Why not a 0.1% impost for energy R&D?
A market is never saturated with a good product, but it is very quickly saturated with a bad one, noted auto visionary Ford.
By Jaideep Mishra, TNN |
NEW DELHI: A market is never saturated with a good product, but it is very quickly saturated with a bad one, noted auto visionary Ford. Consider, for example, financial products like derivatives, which promote information dissemination and bring about better price discovery.
Now, the latest estimates by the International Energy Agency has revealed that in ‘business as usual’ scenario, 45% of the increase in energy demand worldwide up to 2030 would be in China and India. The rising demand requires “vigorous, immediate and collective policy action” across the globe, so as to shore up energy efficiency, cut down on costs and generally bring about better allocation of resources.
Specifically, India needs a proactive market design to better reflect scarcity value, and right across the board. It is welcome that in its latest monetary policy stance, the Reserve Bank of India has permitted oil companies to hedge foreign exchange exposure by using derivative instruments in markets overseas. The larger policy agenda ought to be to have similar products in domestic markets, and sooner rather than later. Heightened demand does call for proper markets.
The fact is that derivative securities do provide economic benefits. The key characteristic of such securities is market influence read leverage, which can be routinely availed at modest cost.
After all, for a fraction of the cost of buying the underlying asset, energy derivatives create a price exposure similar to that of physical ownership. The result is that such products provide everyday means of offsetting exposures among hedgers, or simply transferring risk from hedgers to other market players, including investors and ‘speculators’.
In parallel, derivatives diffuse and spread price information and so actively aid price discovery. Given the fact that the going rates influences production, storage and energy consumption decisions, derivative markets surely bring about efficiency in resource allocation.
In our fledging markets for energy futures, innovative products and hedging instruments are required, in what’s likely to be a fast-growing market, for years. It underlines the need for competitive, ‘real’ energy markets domestically, for economy-wide benefits.
It would appear that the increased cross-market linkages that result from derivative trading fuel and aggravate volatility in the underlying asset. But given market imperfections, derivatives would actually make the market more complete by allowing investment choices that were previously cost inefficient or plain impossible due to regulatory or institutional constraints.
And to the extent energy derivatives promote information-based trading, it increases depth and liquidity, and so ought to reduce spot-market volatility. Empirical evidence seems to suggest that volatility tends to decrease, with increased derivative trading. So given that there is increased informational efficiency with derivative contracts, it means positive price signals for energy markets.
Besides, as IEA says, the consequences for China, India and the rest of world of “unfettered growth in global energy demand” would be “alarming”. It would heighten concerns about energy security, global warming and climate change. The policy challenge, adds the IEA report, is to put in motion transition to a more secure, lower-carbon energy system, and without undermining economic and social development. The need for market efficiency is imperative, as “much of India’s incremental energy needs to 2030 will have to be imported”.
Now, the latest estimates by the International Energy Agency has revealed that in ‘business as usual’ scenario, 45% of the increase in energy demand worldwide up to 2030 would be in China and India. The rising demand requires “vigorous, immediate and collective policy action” across the globe, so as to shore up energy efficiency, cut down on costs and generally bring about better allocation of resources.
Specifically, India needs a proactive market design to better reflect scarcity value, and right across the board. It is welcome that in its latest monetary policy stance, the Reserve Bank of India has permitted oil companies to hedge foreign exchange exposure by using derivative instruments in markets overseas. The larger policy agenda ought to be to have similar products in domestic markets, and sooner rather than later. Heightened demand does call for proper markets.
The fact is that derivative securities do provide economic benefits. The key characteristic of such securities is market influence read leverage, which can be routinely availed at modest cost.
After all, for a fraction of the cost of buying the underlying asset, energy derivatives create a price exposure similar to that of physical ownership. The result is that such products provide everyday means of offsetting exposures among hedgers, or simply transferring risk from hedgers to other market players, including investors and ‘speculators’.
In parallel, derivatives diffuse and spread price information and so actively aid price discovery. Given the fact that the going rates influences production, storage and energy consumption decisions, derivative markets surely bring about efficiency in resource allocation.
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In our fledging markets for energy futures, innovative products and hedging instruments are required, in what’s likely to be a fast-growing market, for years. It underlines the need for competitive, ‘real’ energy markets domestically, for economy-wide benefits.
It would appear that the increased cross-market linkages that result from derivative trading fuel and aggravate volatility in the underlying asset. But given market imperfections, derivatives would actually make the market more complete by allowing investment choices that were previously cost inefficient or plain impossible due to regulatory or institutional constraints.
And to the extent energy derivatives promote information-based trading, it increases depth and liquidity, and so ought to reduce spot-market volatility. Empirical evidence seems to suggest that volatility tends to decrease, with increased derivative trading. So given that there is increased informational efficiency with derivative contracts, it means positive price signals for energy markets.
Besides, as IEA says, the consequences for China, India and the rest of world of “unfettered growth in global energy demand” would be “alarming”. It would heighten concerns about energy security, global warming and climate change. The policy challenge, adds the IEA report, is to put in motion transition to a more secure, lower-carbon energy system, and without undermining economic and social development. The need for market efficiency is imperative, as “much of India’s incremental energy needs to 2030 will have to be imported”.
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By then, estimates IEA, the combined oil imports of China and India would be more than that of the US and Japan today. The longer terms risks to energy security are clearly set to grow. The study recommends prompt policy focus on curbing the rapid growth in carbon dioxide emissions from coal-fired power stations, the prime cause of the surge in green-house gas emissions in recent years. Better thermal efficiency would also have huge economic and environmental benefits.
Reports say that the first set of the more efficient super-critical boilers in India are slated to be installed by 2009 at NTPC plants.
Newer clean coal technologies could considerably mitigate emissions in the medium to the long term. However, given the energy challenge, what is required is stepped up public and private sector funding for energy technology research, development and demonstration.
Worldwide, such funding actually remains “well below levels reached in the early 1980s”, notes the IEA study. There is also the vital need to boost energy R&D in India, as the Integrated Energy Policy report emphasised last year. The funds budgeted by our main energy companies is much too low, relatively speaking.
The latter report went on to recommend a modest surcharge on turnover and tariffs to have a receptacle corpus of funding for energy R&D. Additionally, as we rationalise our tax regime, it might make sense to opt for say 0.1% tax for energy R&D on all taxes levied by the Centre, and earmark the funds for the express purpose.
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