India’s green dream

Reducing emissions presents a sizeable opportunity if obstacles can be overcome

5 November 2021 Pranjul Bhandari, Chief Economist, India

India’s greenhouse-gas emissions and energy use per person is one-third of the global average. Yet, it is the world’s third-largest emitter. Maintaining strong economic growth while reducing emissions will be challenging – but India has already taken important steps towards a greener future and tough targets present a rare opportunity.

The topography makes India uniquely vulnerable to climate change. It is lashed by monsoons, relies on Himalayan glaciers for water, and its 7,000km coastline is susceptible to rising sea levels. Meanwhile deforestation to extract coal and iron ore is depleting its carbon absorption capacity.

The country is on track to meet its Paris Agreement goals for reducing the emissions intensity of its GDP and increasing power generation from non-fossil-fuel sources, while tax incentives are boosting domestic solar-panel production. But the Green India Mission plan for additional forest and tree cover is 30 per cent below target.

Business-as-usual may not be enough to meet climate goals: carbon emissions show no signs of peaking.

Achieving net-zero emissions by 2070 would require transforming sectors such as electricity generation, transport, construction, property, agriculture, cement and steel, while cutting the share of fossil fuel from today’s 85 per cent to 20 per cent by 2070 – or to just 6 per cent without utilising hydrogen technology and carbon-capture strategies.

However, India’s great opportunity is that we estimate 60 per cent of the capital stock it will need in 2040 has not yet been built. It thus will have to refit much less industry than some other counties.

And going green could bring access to international R&D, foreign finance and new markets if other countries impose a carbon tax on imports from high-carbon economies.

The transition to low-carbon will lose some jobs, including coal workers, but 2 million to 2.5 million additional jobs could be created in the renewable energy sector by 2050 with re-skilling.

While the private sector will eventually have to play the main role in the green transition, several catalysts could give the initial push. We find that about half of India’s industry could be encouraged by government incentives and partnerships, and the remaining by investor cues and frontier technologies.

But first, some obstacles need to be addressed. The finances of power distribution companies require improving to fund the grid upgrade necessary for scaling up renewables.

India needs a co-ordinated institutional framework that can help it to overcome multiple levels of complexity – such as federalism, fiscal constraints, and bureaucracy – and provide an anchor for the transition years. The energy investment requirement will be high, scaling up to about USD160 billion a year.

The transition could be bumpy. Inflation may be volatile in years when thermal power is disincentivised, but renewables haven’t reached their full potential. The central bank will have to work hard to anchor inflation expectations.

Fiscal revenues from oil and coal – 3 per cent to 3.5 per cent of GDP – should fall gradually, but this may be offset by revenue-side reforms. The trade deficit could rise if the transition to electric vehicles is faster than the increase in domestic battery production. Careful sequencing will help.

But once the transition is complete, the hope is for improved growth, employment and stability. It is an opportunity that comes along rarely and which is too big to miss.

 

First published 22nd October 2021.

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