HSD = high-speed diesel; FO = fuel oil; LDO = HSDILDO 41 431liaht diesel oil: LSHS = low-sulohur heavv stock. FOlLSHS 15 120Total 80811iodel results by J. Parikh ands, Gokarn


Coal reduction by 10% Oil reduction by 13.5%Difference from Difference fromValues base case Values base case109.17 1214.13 05.6 0

121.3 012.22 24.84 1

59.58 7 66.2 012.43 0 10.75 24.43 0 3.83 176.44 7 80.78 2

21 834 2 426 24 260 041 431 0 35 830 559315 120 0 13003 211778 735 2 076 73 101 7710

To assess the implications of this shift, we compare two scenarios,both of which save the same amount of useful GJ (107 million GJ). Tosave this energy from coal, we would require a 10% reduction of coaluse (ie 10% of 121 million tonnes of coal). To save this energy from oil,a 13.5% reduction in oil use would be necessary. We compare saving250 million GJ from coal with saving the same amount from oil. Table 2gives this comparison, along with base case results with no such policy.

Table 2 highlights two scenarios in which 107 million useful GJ aresaved from coal and oil respectively, assuming that the relative efficien-cy of oil to coal is 2.35. Since the economy uses much more coal than oil,despite the lower heat value, only 10% coal savings are required to savethe same useful GJ as a 13.5% reduction in oil consumption. In actualamounts, this translates into 12.1 million tonnes of coal and 2.7 milliontonnes of oil. It will be assumed that it is possible to do this withoutincurring capital costs, or that they have similar capital costs. Bothresults are compared with the base case (ie no energy savings). It can beseen that 6.6 million tonnes of carbon will be saved if this energy issaved from coal, but only 2.18 million tonnes of carbon are saved if it issaved from oil. Both save the same amounts of GJ, and values of fuelused are much lower compared to the base case for both the cases.However, more valuable fuel in the oil-saving scenario is saved - Rs7.7billion compared to the base case. On the other hand, only Rs2.4 billionwould be saved if this much energy were saved from coal. Clearly, it is inIndias interest to save oil rather than coal. The marginal cost of theadditional carbon savings from coal as opposed to oil is Rs1150 pertonne of carbon (US$l = RslO in 1983-84).

However, one should look beyond the amount of carbon savings andat the details. Table 3 indicates which sectors require more attention.For example, in the case of saving coal, it would be necessary to savecarbon from the power sector (2.7 million tonnes of carbon), iron andsteel (0.8 million tonnes), coal tar (0.7 million tonnes) and 0.2 to 0.3million tonnes each from non-metallic minerals, railways and cement.

On the other hand, if one has to save this carbon from oil, acompletely different sectoral strategy is required. Most attention will berequired for the transport sector (0.9 million tonnes), iron and steel (0.7million tonnes), and fertilizers (0.2 million tonnes). This diversion ofattention to different sectors will also translate into diversion of efforts -manpower, fuels, technology development etc. Thus the GHG reduc-


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Climate change and Indias energy policy optionsTable 3. Sectoral emissions under alternative scenarios of savings from coal and oil.

Model results by J. Parikh and S. Gokam

SectorElectricityiron and steelOther transportCoal tarNon-metallic mineralsRailwaysCementHotelsFertilizersCotton textiles

Base case Coal reduction by 10%values (lo6 (Values lo6tonnes of tonnes of Difference fromcarbon) carbon) base case27.73 25.00 2.73a.18 7.43 0.757.18 7.16 0.026.75 6.08 0.673.75 3.42 0.333.64 3.36 0.283.37 3.04 0.333.33 3.12 0.213.2 3.08 0.122.13 1.95 2.13

Oil reduction by 13.5%Values (lo6tonnes of Difference fromcarbon) base case27.67 0.068.1 0.086.25 0.936.75 0.003.68 0.073.52 0.123.36 0.013.32 0.013.00 0.202.08 0.05

tion savings policy would be at variance with Indias energy conserva-tion policy, which has emphasized saving oil.Fuel substitution scenariosCurrently India follows the policy of substituting coal for oil because ofan abundance of coal resources and inadequate oil production, resultingin large imports. When oil cannot be substituted by coal directly, it isdone through electricity production. For example, diesel pumps havebeen systematically replaced by electric pumps over the last 15 years,oil-fired boilers by coal-fired boilers, and so on. Even diesel in transportis substituted by electricity through electrification of railways and byencouraging suburban electric railways when possible. The need formassive investment has limited the progress of these substitutions, butthey are a part of strategic planning. These measures are not only for thelimited purpose of fuel substitution, but also to speed up transport andreduce congestion. Therefore, we construct two fuel substitution scenar-ios as described above along with the assumption of relative efficiency ofa factor of 2 between oil and coal. Unlike in the previous case, whereenergy was reduced (conservation), here only substitution takes place,ie energy in the economy in terms of GJ does not reduce. There are twoequivalent scanarios: 10% of coal consumption substituted by oil and13.5% of oil or gas consumption substituted by coal. The differencebetween the two can be interpreted as the implications of changing thefuel substitution policy from its current policy.

It should be pointed out that currently much more gas is available tomake it possible to carry out gas substitution. Indeed, gas-based powergeneration is already picking up rapidly. But gas is also priced as anoil-equivalent fuel. Therefore, the results discussed below are likely tobe similar for gas substitution for coal.

It can be seen in Table 4 that the current policy of substitution willlead to 12 million tonnes of additional coal and would cut nearly 3million tonnes of oil, leading to 4.3 million tonnes and 8.7 million tonnesof additional carbon emissions compared to base case and oil substitu-tion, respectively. However, it saves fuel worth RslO 600 million overthe alternative policy of coal substitution by oil (or gas). Thus, thealternative substitution policy will cost Rs10.5 billion in fuel alone, butwill save 8.7 million tonnes of carbon.

The magnitude of the trade-off is, in this framework, purely afunction of the relative price (per unit of useful energy) of the twoenergy sources. This cost measure captures only the variable costimplications of fuel substitution, and ignores the differences in capitalrequirements of substitutions in different sectors of the economy.



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Climate change and Indias energy policy optionsTable 4. Comparison of alternative substitution scenarios.

Substitution of Substitution of DifferenceBase case coal for oil oil for coal between (2) and (3)(1) (2) (3)Fuel tonnage (million tonnes)

Coal 121.30 133.43 109.17 24.26HSDILDO 14.10 12.52 16.07 -3.55FOlLSHS 5.60 4.84 6.36 -1.52Emissions (million tonnes of carbon)Coal 66.20 72.82HSDILDO 12.43 10.75FO/LSHS 4.43 3.83Total 83.06 87.40

59.58 13.2414.10 -3.355.02 -1.1978.71 8.69Value (million Rs)Coal 24 260 26 686 21 834 4 852HSD = high-speed diesel; FO = fuel oil; LDO = HSDILDO 41 431 35 838 47 024 -11 186

light diesel oil: LSHS = low-sulphur heavy stock. FO/LSHS 15 120 13 079 17 161 -4 082Model results by J. Parikh and S. Gokarn Total 80 811 75 603 86 019 -10416

In a wider sense, the costs of fuel substitution should also consider (i)the opportunity costs of increased foreign exchange outlays on pet-roleum products and capital goods; (ii) the costs of diminished output ofcoal in terms of regional income and employment effects; and (iii) thecosts (or benefits) of the change in the nature of local pollutantsresulting from the substitution. It is difficult to assess a priori which ofthese various components will eventually dominate the cost of substitu-tion. If the variable energy costs are the most significant element, thenthe trade-offs quantified here may be reasonable approximations of thetrue costs of carbon savings achieved through fuel substitution.Concluding remarksIndias energy policy planners need to take note of the current debateon global warming. This concern has devalued Indias coal resources.There will be pressures from international aid agencies to substitute gasand oil in place of coal. India needs to study its options carefully.

We have estimated CO2 emissions for 60 sectors for India from theinput-output matrix for 1983-84. The highest emissions are from theelectricity sector (33%) followed by iron and steel (9.8%), road and airtransport (8.6%), coal tar (8.1%), non-metallic minerals (4.5%), rail-ways (4.3%), cement (4.0%), hotels and restaurants (4.0%). Whilecomparing direct and indirect emission coefficients from each sector, itcan be seen that total emission coefficients could be much larger thandirect emission coefficients for many sectors, such as electricity, ironand steel, cement, and so on. The Indira Gandhi Institute of Develop-ment Research (IGIDR) has carried out a detailed exercise concerningthe possibilities of reducing carbon emissions by the power system inIndia.6 It may be possible to do that with modest investment.

When one inverts the matrix and multiplies it with the final demandvector, an entirely different picture emerges. We get emissions bydemand, where all indirect and embodied emissions are seen. The orderof emissions for final demand are: construction (22%), food crops(8.6%), road and air transport (6%), and so on. Construction by itself isnot a very C02-intensive activity, but that picture changes when one

0. Chattopadhyay and J. Parikh, CO2 considers the coal and oil embodied in construction materials such asEmissions Reduction From Power Systemin India, DP-79, Indira Gandhi Institute of iron and steel, metals and alloys, glass, cement and bricks. WhenDevelopment Research, Bombay, India, multiplied by the final demand vector, it is the largest COz-emitting1992. sector. Understandably, the construction needs of a growing developing



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Climate change and Indias energy policy optionscountry, which needs to build factories, offices, roads, schools, hospitalsand houses, are considerable. On the other hand, food crops produc-tion, which is the first basic need, is not as energy-intensive because it iscarried out with labour-intensive technologies. Electricity, which ismore an intermediate good, moves to sixth from first place. Thisexercise brings out the important policy conclusion that increasingconstruction efficiency by optimizing the use of construction materials,as well as by implementing construction technologies that use lessenergy-intensive materials, could be as important as improving energyefficiency for reducing carbon emissions. While the latter is well known,not enough attention is given to the former to reduce CO* emissions.Much of the construction is needed for infrastructure and productionpurposes. Carbon is embedded in exports in transport and hotels, and itis embedded in imports, in iron and steel and electricity.

Policy scenarios of energy conservation for fossil fuels are also carriedout. Two scenarios are constructed, both of which save 2.50 PJ (PJ = lo6GJ) of primary energy: one saves it from coal and the other saves it fromoil. They show that while both coal and oil reduction lead to reducedCO2 emissions, to reduce energy from oil is more attractive for Indiadue to savings in imported oil. Indias preferred energy policy would beto save oil rather than coal. For example, saving 250 PJ from coal savesonly Rs2706 million. The same amount of useful energy savings (about107 PJ) could be obtained from primary energy reduction from oil andwould save Rs7710 million. This difference of Rs5634 million could beinerpreted as incremental costs to India to follow coal-conservingpolicies. It is necessary to take such wide interpretations of incrementalcosts where two development strategies are compared and not just toapply a cost-benefit analysis of coal conservation projects separate fromother alternatives. Also at stake are the totally different sectoralapproaches necessary to achieve this reduction. For example, to reduceCO2 from coal would require efforts for power (2.7 million tons), ironand steel (0.8 million tonnes), coal tar (0.7 million tonnes), and so on.On the other hand, reducing CO2 from oil would require efforts in roadand air transport (0.9 million tonnes), iron and steel (0.7 milliontonnes), fertilizers (0.2 million tonnes), and so on. This diversion ofattention to different sectors will also translate into diversion ofmanpower, fuels, technology development, etc. Thus, a GHG reductionpolicy which would emphasize coal conservation would be at variancewith Indias energy conservation policy, which has emphasized savingoil rather than coal. When coal substitution by oil and gas is promoted,the incremental costs of following such a strategy are even larger,because precious resources are substituted in place of cheap andabundant coal. Substitution of 10% coal in energy terms leads toadditional costs of RslO 416 billion. This would also be at variance withIndias current substitution policy which promotes the substitution ofcoal for oil.

Appendix 1Technical note on input- output exercise usage patterns of each activity of themodel. The exercise was performedThis note describes the various steps model which directly incorporates car- on the 60-sector commodity x com-taken to develop an input-output bon emissions arising from the energy modity transactions matrix of the Indi-



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Climate change and Indias energy policy optionsan economy, published by the CentralStatistical Organisation, Departmentof Statistics, Ministry of Planning,Government of India. The exerciseused sectoral energy transactions (invalue terms) reported in the abovematrix as the starting point, convertedthese values into physical quantities offossil (carbon-emitting) fuels and thenconverted these physical fuel quanti-ties into their carbon emission equiva-lents. These carbon equivalents re-placed the original values of energytransactions in the 60-sector matrix,and the modified transactions matrixwas used to compute a technologycoefficient matrix, which was used asthe basis of analysis of various de-mand, production and conservationscenarios. The following sectors de-scribe in detail each stage of the trans-formation of sectoral energy valuetransactions into carbon emissions.

Stage I: Conversion of sectoralenergy transactions from valueunits to physical unitsThe original matrix provided informa-tion on fossil-fuel usage by each of the60 sectors in terms of the Rupeevalues (1983-84 prices) of coal andlignite (Sector 8), crude petroleumand natural gas (Sector 9), and pet-roleum products (Sector 26) used byeach sector during the accounting year1983-84. The coal classification in-cluded all varieties of coal, includingcoking coal. Crude petroleum andnatural gas were almost entirelyshown as an input into the petroleumproducts activity, as was to be ex-pected, with some small values feed-ing into several other sectors. We in-terpreted these flows as the amount ofnatural gas being directly consumed;as they were relatively insignificant,and a price of natural gas was difficultto obtain for 1983-84, we ignoredthese values. Thus, we have attributedzero carbon emissions from naturalgas usage (both combustion and flar-ing). The petroleum products classifi-ciation is, again, an aggregated one,inclusive of all refinery products. Ourconversion exercise thus concentratedon coal and petroleum products.(1) Coal. From coal production data,

we were able to obtain the proportionsof coking and non-coking coal con-sumed in the country in 1983-84. Nofurther disaggregations were availablefrom the same source. Our first taskwas to make a distinction between fueland non-fuel uses of coal. Since wewere unable to obtain data on sectoralconsumption of various types of coal,we started off with the assumptionthat coking coal was used predomi-nantly by the iron and steel and found-ry activity (Sector 35). This sector wasassumed to use an amount of non-coking coal as well (eg for captivepower generation). In this activity,coking coal, under our criteria, wouldrepresent the non-fuel component ofcoal usage, whereas non-coking coalwould represent the fuel component.In the coal tar production activity(Sector 27), a similar distinction has tobe made. In the iron and steel case,coking coal is first decomposed intocoke and volatile matter; the coke isfed into the blast furnace, in which it isoxidized, and emerges as a mixture ofcarbon oxides. This mix (comprisingsome other gaseous emissions as well)is termed blast furnace gas, and isused as a fuel gas by the rest of theiron and steel making activity. Thevolatile matter extracted from coal isfractionally distillated into a numberof products, the most important beingcoke-oven gas, which is also used as afuel gas throughout the plant. Thus,even coking coal is, at least indirectly,used as a fuel. We therefore avoidedany distinction between fuel and non-fuel uses of coal in the iron and steelsector. We used the same reasoningfor the coal tar sector, and treated allcoal usage by this sector as fuel,although, in reality, the bulk of theenergy requirement in the coal tarsector is met by the gaseous fractionremaining after the condensation oftar.

Since we abstracted away entirelyfrom non-fuel uses of coal, the nextstep was relatively simple; using theproportions of coking and non-cokingcoal production as weights, weobtained a rough weighted averageprice of Rs200 per tonne of coal (at1983-84 levels). This price wasassumed to be uniform for all coal-using sectors. This price was used to


convert the rupee values of coal us-ages by each sector into physical units(tonnes). The same formula was ap-plied to the components of final de-mand for coal.(2) Petroleum products. The conver-sion exercise for petroleum productsinvolved an additional step. We madea distinction between categories ofdistillates (light, middle and heavy),since each of these has somewhatdifferent carbon emission implica-tions. We assumed that the demandfor fuels by the production activities(intermediate demand) in the systemconsists of furnace oil, LSHS (bothheavy distillates), HSD and LDO(middle distillates). Two sectors, ferti-lizers (Sector 30) and organic chemi-cals (Sector 29)) were treated as usingpetroleum products for feedstock (ienon-fuel) purposes. The final demandcomponent for petroleum productswas assumed to consist of LDO (mid-dle), motor spirit and kerosene (lightdistillates).

For all production sectors otherthan fertilizers and organic chemicals,the following procedure was used. Thedocument Indian Petroleum and Nat u-ral Gas Stat istics (PAN GS) (1983-84,1988-89) provided us some idea of theusage patterns of refinery products bysome of the production sectors. Wealso obtained the prices of variousdistillates from the same source (on aRs/kl basis, which were converted to aRs/tonne basis, using specific gravitiesfor various distillates). We chose torepresent all middle distillate usage asHSD, and all heavy distillate usage asfurnace oil, since the calorific values,carbon emissions and prices withineach distillate category were quiteclose to each other. The value ofpetroleum product usage provided bythe input-output matrix was decom-posed into HSD and FO components,using the value distributions obtainedfrom the P&NG Statistics. Since wecould not obtain this value decomposi-tion for all sectors separately, somejudgments about usage patterns werenecessary. The final result was, there-fore, a combination of P&NGS dis-tributions applied to as many sectorsas possible and our own judgment forthe rest of the sectors. The rupee

289


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Climate change and Indias energy policy optionsvalue for HSD and FO thus obtainedwere converted to physical units (ton-nes) using the price information de-scribed above.

In the fertilizer activity, petroleumproducts are used as feedstock as wellas fuel. Based on technical normsavailable for various (nitrogenous)fertilizer processes, we took the ratioof feedstock to fuel as 80:20. Weattributed no carbon emissions to thefeedstock component, because tech-nical descriptions of the process indi-cate that, ideally, all CO2 generated inthe process of hydrogen production isrecycled as an input into the ureaproduction process. Only the fuelcomponent of petroleum usage wasdeemed to emit carbon. Thus, 20% ofthe total rupee value of petroleumproduct usage shown by the fertilizeractivity was taken as fuel, and con-verted into HSD and FO components,and thence to physical components bythe process described above. We haveobviously made an assumption herethat all fertilizer produced in the coun-try is nitrogenous; in reality, while ithas the largest share of output, there issignificant production of phosphaticfertilizers as well.

For the inorganic chemicals activity,we also needed to make a fuel-feedstock distinction. We obtainedthis ratio from the Annual Survey ofZndustries (various years) volumes onthis industry, and then arrived atphysical quantities as in the fertilizercase. For the final demand compo-nents of petroleum products, as wellas for imports, we used the valueshares provided in the P&NG Statis-tics to convert the matrix informationon aggregate values into product-wisevalues, and then to physical quanti-ties, using price information from thesame source.

Stage II : Conversion fromphysical units of fossil fuels(tonnes) to carbon emissions(tonnes)We obtained information on carbonemissions in tonnes/GJ for variousfuels from Estimat ion of GreenhouseGas Emissions and Sinks, OECD,August 1991. Multiplying these para-meters by the calorific values of thevarious fuels considered gave us car-bon emissions in tonnes of carbon/

tonne of fuel. The calorific valuesassumed (in GJ/tonne of fuel) were21, 44 and 38 for Coal, HSD and FOrespectively.

For coal, this carbon emission para-meter was applied to the physicalquantities of coal usage, computed foreach sector and for each component offinal demand in Stage I, to derive totalcarbon emissions from coal usage ineach activity. For petroleum products,the carbon emissions from the usageof HSD and FO were separately calcu-lated for each sector (for the finaldemand components, MS, HSD andkerosene were taken into considera-tion) and these were aggregated toderive a figure for total carbon emis-sions from petroleum products usageby each activity, as well as by eachcomponent of final demand.We then inserted these carbon emis-sion figures back into the original 60-sector matrix, simply replacing therows containing the value transactionsfor coal and petroleum with their re-spective derived carbon equivalents.We thus created a matrix containingall the original 60 sectors, but two ofthe rows were entirely denominated interms of tonnes of carbon.

Appendix 2Direct and indirect carbon emission coeffkients

SectorDirect and indirectenergy Direct Ratio

(1) Food crops(2) Cash crops(3) Plantation crops(4) Other crops(5) Animal husbandry(6) Forestry and logging(7) Fishing(8) Coal and lignite(9) Crude petroleum natural gas(IO) Iron ore(11) Other minerals

(12) Sugar(13) Food products (excluding sugar)(14)Beverages(15) Tobacco products(16) Cotton textiles(17) Wool, silk and synthetic textiles(113)Jute, hemp and mesta textiles(19) Textile products(20) Wood products (excluding furniture)(21) Furniture and textiles(22) Paper and paper products


0.2600.1910.0890.1620.1090.0770.0701.0070.1150.3870.3650.2980.4040.8260.2780.6340.7410.5300.3740.1840.1801.892

0.040 6.5220.019 10.2170.028 3.2330.028 5.8710.001 216.6340.021 3.6760.044 1.5920.211 4.7830.036 3.2150.123 3.1380.108 3.3690.074 4.0000.124 3.2470.336 2.4580.061 4.5320.211 3.0070.122 6.0910.169 3.1350.100 3.7410.041 4.4540.042 4.2730.943 2.007

continued on facing page


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Climat e change and Indias energy policy options

SectorDirect and indirectenergy Direct Ratio

(23) Printing, publishing and allied activities(24) Leather and leather products(25) Plastic and rubber products(26) Petroleum products(27) Coal tar products(28) Inorganic heavy chemicals(29) Organic heavy chemicals(30) Fertilizers(31) Paint varnishes and lacquers(32) Pesticide drugs and other chemicals(33) Cement(34) Non-metailic mineral products(35) Iron and steel industry and foundries(36) Other basic metal industries(37) Metal product excluding machinery(38) Agricultural machinery(39) Machinery for food and textile industries(40) Other machinery(41) Electronic, electrical machinery(42) Railway transport equipment(43) Other transport ~uipment(44) Miscellaneous manufacturing industries(45) Construction(46) Electricity(47) Gas and water supply(48) Railway transport services(49) Other transport services(50) Storage and warehousing(51) Communication(52) Trade(53) Hotels and restaurants(54) Banking(55) Insurance(56) Ownership of dwelling(57) Education and research(58) Medical and health(59) Other services(60) Public administration and defence

0.825 0.0440.266 0.0420.406 0.0651.028 0.09010.956 9.7131.817 0.2580.644 0.1461.824 0.5910.675 0.1420.615 0,1432.951 2.1851.783 1.1972.219 0.9231.455 0.3381.221 0.2671.003 0.1450.855 0.0450.822 0.0430.613 0.0411.033 0.4040.699 0.0590.613 0.1180.862 0.0034.892 3.4741.002 0.0941.265 0.7200.726 0.4970.651 0.0240.169 0.0100.219 0.0080.968 0.6750.134 0.0040.114 0.0030.092 0.0000.107 0.0020.364 0.0070.333 0.0670.000 0.000

18.8526.2706.20011.4201.1287.0354.3993.0844.7694.2961.3511.4892.4034.3024.5706.91518.97218.915

i5.0812.55411.8385.207292.0861.40810.6901.7561.46127.14317.63725.9041.43431.58644.450_46.50154.543

4.9910.000Notes: Carbon emission coefficients are in tonnes per thousand rupees, apart from the coal and petroleum product diagonal elements which are in tonnesof carbon equivalent. The (direct and indirect) coefficients are obtained from the (/-A) inverse matrix. Ratio refers to the ratio of total (direct and indirect) todirect coefficients.

Appendix 3Sectoral definitions for the major sectorsSectorCotton textilesNon-metallic minerals

Construclion

EledricityRailway transport servicesOther transport services

DefinitionCotton ginning, cleaning and baling, spinning, weav ing and finishing of cotton textiles in mills and power looms, printing,dyeing and bleaching of cotton textiles.Manufacture of glass and glass products, earthenware and pottery, chinaware, sanitaryware, porcelainware, insulators,lime and plaster, mica products, structural stone goods, stoneware, stone dressing and crushing, earthenware andplaster statues and products, asbestos cement and its products, slate products, cement and concrete products, mineralwool, silica products and other non-metallic mineral products.Construction and maintenance of buildings, aerodromes, roads, railways, bridges, tunnels. pipelines, ports, harbours,runways communization systems, waterways, water resefvoirs, hydroelectric projects and industrial plants and activitiesallied to const~ction.Generation and transmission of electric energy and its distribution to households, industrial and commercial andother users.Government railways, private railways, services incidental to this transport.Buses, tramways, trucks, taxies, auto-rickshaws, animal services, urban bullock, urban buffalo, horses and other animalsdrawn carts, cycles, hand pulled rickshaw and pack animals, sh ipping transport by boats, steamer, ferry etc. by canal

Hotels and restaurants or rivers and unorganized water transport by sea, air transport and services incidentical to these forma of transport.Services rendered by hotels, boarding houses, eating houses, cafes, restaurants, canteens, etc.Cement CementTrade Wholesale and retail trade.Iron and steel Iron and steel, special steel and ferro-alloys.


parikh and subir gokarn _1993_climate change and india's energy policy options new perspectives...

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