Customer Lifetime Value with particular ref. to banks – Part III

In the case of banks, we can take one example in respect of credit card customers. Suppose on an average, one customer purchase items worth Rs.2000 per month and maintaining unpaid balance of Rs.500 every month.

Table 1

Merchant processing fees (2.5% x Rs.2,000)	Rs.   50.00
Interest on unpaid balance at the end of month: (30% * Rs.500 / 12)	12.50
Total Monthly revenue:	62.50
Annualized monthly revenue	750.00
Annual fee (First year waival)	99.00
Total Annual revenue	849.00
Annual maintenance, processing, mailing costs	400.00
Annual Profitability	449.00

Table 2

	Year 1	Year 2	Year 3
Referral rate	6%	8%	10%
Referred customers	0	6000	6480
Retention rate	75%	80%	85%
Retained customers	0	75000	64800
Total customers	100000	81000	71280
Average balance	500	500	500
Revenue per customer	750	849	849
Total Revenue	75000000	68769000	60516720
Direct costs@400	40000000	32400000	28512000
Acquisition cost@80/-	8000000	0	0
Marketing cost@25	2500000	2025000	1782000
Total costs	50500000	34425000	30294000
Profit	24500000	34344000	30222720
Profit per customer	245	424	424
Disc.Rate	1.00	1.14	1.30
Net present value profit	24500000	30126316	23248246
Cumulative NPV profit	24500000	54626316	77874562
Life Time Value(each)	245.00	546.26	778.75
(calculated on original 100000 customers)

In a bank, due to business campaign for new credit cards, one lakh customers are acquired with acquisition cost of Rs.80 per customer. All these customers are not static. They tend to drift away. A year later, only 75% of them are still using their card. Their retention rate is 75%. Of those who remain, the retention rate increases to 80% in Year 2 and 85% in Year 3. Some of these customers are attracted by marketing efforts of Rs.25 per customer per year to become advocates and get their relatives and friends to take out the card. This results in a referral rate of 6% and six thousand referred customers in the beginning of Year 2. The referral rate increased to 8% and 10% in subsequent years due to marketing costs. The revenue per customer is Rs.750/- in the first year. In the following two years, it goes up by Rs.99/- because the annual fee which was free in the first year kicks in. The direct costs are the same (Rs.400/-), but in addition we have the annual marketing costs of Rs.25/- but no acquisition cost of Rs.80/- . The discounted rate is worked out based on 7% interest and risk rate of 2. Life time value of customer is worked out to be Rs. 245, Rs. 546.26 and Rs. 778.75 for three years which shows the increasing trend of customer value addition to bank.

Thus the Life Time Value helps to find out the profitability trend of customers in the sales field and it is one of the yardstick for marketing men in banks and other selling centre points. They should target the customers having LTV on the increasing trend so that overall profitability of any firm can be intact.

Venkata Ramani  AICWA

Layman’s Guide for Valuation of Perks – Part III

Perks:

Service of sweeper, gardener or watchman or personal attendant: Actual cost to the employer Less: amount paid by the employee

Supply of gas, electricity or water for household consumption: Amount paid to outside agency if procured from outside agency or manufactured cost for actual usage of units Less amount paid by the employee

Education facilities to the members of the employee:

Free education to children in the school maintained by employer or sponsored by employer …Up to Rs.1000 per child per month is exempted. Other schools…. Actual cost to employer Less amount paid by the employee

Loans to employees at concessional interest or no interest rate: Interest charged by employer is equal to more than SBI rate: No perks.

In other cases: The difference of interest amount Less amount paid by the employee towards interest.

Note: Loan not exceeding Rs.20000 in aggregate will not be considered for this clause.

Medical Loan for treatment of diseases specified in Rule 3 A will not be considered for this clause.

Free meals during office hours: Free meals in remote area or offshore installation area is not a taxable perk.

In other places, actual cost to the employer. But rebate is there up to Rs.50 per meal or tea or snacks. Tea or non-alcoholic beverages and snacks in the form of light refreshments during working hours is not taxable.

Value of any Gift: Value of gift is taxable more than Rs.5000 in aggregate in a year.

Expenditure on club other than health club or sports: If the expenditure is incurred by the employer for exclusively for official purposes, it is not a perk and not taxable. Otherwise, it is taxable Less amount recovered from employee.

Any other benefit or amenities or service etc. provided by employer other than telephone /mobile services: The actual cost to employer Less amount recovered from employee.

C R Venkata Ramani

AICWA

Layman’s Guide for Valuation of Perks – Part II

Valuation of Motor car(Rule 3(2) (A))

The perks will be valued as per ownership.

• Type-1:

Owner:                 Employer

Expenses met by: Employer

Purpose:   Fully official

Taxability:  Not a perk but documents have to be maintained as per rule 3(2)(B).

• Type 2:

Owner:                 Employer

Expenses met by: Employer

Purpose:   Fully private

Taxability:  All expenditure including driver salary plus 10% of original cost of car. If hired, full hire charges.  From this, recovery from employee can be deducted. The remaining amount will be taxable perk under this head, if amount is positive.

• Type 3:

Owner:                 Employer

Expenses met by: Employer

Purpose:   Partly official and party private

Taxability:  Monthly valuation of Rs. 1800 for the car and Rs.500 for chauffeur if the car capacity is less than 1.6 litre(hp<16). For cars above this category i.e.hp >16, valuations will beRs.2400 and Rs.900 for chauffeur.  Nothing is deductible in respect of any amount recovered from employee.

Maintenance in respect of private use  is to be borne by employee

Same logic applies for more than one car of company used by one employee.

• Type 4:

Owner:                 Employer

Expenses met by: Employee

Purpose:   Fully official

Taxability:  Not a perk and hence not taxable.

• Type 5:

Owner:                 Employer

Expenses met by: Employee

Purpose:   Fully private

Taxability:  All expenditure including driver salary plus 10% of original cost of car is to be taken. If hired, full hire charges is to be taken instead.  From this, expenses met by employee can be deducted. The remaining amount will be taxable perk under this head, if amount is positive

• Type 6:

Owner:                 Employer

Expenses met by: Employee

Purpose:   Partly official and party private

Taxability:  Monthly valuation of Rs. 600 for the car and Rs.900 for chauffeur if the car capacity is less than 1.6 litre. For cars above this category, valuations will be Rs.900 and Rs.900 for chauffeur.

Nothing is deductible in respect of any amount recovered from the employee. Maintenance in respect of private use  is to be borne by employee

• Type 7:

Owner:                 Employee

Expenses met by: Employer

Purpose:   Fully official

Taxability:  Not a perk but documents have to be maintained as per rule 3(2)(B).

• Type 8:

Owner:                 Employee

Expenses met by: Employer

Purpose:   Partly official and party private

Taxability:  Documents have to be maintained as per rule 3(2)(B).

Actual expenditure reimbursed by Employer (Less)

a)Monthly valuation of Rs. 1800 for the car and Rs.500 for chauffeur if the car capacity is less than 1.6 litre(hp<16). For cars above this category, valuation will be actual expenditure (less)Rs.2400 and Rs.900 for chauffeur (or)

b)If  records are maintained as per Rule 3 (2) (B) and higher sum is for actual expenditure i.e more than Rs.1800+500 or Rs. 2400+900, then this amount can be deducted from actual expenditure.

From the above, the amount recovered from employee has to be deducted so as to arrive at taxable perk, if it is positive.

• Type 9:

Owner:                 Employee

Expenses met by: Employer

Purpose: Fully Private

Taxability: From the actual expenditure incurred by the employer, amount recovered from employee has to be deducted and the balance amount is taxable.

Rule 3(2)(B) says that in order to claim perk exemption for car,

1. Employer should maintain complete details of journey undertaken for official purposes either through driver or through the officer concerned which includes date of journey, destination, mileage and amount of expenditure incurred thereon.. Typical log book contains date, name of officer using, from km, to km, total no. of kms, place visited, expenditure incurred for petrol, maintenance etc.

2. Certificate of immediate officer is necessary mentioning that the expenditure is incurred for wholly and exclusively for performance of official duties on month basis.

The above conditions should also be satisfied  if a car is owned by the employee, expenses are incurred or reimbursed by employer and the employee claims that the expenses for official purposes is more than Rs. 1800 per month for cc rating of 1600cc and Rs.2400 for cc rating above 1600 cc.

• Car facility between office and residence provided by employer: Not taxable.

C R Venkata Ramani AICWA

Layman’s Guide for Valuation of Perks – Part I

A perquisite is defined (in the Oxford English Dictionary) as any casual emolument, fee or profit, attached to an office or position in addition to the salary or wages.  In other words perquisites are benefits in addition to normal salary to which employee has a right by virtue of his employment.  To put it simply perquisites or ‘perks’ as they are called colloquially, are benefits generally in kind, received by an employee by virtue of his employment.

Now at last Perks tax rules replace Fringe Benefit Tax (FBT) in India w.e.f… 1.4.2009. The taxability of perks is almost same as was existed before introduction of FBT i.e. around 2005. Only change is that employees provided with car will now have to pay tax on increased monthly valuation.  Now the employees have to pay taxes on perks given tot hem by their employers.

Now we will discuss about some of the perks:

Valuation of Accommodation (Rule3 (1))

Valuation of Unfurnished Accommodation

1. 1. Provided by Central/State Govt: License fee determined by Govt less rent recovered.
   2. Provided by Employer other than Central/State Govt:

i.            Owned by employer: In cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census: 10% of salary (less) rent actually paid by employee. In other places where population is exceeding 25 lakhs, it is 7.5% of salary less rent actually paid by employee.
ii.            Taken on lease by employer: Rent paid by employer or 15% of salary whichever is lower less rent actually recovered from employee.
iii.            Accommodation in hotel by employer: 24% of salary paid or payable or actual charges paid to hotel or payable which ever is less. From this amount, the amount recovered or recoverable from employee is to be deducted. If period of accommodation is only 15 days or less, it is not taxable provided the stay is due to transfer from one place to another. For the first 90 days of transfer accommodation is provided both at existing place of work and in new place, the accommodation which has lower value shall be taxable. After 90 days, both will be taxable.

Non-Applicability of this valuation

The above valuation is not applicable if the accommodation provided is in a mining site, project execution site, onshore oil exploration site, dam site, offshore site, power generation site subject to following conditions:

1. The accommodation should be of temporary nature and
2. Plinth area should not exceed 800sqft.
3. Accommodation should be located at least 8 kms away from local limits of municipality/ cantonment
4. Located in a remote area which is located at least 40 kms away from a town having a population of not exceeding 20000 based on latest census.

Valuation of Furnished Accommodation

With the valuation of unfurnished accommodation, we have to add value of furniture (if owned by employer, then 10% p.a. of original cost of furniture or if it is hired from third party, then actual hire charges). From the total of the two, deduct any actual charges paid for accommodation and furniture)

Furniture includes television sets, radio, refrigerator, A/C or other household appliances.

Note: ‘Salary’ for the purpose of this section includes basic salary, DA which enters in retirement computation, all taxable allowances, bonus or commission or ex-gratia, any other monetary payment. But it does not include any other D.A., employer’s contribution to PF, exempted allowances, value of perks.

No cheers for Future Generation- Copenhagen Meet

The world is living on borrowed time like a cancer patient who refuses to give up smoking despite being told by doctors that it is the smoking which is the root cause. The only reason for some optimism is that the cancer has been detected at an early stage and there is still hope for recovery provided the right steps are taken at the earliest. Legally binding agreement is a must and it should be thrashed next year without fail.

In the recently concluded Copenhagen meet, India can be proud to be one permanent member among five .The other four are USA, China, Brazil and South Africa.  We can call it UN Climate Security Council. But it has no legal powers to insist on cutting emissions as promised. So it is a committee just to tell the world what is happening and who is failing as per the base papers which were taken note by all nations. The final accord provides for a list of non-binding emissions cut commitments from nations as they individually see fit and an equally vague list of funding promises. Even this accord is not accepted by all but all nations have taken note of it. The real sufferers are the small island nations who can see the Damocles’ sword hanging above their head and may fall any time and lose their identity in the world map. These poor nations are praying hard for better sense for political leaders at least in the next year. This meet has given China and India to come together to dictate terms with any bigger nation.

Main points in the deal:

1. A Global goal to reduce world emission by 50% by 2050.

2. Developed countries to set their emission targets by Feb2010. Adherence to targets would be subject to international monitoring.

3. Developing countries are to list their action to control emission with external assistance. Adherence to targets would be subject to external monitoring and verification by some local authorities following international standards without impinging on the sovereignty of nations.

4. Long term funding to the tune of $100 millions per year by 2020 and making available $10 million per year for short term funding from 2010 to the poorest and most vulnerable to climate change.

5.A review of the overall agreement in 2016.

So Year 2010 will tell something about countries plan of action. As per draft plan legislation of US, the emissions in USA will be reduced by a mere 20% from 2005 levels by 2020 which translates to a paltry 4% reduction from 1990 levels. Though the targets  for 2050 is kept at 83% reduction compared to 2005, the US initiative neither pleased the EU nor the developing countries. They seek minimum target of 30% to 40% to be achieved by USA by 2020. USA is not agreeing to it as it fears that it will hit its economy badly at this time of war logged America.

We pray to God on this Christmas for better sense for all to help future generation to enjoy life . We can celebrate 2010 as Environment safeguard year with positive minds submit their plans in Feb2010 to UN.

C R Venkata Ramani

Ref: some portion of the above are taken from Business standard /Business line of Dec09.

Customer Lifetime Value with particular ref. to banks – Part II

A typical Life time value calculation:

LTV traces the buying behaviour of group of existing and new customers under different cluster groups in present and future period. To make it simple, we can presume that LTV is the profit that we will receive from a given group of customers within next 3 to 4 years. This may be taken as a trend for future and it may be revised once in three to four years. For working out a typical LTV calculation, we can take customers who are acquired in 2006 and measure their behaviour in that year, in 2007 and in 2008. This is almost similar to NAV value of investments for the purpose of balance sheet.

Sale of books through catalogue customers:

For calculating the LTV, the following details are required.

• The number of customers acquired in the referred year no.1
• The retention rate of the customers in year no.2 and 3 and so on.
• The number of orders placed by customers for all the years under ref.
• The average order size for all the years under ref.
• The number of catalogues used to attract these customers for all the years
• The additional catalogue sent to customers during 1^st and subsequent years.
• The cost of catalogue per piece
• Discounted rate for finding the net present value.

Table 1:Example showing calculation of LTV for  one new sales campaign for sale of books

From the above table we can observe that for getting 5 lakh new customers, an amount of Rs.35 lakhs was spent by way of catalogue in the first year. The retention rate was presumed to be 35% in the first year and hence the 2^nd year started with 1.75 lakh customers. The retention rate for second year increased from 35% to 60% and in third year it is 70%. From this retention rate, we can understand that many of the disloyal customers disappear after the first year. But in the second and third year, customers stabilize with the book store as loyal existing customers as compared to new customers.  Not only they are loyal to book store but their average number of orders and average order size are also increased. For introduction to new customers, initially 2 catalogues per customer were circulated in the first year followed by 5 supplement catalogues. In the second and third year, in place of introductory catalogues, 10 supplementary catalogues per customer were circulated to keep them in regular contacts for increasing the business. The total cost of catalogues was calculated taking cost of one catalogue as Rs.1/-. In the same way, the total cost of sales was presumed to be 60% of sale value. Thus total costs and revenues are calculated and gross profit is arrived at.

The discount rate (based on prevailing interest rates) is also included because future profits are not worth as much in today’s money as present profits. The formula for the discount rate is D= (1+( i x rf))ⁿ

Where D= Discount rate, i= interest rate in %, rf= Risk factor and n= number of years after which we receive money. For e.g. , if a risk factor is 1 and an interest rate of 12%, the discount rate  for the second year (one year from now) is

D= ( 1+(0.12  x  1))¹ or  D= (1.12) ¹ =1.12

In the similar way, the discount rate for the third year (two years from now) is

D= ( 1+(0.12 x  1))² or  D= (1.12) ² =1.25

The LTV is calculated by dividing the cumulative LTV by the originally acquired 5 lakh customers. The LTV of three years are Rs.45, Rs.66.04 and Rs.81.52 respectively.

Profit per customer is arrived at by dividing the gross profit by number of customers of respective year. In the above example, the profit per customer increased from Rs.45 to 82.59. The profit is less in first year as it is the year of capturing new customers. The second and third year, it is only retaining customer costs and it has given improved profits. From this we can understand that acquiring new customers is not a profitable action in the initial stage but subsequently when new customers become existing customers, they are more profitable. That is why money spent on increased retention has a higher pay off than money spent on acquisition.

We have calculated an average LTV for a group of 5 lakh customers. This may consist of senior citizens, college students, professionals, high spending group, low spending group, no spending group, group preference to superior, medium and economy quality etc. If we want to create customer data profile by creating customer segments by different age group or by spending habits or by geographical locations etc, it can be possible with the above data with segregation under different groups.

C R Venkata Ramani

Debate over Extension of Stock market timing in india

On 14/12/09, Bombay stock exchange , India announced extension of trading time by0.15 minutes i.e. from 9.40 am  IST instead of 9.55 am IST. This is done in order to catch up some business of NIFTY trading in Singapore stock exchange. Another  competitive National Stock exchange in India announced  on 15/12/09,extension of 1 hour trade instead of 0.15 minutes. i.e. trade will start from 9.00 am IST and BSE also followed suit. They informed SEBI and public and brokers that the revised timing will be effective from 16/12/09 in order to catch up more business.

There was chaos among broking community and vociferous protests were heard throughout India against the revised timing. Nearly 70% of brokerage firms were against the new timings and called NSE and BSE board of members as senseless to the reality and are doing all these changes without any discussion with all the aggrieved. The arguments put forward by them against the new timings are:

1. There will not be any sizable extra revenue for the stock exchanges. Only business will be brisk for the first hour and rest of the time it will be dull and flat except closing time.

2. In Metros, the employees of stock brokerage firms have to start from their house right from 6 am to reach the office by 8 am so that they can start their operation by 9 am after doing some preliminary preparations. So they are inconvenienced due to disturbance in their routines thus they have to sacrifice one hour from their family timing for business.

3. The employees have to be paid extra money or they have to work without any additional compensation. At a stretch to work from 9 am to 3.30 pm will create lot of health problems.

4. 2 days time is insufficient to make the infrastructure ready for the show.

5. Linking of banks with stock broking accounts will be difficult as most of banks still follow 10 am work syndrome. So banks have to be convinced to start bank operation from 9 am.

6. Extra overhead like A/c , lighting etc. will add up costs and there will not be corresponding increase in revenues.

7. NIFTY related business diverted to Singapore exchange is meager. If advancing time will catch that business of Singapore exchange, then there is no end for such type of arguments and we cannot open our exchanges throughout 24 hours to catch all world business. It is ridiculous to extend timing.

Seeing the plight of stock brokers, SEBI called both exchanges in india and discussed the matter. Both the exchanges agreed to implement the timings from 4th of Jan 2010. The arguments put forth by the exchange authorities are as follows:

1. Increase in time will help to generate additional business. The business meant for India should not be left out to other national exchanges like Singapore exchange where sizable India related NIFTY business is diverted.
2. All over the world, the timing of trading is greater than India. India should come up and go along with the world so that they can have global business. It is similar to global business mergers and acquisitions done by Indian industry players.
3. Only in India, there is lot of holidays in stock exchange. So we are in fact losing sizable business due to this.
4. Indian public are receptive to new timings and welcome the same. Public in general can trade before going to office and it will enhance the revenue of stock brokerage houses.
5. Due to various type of business like shares, derivatives, currency, commodity, public wants to spend some time  in stock market before starting to do  some other routine works. Even mutual fund deposits, gold bonds, debt bonds are all dealt by brokerage firms and doing it online gives them lot of freeness as compared to the position of relying on brokers after office hours.
6. In metros like Mumbai, Chennai etc, already employees in software industry are doing work from 9 am to 7 pm . Why others cannot do like that doing 10 hours of work for the sake of national growth. If necessary, 30 minutes break can be given for lunch and relaxation.
7. Banks also will modify the timings once they feel that they will get business. Since all works are done by the use of the software programmes, there will not be any problems. Many banks are opening at 8 am like ICICI bank. The govt banks also should come forward to imitate private banks to catch up business. So linkage of banks with stock broker accounts and clients will not be a major problem.
8. The extension of date from 16.12.09 to 4.01.2010 will give ample time for linking up of the accounts by banks.
9. SEBI advised exchanges already to devise means to extend trading hours from 9 am to 5 pm whereas the present extension is only from 9 am to 3.30 pm.

10. 90% of public are after the extended trading hours and less holidays as money can be taken out as and when necessary. During bank holidays, how the stock brokerage firms worked without any problem?

So the arguments for and against for extension of trading time has taken much of the time of experts and stock brokerage firm leaders. It appears for me that the extension of timing is a welcome move which will make us globally competive. As pointed out by some brokers, if need be, the stock exchange can work 24 hours just like BPO covering international stock trading covering trades of other nations currencies, shares, loan papers, gold futures etc. which will help us to generate employment. Think about employment bubble. If software /BPO industry cracks, then there will be severe strain on Indian Govt to feed millions or face unrest and unemployment and increase in dacoity and robbery including terrorism.

Let Better sense prevails on stock broking community.

C R Venkata Ramani

AICWA

Customer Lifetime Value with particular ref. to banks – part I

Mahatma Gandhi once said about banks : “A customer is the most important visitor on our premises. He is not dependent on us; we are dependent on him. He is not an interruption on our work; he is the purpose of it. He is not an outsider on our business; he is a part of it. We are not doing him a favor by serving him; he is doing us a favor by giving us an opportunity to do so.” Now we are seeing it to be true in the present competitive atmosphere of banks. Every bank entices customers by offering different products/channels/facilities. But banks are also aware that no product can be offered at discount to its cost price as stability of bank will be threatened in the long run and also due to more and more statutory bindings. As a compromise, the banks are offering bundle of products at differential loss/gain to its customers.

The main thrust of the bank nowadays to attract customers who are preferring to go to different source base for their loan as well as deposits for stock market, mutual funds etc. It is not only the new customers to attract but also efforts to retain existing customers. It is costly to get new customer than to retain the existing customers. Also when attracting customers and retaining customers, the customer life time value has to be calculated by available data by banks. So to consider the future profit potential of customers, marketing and sales functions of the bank have begun searching the solution for finding out “Customer Life Time Value”. This new concept may change the balance sheet of world banks to treat each customer (segment) as an investment instrument similar to an individual stock in a bank portfolio investment. Based on good customer content, the goodwill value of the bank will be calculated for mergers and amalgamations. This may be called Customer Equity Value (CEV) which is becoming buzzword among marketers. This can be improved by good acquisition and customer retention management strategy geared to improve economic value addition for share holders of banks.

Customer Equity Value is summation of CLV of total existing customers and CLV of new customers where CLV is “the net present value of the likely future stream from an individual customer”.

Formula:

CEV = Total CLV Existing customers ( in Rs.)+ Total CLV New Customers ( in Rs.)

Where CLV is the net present value of the likely future profit stream from individual customer.

Customer Life Time Value (CLV) is defined as the net present value of the likely future profit and Loss stream from individual customers/groups. This concise definition has the following elements.

1. Net present value of the likely profit/loss from customers or cluster group of customers.
2. This is for the full life time value of the customer group. But usually it is worked out for 5 to 10 years based on availability of the data of customer /customer groups for practical purpose and it is kept as a trend for life period unless any significant changes occurred.

There can be winners and losers in the bank on the overall composition of customers. Since changes in the customer behaviour usually are not volatile, CLV formula will be useful to understand the profit momentum of any bank. The customers should never be assumed to always go in the same direction because many times high maintenance customers can be unprofitable regardless of their sales turnover.

The CLV is the expected profit that bank will realize from sales to a particular customer/group in the future. The calculation of CLV involves discounted cash flow for multiple period for customers/groups. The calculation also considers the probability of losing some customers and also getting new customers through satisfied customers. By using the DCF math formula, we can equate the future stream of net cash flow i.e. revenue into a single average discounted amount of profit as on a specified day or year end. The CLV focuses on the customer as the influencer of bank’s profitability rather than the products and services. The CLV gives the measurement ability to evaluate the new customers, not existing customers, who are to be targeted and to be attracted through marketing campaigns. It also gives the limit upto which the bank can spend for acquiring the new customers based on their CLV.

The value of the CLV of a customer is determined by the following revenue and cost factors.

Costs:

1. Acquisition cost
2. Benefits or concession given to parties.
3. Downward migration.
4. Bad debt
5. Customer removal cost.
6. Renewals and retentions promotions.

Revenue:

1. Recurring revenues
2. Up selling and cross selling to customers.
3. Referred customer revenue

The sum total of all these will constitute Customer Life Time Value.

C R Venkata Ramani

(AICWA)

Whether there is no hope for Future Generation- Copenhagen Meet

Whether there is no hope for Future Generation- Copenhagen Meet

The latest development in Copenhagen meet has the following news as per Business standard of 14^th Dec09.

“The day after tens of thousands of protestors took to the street to express frustration over the deadlock at the ongoing United Nations climate negotiations, a lull hung over this city, with the conference site, the Bella Centre, closed to business. Yet, it was the kind of lull that holds within it the promise of an impending storm.

On Monday, the final push to secure a global deal kicks off. Environment ministers will have their work cut out as they try to hammer out a workable document for their leaders to endorse to the backdrop of a relentlessly ticking clock. The heads of state and governments of over 110 countries will begin to arrive in the Danish capital from Wednesday.

But, at the end of an acrimonious week of talks, there are scant signs of any softening of the sharply divergent positions the world’s developed and developing countries came to Copenhagen with. And the fault lines do not only run between these two blocs but within them as well.

The least developed countries (LDCs), in particular small island-tates like Tuvalu,have broken ranks with the G-77 and China grouping to demand a radical new treaty,that would force far deeper cuts in greenhouse gases than those under consideration for both developed and major developing countries.

Meanwhile, the European Union – which, on Friday,became the first bloc to put money on the table, with an offer of ¤2 billion (Rs 13,730 crore) in fast-start climate aid for LDCs — is walking a fine line between censuring a recalcitrant United States for its paltry commitments so far and supporting the US strategy of demanding an entirely new protocol to supplant Kyoto.

An ongoing war of words between China and the US has further muddied the waters.

But despite the twists and turns of the first week, negotiators finally have two, formal, draft proposals to work on, one building on the Kyoto protocol and the other on “long-term cooperative action”, that would likely see a new protocol to run alongside Kyoto, allowing for the entry of the US.

One of India’s chief negotiators, Chandrasekhar Dasgupta, told Business Standard on Sunday that while India “did not agree with everything” in the draft texts, they were a “good basis for the negotiations,” and a “good attempt to distill the various positions and produce a balanced draft”. The drafts have been attacked by the US and other developed nations, who would prefer to see a single new agreement, with more stringent requirements of the major emerging economies.

The drafts currently under consideration maintain the distinction between the differential responsibilities of developed and developing countries.

There are, however, references in the “long term cooperative action” draft to a peaking year for the emissions of developing countries, as well as an international review of the domestic voluntary mitigation actions of these countries, references that India opposes.

The drafts offer very little by way of precise numbers, featuring instead a series of bracketed figures, indicating text that negotiators have not agreed to. The outcome of the final form of the drafts will be dramatically different, depending on how the blanks are filled in.

Thus, rich countries, it is suggested, should ‘cut emissions by at least (25-40) (in the order of 30) (40) (45) per cent by 1990 levels by 2020’. Similarly, the draft states that parties should collectively reduce global emissions by ‘at least (50) (85) (95) per cent from 1990 levels by 2020’.

Even the overarching ambition of the drafts is bracketed off, stating an agreement to limit the increase in global average temperatures to (2 degrees C) (1.5 degrees C).

Further, the release of the two formal drafts has not put an end to the slew of other informal drafts that have been making the rounds and stirring the pot this last week in Copenhagen.

Even as the Danish government has distanced itself somewhat from the so-called Danish text, that caused much uproar amongst the G-77 plus China camp, rich countries are likely to continue to push for a single treaty that would impose specific commitments on major developing countries.

India, China, South Africa and Brazil are also believed to be working on a refinement of their counter BASIC proposal, expected to be circulated on Tuesday.

Dasgupta clarified that India had not come to the negotiations with a begging bowl. The outcome New Delhi really wants from the talks is not simply a cash handout but “enhanced implementation of existing climate agreements”. In other words, for the rich countries to act swiftly to meet the commitments they are already signed up to.

Alternative proposals for new protocols at this juncture, he said, were “red herrings that distract attention from the urgent task at hand”. India wants industrialized countries to commit to at least a 40 percent reduction in their greenhouse gas emissions over 1990 levels. At the moment, the commitments on the table amount to a paltry reduction of between five and 20 per cent, depending on whose figures you rely on.

Ahead of round-two of the conference, negotiators from all camps privately admit that the optimism of the early days of the talks, when a raft of countries including the US, China and India had made concrete climate-related pledges, is dimming.

It now looks increasingly likely that unless world leaders are able to pull a last-minute rabbit out of the negotiations’ hat, the agreement they announce at the end of the week will be a feeble, non-binding, political statement, strong on intentions and weak on deliverables.”

For the sake of future generation, world should unite itself as one unit and sort out the problems. The possible solutions may be:

1. The LDC should be helped financially and technically for adhering to the standards set out by Copenhagen summit.
2. The rich nations like USA, Canada etc. are also facing economic problems in their country and hence no nation can demand more money from them at this stage. USA is spending huge money for civil wars in Afghanistan; Iraq etc. and hence world cannot expect sizable support from Mr.obama. Developing countries should not go with begging bowls before rich nations.
3. The developed countries like China and India should set possible targets of emission on a realistic way without any outside fund support but can demand technical help from developed countries. The present voluntary target declared by them is non-achievable without any foreign fund aid and hence they have to work out revised target and achieve it with legalized target.
4. Security Council of UNO should be the watch dog for all the achievements as it can take to task the rough and tough nations which do not adhere to international norms .
5. Nations are requested to save Mother Earth with their unity and help future generation to live comfortably.

 

We hope better sense prevails on national leaders keeping aside the politics. Let 2010 may be celebrated as Year of Conscience.

C. R. Venkata Ramani

Green House Gas Emissions – Protest from Developing Countries

Binding cuts in Gas emissions- Reasons for Protest

The developed countries have done the bulk of the damage to the environment over the last couple of centuries, raising the concentration of greenhouse gases in the atmosphere, leading to global warming, melting glaciers, rising sea levels, change in weather patterns etc.. Therefore, the bulk of the responsibility for arresting, reversing and mitigating the damage must also fall on them. Developing countries like India feel that rich nations having spoiled the atmosphere by emission of gases like CO2 thus getting richer in the earlier time now want poorer and developing countries to cut its green house gas emissions without owning their mistake and take greater part in financing the poor and developing nations.

This emission control may hamper the developing countries to spend more than the present normal expenses which they cannot fund due to their under-development. The storage of gas emitted which is one of the form of controlling gas emission is definitely beyond the reach of poorer and developing countries due to enormous cost involved. So India and China are demanding only voluntary cuts in emission intensity and do not like any binding commitments from international community at Copenhagen summit.

India is about 17% of humanity, but accounts for less than 5% of total greenhouse gas emissions. In other words, the average quantity of greenhouse gas emissions per head for the world is 3.4 times the per head emissions in India. American emission levels are some 18 times India’s. When the Indian economy grows fast, India’s emission levels will grow. Any attempt to cap India’s emissions will mean restricting India’s ability to grow and that is not acceptable as per economic experts and politicians in India. But this type of argument will not hold good in totality and India also should participate in controlling emissions, of course, in lesser % as compared to developed ones when it is growing .

It is just like profitable industries should contribute to the society by way of doing some welfare schemes in the country where they are located. In the same vein, India also should contribute something within its capacity to retain the ozone layer intact when it grows globally. The impact of climate change hits the poor the worst, whether it is drought or floods, rising sea levels or reduced crop yields. So attempts to fight climate change help the poor the best. . Developing economies like India are just beginning to take baby steps on the global stage and industry and entrepreneurship will have to go a long way. Millions of households in India still have to depend on firewood and kerosene to light up their homes even as scores of Indians die every year for want of basic health amenities.

Accepting the above logic, Minister Jairam Ramesh has told Indian Parliament that India can safely undertake/attempt to reduce the emission intensity of growth by 20%-25% by 2020. Jairam Ramesh also told Parliament about our plan to have 22,000 MW of solar energy by 2022, the policy to have clean coal technologies for power generation, fuel efficiency norms for all vehicles, green building codes.

Emission intensity refers to the amount of emissions required to generate one unit of output. In other words, what India proposes is that the amount of emissions required to produce one unit of GDP in 2020 would be a quarter less than the amount of emissions that was required to produce one unit of GDP in 2005. This, of course, provides for significant rise in absolute levels of emissions. The way to reduce greenhouse gas emissions is to raise energy efficiency, raise the efficiency of converting heat generated by burning fuels into electricity (thermal efficiency), substitution of fuels that generate more greenhouse gases with fuels that generate less, improve logistics, design buildings and towns to function with less energy using solar heaters. The amount of carbon dioxide in the atmosphere can be reduced by growing more trees and plants, which absorb the gas to make food.

Developing Countries like India can accept binding target for emission intensity provided the advanced countries like USA and Europe agree to steep cuts in their absolute levels of emissions and also provide funds and technology to countries like India to achieve their targets. The stakes for the Copenhagen summit have been building up over the last few weeks, but with China declaring a voluntary deduction in carbon intensity by 40-45% by 2020, the pressure on reluctant players like the US to act and commit just got higher.

The Chinese move to voluntarily reduce its carbon intensity days ahead of the summit in Denmark has large implications. One, it will be difficult for developed countries like the US to oppose commitments to reduce greenhouse gases. Close on the heels of China, India has announced its decision to set a target of cutting down its carbon intensity by 20-25%, domestically. This is achievable even with a GDP growth of 8-9% with the application of right technologies and fiscal measures that encourage energy efficiency. The crucial differentiator in the stand taken by China and India is that of setting an individual target that is not bound by an international or external cap. More importantly, India has made it clear that it is not ready to subject itself to international verification. The targets set by the country will be in accordance to its resources and social and economic priorities.

Lifestyles in developed countries still remain largely unchanged as the wealthy continue to live in large villas, drive around in gas-guzzling SUVs and use energy-intensive equipment for daily household chores. India may be the world’s sixth-biggest greenhouse gas producer, but it has a per-head emission of just 2 tonnes of carbon dioxide — 66th in the world — whereas US is the fifth in the world with a per-head emission of 20 tonnes of carbon dioxide-equivalent. This is precisely 10 times that of India, which is expected to have the same caps on emissions as developed countries like the US. This is totally against the principle of ‘Equality’. The rich nations must cut their greenhouse gases at least 40%  by 2020.

South Africa added new impetus saying that it would cut is carbon emissions to 34% by 2020 if rich countries provided financial and technical help. Now there is competition among  developing nations and poor nations for demanding compensation for taking steps to reduce gas emissions. The United Nations is also insisting on developed nations to provide immediately $10 billion – a – year  funds for helping the poor nations to cope up with targets. The present aim of Copenhagen pact to achieve a politically binding deal and a new deadline is set up to 2010 for working out legal details.

Interesting Statistical Details about Greenhouse gases emission:

China is the largest producer of emissions in the world, according to the latest ranking from risk management consultancy Maplecroft.

China emits about 6,018 million tons of greenhouse gases per year

The United States is a close second with 5,903 tons of greenhouse gases released each year

Russia produces about 1,704 tons per year

India releases about 1,293 tons per year

Japan produces 1,247 tons per year

Germany produces about 858 tons of greenhouse gases per year

Canada produces 614 tons per year

Britain produces 586 tons per year

South Korea produces 514 tons per year

Iran produces 471 tons of greenhouse gases per year

C R Venkata Ramani

References:

Some excerpts from Economic times of India dt Nov 2009.