The Carbon Noose Around Asia's Neck

Mumbai, India -- The story is buried in the business section of the Times of India. India's largely government-owned monopoly, Coal India, is changing its pricing system -- and the result will be a staggering 25 percent projected increase in the price of electricity generated with domestic coal. Since imported coal has already tripled in price over the past three years, the reality should be sinking in. An economic development strategy for Asia premised on cheap (if dirty) coal is over.

Even The Economist sees the crisis. The cover of its Asian edition blares "Trouble for King Coal in India."  In spite of $60 billion in recent private investment in coal generating plants, India's coal fleet has operated at less than 50 percent of capacity for the past six months -- many plants squeezing through with only a few days worth of coal reserves at a time. Coal production in India has grown -- but at a snail's pace compared with China. Major industrial giants that were financing the enormous fleet of new power plants that this country needs have, effectively gone on a capital strike, suspending plans for 42 gigawatts of new coal capacity. India now produces only 73 percent of its own demand, giving coal exporters like Indonesia and Australia the whip hand and the ability to extract enormous price increases as India competes with other Asian countries seeking to fire their boilers and light their cities.

China has faced the same challenge over the past year. Overheated construction of coal-fired power plants in both countries has caused domestic and Asian demand to outrace supply. That brings expensive, long-distance coal -- its price as much as 60 percent comprised of the cost of embedded diesel fuel required to move it by rail and ship -- into the market. And now low-cost producers, like Indonesia and Coal India, are raising their prices to match soaring international spot prices -- just as low-cost oil producers like Saudi Arabia did with oil in the 1970s.

China has adopted coping strategies drastically different from India's. Domestic coal production has doubled over the last decade. To no avail. While India faces coal shortages, which yields electricity cuts, China has abundant coal that is too expensive for electricity consumers to afford -- so it too has been running its power fleet at a fraction of capacity, and imposing steep price increases on power consumers.

But neither India's nor China's coal reserves are near their major population and industrial centers. So coal (or electricity) must be shipped long distances, and the diesel (or copper) needed to do so ensures that however low worker and environmental standards are placed, coal power will no longer be priced at the cheap 4-5 cents a kilowatt range that Asia is used to -- and was counting on. Instead, any reasonable projection is that except during economic slumps, coal power will cost more like 10 cents -- before cleaning up the pollution it creates. (A new study estimates that coal pollution kills 370,000 Chinese each year, and costs the economy between one and five percent of its total GDP.)

Worse, over-reliance on coal is, in effect, driving up India's carbon-imports bill. Either India imports diesel to mine and transport its own coal, or it imports its coal directly. Already, the soaring current-accounts deficit for imported hydrocarbons is an existential threat to the Indian economy. In the U.S., our oil imports bill is a huge drag on our economy -- at $350 billion it is more than half of our trade deficit, 16 percent of the federal government's tax revenues.

But bad as this burden is, it pales in contrast to the stranglehold that imported fossil fuel holds over India. The combined oil and coal imports bill for 2011 soared with higher prices. Relative to India's economy, it is four times as large as the American oil imports drain. And it's heading up. Estimates vary -- The Economist forecasts a two-thirds increase, to $165 billion by 2017. Carbon imports already equal two-thirds of all the tax revenues taken in by the Indian government. The population can't afford the prices of imported coal and oil, either. So the Indian government forks out a hefty $23 billion each year in fossil fuel subsidies -- money that is desperately needed for infrastructure and education.

"Yes," the official (as well as most of the private) responses go. Paraphrasing, "Coal is no longer cheap. India can't afford the oil it imports, much less more-expensive coal. But we have no choice. Nothing else can power our development." Four years ago, with coal power at 3-4 cents, wind at 10-12 cents, and solar at 25-30 cents, that argument made sense. And that perspective -- that coal is the essential, unavoidable path to prosperity -- has sunk deeply into Asia's consciousness.

But cost matters, and a largely unnoticed economic revolution has swept Asia's energy markets. Regional coal prices and global copper costs -- the ingredients of fossil power and the grid that transports it -- have tripled. Solar panels and LED lights, however, cost only a third of what they formerly did -- that's a nine-fold shift in relative costs.  Today, the marginal kwh of coal power costs upward of 10 cents, wind in China and India costs about seven cents, and solar is already below fifteen cents.

Stringing a wire to a remote Indian village to electrify it costs a staggering $0.02/kwh per kilometer.  So just wiring a village ten kilometers from the grid adds a staggering $0.20 to the cost of each coal-fired kilowatt -- about the cost of giving that same village rooftop solar, with the electricity thrown in for free. And even in villages that are already on the grid, 25 percent of India's power is currently squandered operating hugely wasteful and inefficient irrigation pumps at erratic hours. Wind and solar are now cheaper than new coal for India -- but efficiency and energy sector reform are cheaper still.

Between 2001 and 2010, the U.S. almost locked itself into a generation of 180 costly and unneeded coal-fired power plants. Campaigns led by the environmental community, the enacting of state renewable energy standards, and more-abundant competitive sources like wind and natural gas, headed off that almost catastrophic coal rush. Now Asia faces a similar choice -- overbuild coal plants and guarantee bloated prices that will depress its economic potential, or pivot away from reliance on new coal and start deploying the new, low-cost power leaders -- efficiency, distributed generation, wind, and solar.

Will India and China slip the carbon noose in time?

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