This piece is part of the essay series, Shaping our green future: Pathways and Policies for a Net-Zero Transformation.
Introduction
With the COVID-19 pandemic slowing down and the economy recovering strongly, India’s development pathway must now focus on two key areas: Climate change and job creation. The next decade will be decisive in achieving these twin goals. The first requires a rapid transition away from fossil fuels as well as adapting to disruptive new weather patterns; the second entails the creation of millions of high-quality jobs every year, for all of India’s young workforce. India needs to ensure that its youth have access to employment, while simultaneously shifting to a deep decarbonisation pathway. The failure to address these challenges will likely result in widespread distress, unchecked migration into collapsing cities, and significant social strife. India’s actions in the next few years will determine whether its development model can ensure sustainable prosperity for all. The choices are stark, the consequences profound.
India’s Decarbonisation Pathways
Pursuing a deep decarbonisation pathway will be a key aspect of achieving sustainable prosperity. India is doing much better than other countries in delivering on its 2015 Paris Agreement carbon emission targets. The country’s carbon emissions to GDP ratio is already down by 39 percent compared to 2005 levels, as against the target of a 33–35 percent reduction by 2030. However, India’s GDP is growing strongly, and modelling studies show that its greenhouse gas (GHG) emissions will continue to increase and will likely reach 6–8 billion tonnes of carbon equivalent emissions by 2050.
The country’s carbon emissions to GDP ratio is already down by 39 percent compared to 2005 levels, as against the target of a 33–35 percent reduction by 2030.
The Intergovernmental Panel on Climate Change (IPCC) has recommended that the world must reach zero carbon emissions by 2050, to ensure that global average temperatures do not increase by more than 1.5 degrees Celsius above pre-industrial levels. More than a hundred countries have committed to reaching net zero by 2050, including the United States (US). China has announced that it will reach net zero by 2060. To help reach this global goal, India should also transform its current development pathway into a deep decarbonisation pathway. Today, India emits about 3.5 billion tonnes of carbon equivalent GHG emissions per year, including agricultural emissions that are about 1 billion tonnes. Therefore, India should adopt either a low carbon pathway that keeps emissions flat at 3 to 4 billion tonnes per year or an ambitious net zero pathway to reach net zero emissions by mid-century. India has some flexibility and can set a target of net zero by 2050 or 2060. A truly inspirational goal would be to reach net zero by 2047—the hundredth year of Independence.
A Net Zero Pathway
The net zero pathway will require committing to a legally binding net zero target by a fixed year. Such a target, passed by Parliament, will necessitate each ministry and state government to define the annual carbon budgets needed to reach net zero by the mid-21
st century. Coordinated policies and actions must be enforced to ensure rapid peaking in carbon emissions and a dramatic decline thereafter. Furthermore, once a target is set, the Central and state governments will have to quickly build the necessary state capacity for monitoring and compliance. India requires trillions of dollars in green investments to reach a net-zero target by mid-century. Together, a legally binding net-zero target and supportive government policies can lead to massive investments in green technologies and equipment. This, in turn, will thoroughly transform electricity generation, transportation, construction, real estate, agriculture, cement, steel, and many other industries—a largely private-sector transformation, driven by private-sector capital.
Massive green investments will likely drive fast economic growth and create high-quality jobs. Indeed, if India is able to attract sufficient global capital, there will not be any trade-off between development and emission reductions. Further, the green investments will require Indian industries to invest in the most competitive, advanced technologies and business models, and could not only get India to the
Green Frontier—representing long-term, sustainable prosperity—but also enable it to stay there.
Diplomatically, a legally binding net zero target by the mid-21
st century can win India enormous global goodwill and lead to more supportive technology transfer and global trade agreements. More importantly, it will signal to global capital that India is soliciting green investments. A stable government framework and policy predictability are vital to reducing investment risk and attracting global capital.
A Low Carbon Pathway
As an alternative to this ambitious net zero pathway, India can choose to follow one of several low-carbon pathways. The Paris Agreement, and all other international negotiations on climate change, recognise the common but differentiated responsibilities of developing countries compared to those of wealthier countries. Diplomatically, India is not obliged to reduce carbon emissions to net zero by 2050; it could follow a much more gradual path. Instead of carbon emissions peaking by 2030 or so, India’s emissions could peak by 2050 or 2060. Emissions could then get to a stable, low carbon level by 2080 or even later.
If India is able to attract sufficient global capital, there will not be any trade-off between development and emission reductions.
In support of such low-carbon pathways, India can formulate clear sectoral targets, such as the current 450 GW target for solar energy or various building efficiency standards. This will gradually reduce carbon intensity per unit of GDP. The decarbonisation pathways can also provide a clear roadmap for the private sector for their investment plans, while allowing India to slowly decommission many high-carbon sources such as coal-fired power plants and diesel trucks. With the investment requirements reduced, India will be able to gradually move people out of high-carbon industries such as coal mining and steel production.
Modelling Different Decarbonisation Pathways
Which decarbonisation pathway is better for India? Detailed energy systems and economic modelling is required to evaluate the different decarbonisation pathways. In the past, most decarbonisation modelling approaches have concentrated just on GHG emissions and policies required to reduce emissions. However, for India, it is vital to also understand their economic impacts. What will happen to GDP growth across these decarbonisation pathways? How will jobs in different sectors be impacted? What will be the impact on government taxes and revenues? Will India’s balance of payments improve? How large will be the investments required and in which sectors and by when? Will air pollution decline due to the reduction in hydrocarbons usage? What does India have to do in the next decade to get on a deep decarbonisation pathway? These are some of the key questions that need to be explored to understand how India might be able to achieve sustainable prosperity for all.
Most decarbonisation modelling approaches have concentrated just on GHG emissions and policies required to reduce emissions.
Over the past few years, three independent expert groups (World Resources Institute, the Climate Policy Lab at the Fletcher School at Tufts University, and Cambridge Econometrics in Cambridge, UK) have evaluated different decarbonisation pathways for India. These expert groups have built detailed energy-systems models and integrated them with input-output macroeconomic models. They have then calibrated these models against actual historical data to ensure that the models provide sensible results across multiple dimensions.
However, such long-term models are not meant to be used for forecasting or making strong predictions. Rather, they are intended to illustrate how different future scenarios might evolve, considering the linkages across multiple dimensions such as energy usage, GHG emissions, transportation choices, industrial growth, job creation, and public- and private-sector investment. Some of these relationships may be linear in nature, others might be non-linear. While making robust predictions across such relationships over decades is not possible, it can be instructive to show the range of possibilities. Moreover, there are many counterintuitive interactions that may result in surprising outcomes that can be captured through such models. For instance, GDP growth might accelerate when the high healthcare costs associated with air pollution are reduced.
Key Policy Levers for Decarbonisation
The modelling studies conducted so far have evaluated many different decarbonisation pathways. Each lower carbon pathway (including net zero pathways) has been compared against a business-as-usual reference pathway, which has some notable characteristics. Most importantly, it assumes a pre-Covid-19 growth projection for the Indian economy. Thus, in the reference pathway, the Indian economy grows at a long-term compound annual growth rate of around five percent between 2020 to 2050, reaching approximately US$15 trillion (in 2018 dollars). This is an optimistic projection that assumes no other global pandemics; zero impact from climate change; and no adverse global crises, such as a financial crisis or conflict. Yet, in the past few decades, India has experienced several global crises and growth slowdowns. Moreover, while the reference pathway includes all the various green policies that have already been announced by the Indian government, it still results in total GHG emissions for India reaching over 7 billion tonnes of carbon equivalent emissions by 2050, with the emissions continuing to increase every year, instead of peaking and then declining. Renewable electricity generation reaches 69 percent of total units generated. Solar power increases to about 430GW but coal-based power generation stays at about 200GW. Electric vehicles account for about 30-35 percent of new sales.
To evaluate the impact of policy interventions, technology cost curves for the deep decarbonisation pathways modelled are the same as the cost curves used in the reference pathway. This, too, may be a conservative assumption in terms of investment requirements. Much more rapid adoption of green technologies will likely result in massive size economies (scale, learning, and network effects) and further drive costs down relative to the reference pathway. Lower costs will naturally result in positive feedback and accelerate market adoption of green technologies. However, these second-order impacts are not captured in these modelling studies.
Much more rapid adoption of green technologies will likely result in massive size economies (scale, learning, and network effects) and further drive costs down relative to the reference pathway.
Detailed modelling indicates that four key policy levers will have to be applied simultaneously to drive deep decarbonisation in India, including in the net-zero pathway.
First, the electricity generation system will have to be transformed to only renewable sources. Thermal power plants today emit over 40 percent of India’s carbon emissions. In the next few decades, India will have to commit to building no new coal-fired plants and retire its existing fleet of thermal power plants. Additionally, along with the generation system, the transmission and distribution systems will have to be rapidly reengineered for large-scale storage and remote evacuation.
Second, India may have to impose mandates to transform petrol and diesel vehicles into zero-emission vehicles. The European Union (EU) has proposed that only zero-emission vehicles will be sold in the EU after 2035. India can decide that year it will switch over to 100 percent electric or biofuels or green hydrogen vehicles, but that decision must be made soon to help manufacturers to plan accordingly. The current FAME and PLI schemes are excellent, but deep decarbonisation pathways require a much more rapid transformation. Current technology trends suggest that large commercial vehicles and aeroplanes will require either biofuels or green hydrogen.
Third, industrial and commercial usage of fossil fuel (in industries such as cement, steel, and fertiliser) will have to be progressively restricted through a carbon emissions trading system. Under such a system, every company (say, above INR 250 crores in revenues) will have to provide exhaustive climate disclosures and will be granted a carbon allowance. The International Financial Reporting Standards (IFRS) is already working towards this. Europe has shown how this can be done by providing each company with certain carbon allowances and then gradually restricting the allowance every year. Companies can start to reduce fossil fuel usage or else trade with other companies, which have surplus credits, to continue to emit carbon. Moreover, India’s carbon trading system will have to be aligned with the EU and other countries to avoid the use of carbon border taxes. Carbon pricing around the world could potentially be differentiated to ensure that there is a clear market incentive to invest in decarbonisation technologies in India and other developing countries first. This will encourage investments to flow to developing countries for decarbonisation, consistent with the climate justice principle of
common but differentiated responsibilities. A global system for pricing and trading carbon emissions will have to be coupled with import duties, to ensure a level playing field for all countries.
Finally, India will have to restructure its carbon taxes. At present, Central and state governments together are collecting several trillions of rupees (close to a hundred billion dollars) from petrol, diesel, aviation fuel, natural gas, and coal taxes. Additionally, railway coal freight charges are set at high levels to subsidise passenger fares. These various taxes and fees have created significant market distortions. In the next few years, fuel taxes should be brought within the GST framework, and taxation rationalised while ensuring revenue neutrality. In the longer term, as fuel usage drops, tax collections will come down, and carbon tax levels will have to be gradually increased to maintain revenue neutrality. These carbon taxes will have to be aligned with the global carbon-trading system as well.
As India moves to net zero, imports of hydrocarbons
will start to decrease, improving energy security. Coal is India’s primary domestic fossil fuel. As coal plants are retired and other major users transition away, coal usage will automatically decline. With many decades to plan the transition away from coal, India can ensure that it protects all existing direct and indirect workers in the coal economy. Alternative employment through solar energy, healthcare, textiles, agri-processing, and other such industries can be established to create sufficient job opportunities for displaced workers. Further, all negative impacts of coal mining—e.g. destruction of natural habitats, pollution and crime, ravaging of traditional occupations—can be avoided.
Net Zero is Net Positive
All the modelling studies done to date confirm that decarbonisation pathways are better for India compared to the reference pathway. As mentioned earlier, these decarbonisation pathways do not assume that green technologies improve in the decarbonisation pathways relative to the reference pathway. The cost-performance of various green technologies is held constant across the pathways; only
pricing (through different taxation policies) and
usage (through mandates and subsidies) are modified. These changes are sufficient to drive very different technology diffusion patterns across the economy, leading to massive reductions in carbon emissions.
These emissions remain at today’s levels throughout the modelling period.
Every deep decarbonisation pathway for India, ranging from those that flatten India’s emissions pathway to net zero by 2050, delivers better outcomes than the reference pathway, including an increase in the GDP, more jobs, lives saved due to air pollutions, investment levels for the economy, and energy imports. The economic logic is simple. Green technologies are more cost-effective than brown technologies now. Massive investments in these green technologies will naturally result in higher GDP growth, higher job creation, and lower energy imports, while reducing carbon emissions and air pollution.
The models show that the various decarbonisation pathways improve the GDP by one to four percent virtually every year, relative to the reference pathway. Job creation is five to eight percent higher every year in the decarbonisation pathways. Cumulative lives saved from lower air pollution range from 5–10 million over 30 years. Additionally, India’s energy import bill goes down by hundreds of billions of dollars every year as fossil fuels are substituted by renewable energy, green hydrogen, and biofuels. To achieve these goals, India must spend just an additional US$5–10 billion dollars per year in the next few years. These investments then ramp up by 2030, to an additional US$20–50 billion dollars per year. Massive incremental investments relative to the reference pathway only begin in the 2030s, as the transportation fleet is converted to electric vehicles. Ultimately, in the net zero pathway, India has to invest an additional three percent of GDP per year to get to virtually zero carbon emissions by 2050.
These modelling studies confirm that green technologies drive high-productivity growth in the economy and are more cost-effective than brown technologies. Note that India’s competitor economies will invest massively in green industries; indeed, Germany, the US, and China have already begun this green transformation. The latest and most sophisticated green industries (such as solar energy with battery storage, electric vehicles, plant proteins, and biofuels) will define a Green Frontier, representing the most efficient and competitive companies in the world. India, too, must get to this Green Frontier—not only because it helps in decarbonising its economy, but also to compete with other leading economies. Thus, decarbonisation pathways provide superior economic and health outcomes for India, and are also essential for its competitiveness.
Net zero is net positive for India.
Financing Net Zero
Financing for deep decarbonisation will likely constitute the bulk of India’s overall investments in the next few years. For instance, the International Energy Association (IEA) estimates that India requires US$1.4 trillion over the next two decades in financing green energy technologies alone. To put this in context, India’s GDP in FY2021 is US$2.7 trillion. The recently announced PM Gatishakti investment Programme is sized at INR 100 lakh crores, or approximately US$1.3 trillion.
Commercial capital drives the global economy and is many times larger than public funds or impact capital. Green investments must, therefore, compete with brown (non-green) investments to find large markets and generate attractive returns. Typically, when promising new technologies are introduced, commercial investors rush to fund them, expecting that costs will fall dramatically over time. This spurs rapid market adoption and eventually high returns for investors. Due to the sterling work of inventors and engineers, this is exactly what is happening with green technologies.
Consider some examples of decarbonising technologies at the Green Frontier. Renewable power is now cheaper than coal-fired power. Converting to renewable sources, whether at a utility scale or at a retail level, is economically viable for end-users while still delivering a reasonable return on capital for investors. Electric vehicles have a substantially lower total cost of ownership than internal combustion engine vehicles, and their cost advantage continues to increase with the decrease in battery prices and the development of efficient charging infrastructure. Plant-based proteins are cost-competitive with traditional protein sources (such as milk, eggs, and meat), thereby reducing the need to keep large animal herds that generate massive methane emissions. Thus, renewable energy, electric mobility, and plant-based proteins are developing into large industries, with many fast-growing competitors, each attracting substantial commercial investment. The government’s role is to maintain a stable and supportive policy environment and help unleash market forces, to ensure that market and competitor dynamics drive India to the Green Frontier. Indeed, it is quite possible that India might have the most cost-effective deployments of these technologies in the world—replicating what it has already achieved in telecom services, fintech, and e-commerce.
Some green technologies are still early in terms of customer acceptance and market adoption, such as offshore wind, battery storage, green hydrogen, biofuels, carbon capture, new nuclear fission and fusion technologies. These technologies are too expensive, or their risks still too high for commercial deployment. However, when they do become commercially viable, they will likely be crucial in driving decarbonisation. Thus, allowing these immature and risky technologies to be guided purely by market forces may not work in favour of India’s decarbonisation targets: Governments and markets will have to work in tandem to lower costs and jumpstart new green industries. In cases where an idea has potential (risky) or the cost of deployment is high (costly), executing demonstration or pilot projects can create learnings for private enterprises and create valuable policy lessons for regulators and policymakers.
When promising new technologies are introduced, commercial investors rush to fund them, expecting that costs will fall dramatically over time.
The Indian government has access to a wide range of policy levers and funding options to jumpstart green industries. For example, it can: (a) absorb the initial capital expenditure of demonstration or pilot projects, (b) offer subsidies for part of the capital or operating costs, (c) mandate or incentivise offtake of the final product, (d) help push for and create technology transfer initiatives between countries, and (e) offer connecting infrastructure or distribution for the new technology. Three different sets of impact capital providers can assist in jumpstarting green industries to complement the role played by the government and the market. First,
advanced countries, who are deploying capital (grants, aid, loans, equity) to help commercialise new technologies. Second,
philanthropic capital, which is concerned with long-term social impact and does not judge its performance solely by financial returns. Third,
firms that are committing to net zero targets, their cash flows now being channelled into green investments.
In the next few decades, India will require trillions of dollars of commercial capital, tens of billions of dollars of impact capital, and hundreds of billions of dollars of public funds to reach the Green Frontier. These immense funding requirements will necessitate India to fully mobilise domestic and global sources of capital, and prime its financing system to support these capital flows.
Ensuring a Just Net Zero Transformation
Deep decarbonisation pathways create more jobs than the reference pathway. Green industries are simply more labour-intensive than brown industries. Therefore, there is a net job gain as workers shift away from fossil fuel jobs to green energy jobs. Additionally, there is a substantial induced job effect when GDP growth is faster and more robust. For example, more people work in retail industries, for the government sector, and in personal services.
Getting started early is important to avoiding stranded workers and their families. If India has multiple decades to plan for the transition, it can be done smoothly through retirements and gradual reskilling. However, abrupt changes will make it difficult to move millions of workers from one set of jobs to another. Moreover, careful planning is also required to avoid geographic dislocations, since the hydrocarbon economy is typically in rural areas while new green jobs might primarily be created in urban areas. Alternative livelihoods must be established now so that the children of today’s workers do not also go into the hydrocarbon economy.
India’s Decisive Decade
Today, India can leapfrog the traditional farm-to-factory development model and go straight from farm to the Green Frontier. The next decade will be decisive in establishing its development pathway: Is India going to race to the Green Frontier or is it going to be relegated to a global laggard? To get to the Green Frontier, India must commit in a legally binding manner to the target of net zero by mid-century. This will ensure that investors and entrepreneurs understand clearly that a green transformation will be required and that this is the overall direction for the country. Moreover, India’s global partners will then likely provide full support through technology transfers, preferential market access, blended capital, and helping it avoid punitive carbon import duties.
After a net zero goal is declared, the right policies—for renewables, electric mobility, carbon trading systems, and carbon taxes—must be implemented in the next few years. By moving quickly, policy and market bottlenecks can be avoided. Investments will also be lower now than in the future, when the transition will become more abrupt and disjointed. Starting early will allow businesses more time to plan and prepare. Today’s brown assets can also be fully utilised and then retired. If India waits to move later, it will run the risk of significant stranded assets and massive debt write-offs. The time for policy action is now.
No country has achieved sustainability and prosperity simultaneously. Developed countries first became prosperous and are now moving towards a more sustainable economy. Against this backdrop, India’s green development will be truly unique. In the next decade, the country must leapfrog traditional development models and bring sustainable prosperity to its people. By undertaking the largest green transformation in the world, India will usher in a zero-carbon, inclusive development model.
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These modelling studies incorporate India’s goal to install 450 gigawatts of renewable energy by 2030 and all the other green policies announced to date.
These are completely independent efforts utilising some of the most sophisticated models in the world to study these issues. No other modelling groups appear to have built, tested, or utilised such models to evaluate the economic and health impacts of different decarbonisation pathways for India.
Over US$150 billion per year of fossil fuels including crude oil, coal, and natural gas are imported every year by India.
These modelling studies have not evaluated any reduction in agricultural emissions (which account for about 1 billion tonnes on annual carbon-equivalent emissions).
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