The long road to a green golden era

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Background 

India’s vision is to achieve Amrit Kaal or ‘Golden Era’ by 2047. This is interpreted as improving living conditions for all through profitable growth, along with infrastructural and technological advancements in the next 25 years. However, the World Development Report 2024 (WDR) pours cold water over India’s ambitions, pointing out that at current trends, India will need 75 years just to reach one quarter of US per person incomes. The WDR identifies the middle-income trap as the key challenge and assigns most of the blame for digging the trap on middle-income countries. India, currently classified as a lower middle-income country, faces the question: Can it overcome this trap to achieve the Golden Era in 25 years? Will the energy transition enable India to bypass the middle-income trap, or will it become the trap?

The diagnosis and prescription 

Addressing more than 100 middle income countries (MICs), which is home to 6 billion people, the WDR proposes a 3i strategy to get out of the middle-income trap: investment followed by new technology infusion in the middle-income phase, and attention to innovation in the upper-middle income phase.  The WDR observes that countries trap themselves in the middle-income slot because they stop with the investment phase and compromise on institutional, economic and political freedom. The WDR calls on MICs to substitute their quest for structural efficiency addressed through firm size, income inequality and energy use with the quest for efficiency in the use of the factors of production: capital, labour and energy (rather than land).  In the 1870s, the neoclassical marginalist counter-revolution, also called for subtracting both distributional equity and economic development to leave only allocational efficiency in economics.  Clearly, this is not a sustainable position in the real world, where democracies have to strive for distributional equity, even if it is at the cost of efficiency.

In the context of energy, the WDR has a long litany of shortcomings of MICs that supposedly contribute to high carbon emissions. The WDR proposes that MICs will need to use a combination of energy intensity (energy consumed per US dollar of GDP) and carbon intensity (carbon emissions per unit of energy) reduction to reduce carbon emissions. It observes that MICs have a greenhouse gas (GHG) intensity of GDP that is 3.5 times higher than that of high-income countries and that this difference supposedly reflects both the misallocation in the use of energy with the energy intensity of GDP also 2.5 times higher than in high-income countries and the lower diffusion of low-carbon energy technologies.

Blaming misallocation in the use of energy in MICs ignores history. Energy use patterns in MICs is the result of exploitation by high-income countries (then labelled the North), which drained resources and capital from the South (now MICs). This left the South (then low income) in a state of underdevelopment in the late ninetieth and early twentieth centuries, and in a state of delayed industrialisation in the twenty-first century. For example, in India, delayed industrialisation is underwritten mostly by coal, as it is abundant, and secure for the nation, and affordable for the impoverished population.  Polluting industries moved out of the global North into the South after the publication of the report on Limits to Growth in 1972, by the Club of Rome, highlighting the need for ecologically sustainable development.  This increased both energy and carbon intensity of the global South.

To decouple emissions from economic growth, the WDR recommends disciplining incumbent companies, rewarding merit (including dispatch of energy), and de-risking investments in low-carbon energy. The report argues that disciplining incumbent firms will increase energy efficiency and decouple emissions from economic growth. To facilitate adoption of energy-saving technologies, the WDR recommends competition or market contestability. The report cites the case of Georgia, where markets with a higher concentration have lower energy efficiency.  It also cites Argentina where firms with a higher share of skilled workers are better able to adopt advanced green technologies. In general, the report points out that exporting countries have lower carbon emissions intensity. The report assigns special credit to South Korea, which was able to move from middle-income to high-income status in 25 years through export driven growth.

The report observes that when incumbent companies are disciplined through higher energy prices, it will reduce energy intensity. This is true in India, where all industries, including incumbents pay high tariff for electricity, which has forced them to become energy efficient and also pushed them to adopt renewable energy (RE) sources. Higher energy prices have been fully compensated for by higher efficiency in many heavy industries in India, as highlighted in the report.

Recommending carbon pricing, the report suggests adopting the concept of total carbon price (TCP), that includes a combination of direct and indirect carbon pricing instruments, including energy excise taxes and fuel subsidies. Though not labelled TCP, India has used high excise and sales tax on petroleum products to raise revenue, which has yielded the unexpected benefit of curtailing oil use and limiting carbon emissions. Petroleum product prices in India are among the most expensive in the World in purchasing parity terms. Taxes, royalties, and other levies imposed on domestic coal often make domestic coal more expensive than imported coal in India. Taxes and levies on petroleum products contribute to decreasing the total cost of ownership of electric vehicles (EVs) compared to internal combustion vehicles, and high taxes on coal contribute to lowering the levelized cost of electricity (LCOE) generated by RE sources relative to the LCOE of power generated by coal.

The report argues that the most efficient way to scale up the efficient provision of low-carbon energy is to respect the merit order. Merit order is the system of grid operators who dispatch power, starting with the cheapest with the lowest running costs, followed by others in ascending order. The price at any point in time determines wholesale market prices. According to the WDR, any power supplier who offers RE at zero marginal cost (low or insignificant operating costs) should have priority in meeting demand.  While there is merit in the use of merit order dispatch of electricity and in the use of LCOE - both of which are important in attracting investment in RE - the fact that both overlook the cost of back-up and cost of integration. The presence of RE power in the market reduces the need for higher-cost plants to generate, so market prices fall. However, this does not reflect any decline in long-term costs. RE generators generally have higher overall costs than the conventional generation they replace.

It is true that cost of capital for low-carbon energy, such as solar photovoltaic and wind, in MICs is twice that in high-income countries. The report points out that cost of capital averages 3.8 percent in high-income countries, but 7.2 percent in upper-middle-income countries and more than 8.5 percent in lower-middle-income countries, reflecting higher technological, market, political and regulatory risks. In general, weighted average cost of capital can account for 20–50 percent of the LCOE from utility-scale solar PV projects. In Brazil and India, the cost of capital oftens accounts for 50 percent of the LCOE of solar PV.  Reduction of risks will definitely make RE projects less expensive and, in turn, reduce public finance needed to underwrite these projects. In India, RE power generators are offered long-term power purchase agreements (PPAs) that offers revenue security, which in turn reduces borrowing costs.

The WDR blames state-owned incumbents in power generation and distribution, common in MICs, for lower share of RE in power consumption and also for the lower share of EVs in transportation in MICs compared to high-income countries. While this is partially true, the large component of subsidies that underwrites uptake of RE and EVs in high income countries is simply unaffordable in MICs.

Questions for thought

In India, media commentary around annual budget provisions make causal links between the size of allocation (for example for investment in low carbon energy) and the outcome (net zero or decarbonisation of the grid). This suggests that there is overemphasis on investments rather than on infusion of technology or on facilitating innovation. But, embedded inefficiency is not the reason, as alleged in the WDR. It is because infusion of new technologies and innovation through generous subsidies, as it is the case in the global North, is difficult for the global South. High debt and higher borrowing costs makes the choice between ambitious climate actions, whose payoffs lie in the long-term future, and addressing pressing current concerns, whose political costs and consequences lie in the present.

The North, representing about 1.3 billion people (16 percent of the global population), emitted about 12.5 billion tonnes (BT) of carbon dioxide in 2023, accounting for about 33 percent of total global carbon emissions—a disproportionate share. Until recently, energy consumption growth and carbon emissions in the North was assumed to have peaked, but the development of artificial intelligence (AI) has raised the prospect of energy consumption growth reviving in the North. This is driving the North to discipline the South by invoking guilt (of inefficiency) to accelerate carbon reductions. However, without financial support from the North, higher domestic spending on carbon reductions and the energy transition by the South will come at the cost of spending on soft infrastructure (health, education).  A fragmented energy transition will deepen the middle-income trap. Getting out is likely to become difficult – especially as the global North is building trade walls against products from the South, even if they are green. The golden era for millions of Indians will move further into the future.

Source: World Development Report 2024, World Bank 

Lydia Powell is a Distinguished Fellow at the Observer Research Foundation.

Akhilesh Sati is a Program Manager at the Observer Research Foundation.

Vinod Kumar Tomar is a Assistant Manager at the Observer Research Foundation.

• Energy
• India
• Amrit Kaal
• carbon emissions
• economic growth
• energy transition
• India
• middle-income trap
• renewable energy
• World Bank

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