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Net-zero presents many opportunities for India — and challenges

Pranjul Bhandari writes: Switch to renewables will impact several economic agents, require institutional coordination to address multiple complexities.

Written by Pranjul Bhandari |
Updated: November 11, 2021 7:28:08 am
India’s traditional position has been that since its per capita energy use is only a third of the global average, and it needs to continue to grow to fight poverty, costly energy reduction targets should not be applied to it.

At the COP26 climate change conference in Glasgow, Prime Minister Narendra Modi made some bold commitments. India joined the other G20 countries in making a “net-zero” commitment, setting 2070 as its target year. For the more foreseeable future, it made some tangible commitments: A one billion tonne reduction in the carbon emissions projected for 2030, raising its non-fossil fuel energy capacity to 500 GW by the same year, by which time it would also meet 50 per cent of its energy needs by renewables. This is not just significant for the world, but we believe also a sizeable economic opportunity for India. The challenge now is to overcome the obstacles along the way.

Why was it important to sign up for net-zero? India’s topography — its 7,000 km-long coastline, the Himalayan glaciers in the north, and its rich forest areas which house natural resources like coal and iron ore — make the country uniquely vulnerable to climate change. Large parts of the population also remain unprotected. An IMF study suggests that if emissions continue to rise this century, India’s real GDP per capita could fall by 10 per cent by 2100.

India’s traditional position has been that since its per capita energy use is only a third of the global average, and it needs to continue to grow to fight poverty, costly energy reduction targets should not be applied to it. And yet, India is the third-largest emitter in the world and technological development is making it possible to decouple economic and emissions growth by switching to renewables.

It is important to acknowledge that the country has already taken several important steps towards a greener future. For instance, it is a signatory to the Paris Agreement and is set to over-deliver on some of the targets. For example, 40 per cent of its installed power generation capacity was meant to come from non-fossil fuel sources by 2030. India has already reached 39 per cent by September 2021.

Unfortunately, in a business-as-usual scenario, carbon emissions were showing no signs of peaking, and there was pressure to sign up for a net-zero target by a fixed year.

The new net-zero approach will require dramatic changes in the power mix and industrial processes. Some studies which discuss the prospects of emissions peaking in 2040 and reaching net-zero by 2070, found that this will need the share of fossil fuel to fall from 85 per cent now to 20 per cent by 2070, assuming a high use of hydrogen technology and carbon capture strategies.

But at the same time, a net-zero approach could bring more benefits over time. It could give a clear signal of India’s intentions and provide better access to international technology, funding and markets. And herein lies the opportunity.
Much of India’s wealth is yet to be created. We estimate that 60 per cent of India’s capital stock — factories and buildings that will exist in 2040 — is yet to be built. The country can potentially leapfrog into new green technology, rather than being overburdened with “re-fitting” obligations. If India can now transition to green growth, it could create a more responsible and sustainable economy.

Moreover, if India’s exports achieve a “green stamp”, they may find better market access, especially if the world imposes a carbon tax on exports from economies where carbon emissions remain elevated. Despite India’s large domestic market, exports are a critical driver of overall GDP growth. They not only open up new markets but also bring in international competition, forcing the domestic industry to become more efficient, while pushing up FDI inflows and technical know-how. In fact, careful scrutiny reveals that all high-growth periods in India have had the support of fast-growing exports.

We estimate that 2-2.5 million additional jobs can be created in the renewables sector by 2050, taking the total number of people employed there to over 3 million. This is not surprising given that renewable energy technologies tend to be more labour intensive than conventional energy technologies. In fact, “distributed renewables” such as small-scale hydro, rooftop solar and biomass create most jobs per unit of installed capacity. But some jobs will be lost, too. The coal industry is now a significant employer across states such as Bihar, Jharkhand, Odisha and Chhattisgarh. Overall, with the right skill efforts and “distributed renewables”, the transition could add to employment.

But some obstacles need to be addressed. The finances of power distribution companies need to be improved to fund the grid upgrades necessary for scaling up renewables. This would require a host of reforms, including having a truly independent regulator who ensures market pricing of power tariffs, incentives that speed up smart metering and plug T&D losses, and policies that lead to the privatisation of discoms.

India needs a coordinated institutional framework that can help overcome multiple levels of complexity like federalism, fiscal constraints and bureaucracy. This is particularly important as the green transition will be a multi-stage process. It will involve switching from fossil fuel to electricity, generating electricity from renewables, and removing emissions from the atmosphere. It will impact all economic agents.

The energy investment requirement will be high, rising from about $70-80 billion per year now to $160 billion per year. Alongside this, a similar amount will be needed for transportation and other infrastructure. While the private sector will be required to fund much of this, the government can play a pivotal role, especially in the early days. We find that government incentives and partnerships act as a catalyst for half of the industrial transition.

The transition years will be bumpy. Inflation could be volatile till renewables reached their full potential. The central bank will have to work hard to anchor inflation expectations. Fiscal revenues from oil and coal should fall gradually, but this can 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.

The hope is that, once the transition is complete, the macro variables will settle, but at

improved levels of GDP growth, sustainability and stability.

Well begun is half done. India is on the right track but needs to redouble its efforts to remove the obstacles.

This column first appeared in the print edition on November 10, 2021 under the title ‘India’s green transition’. The writer is chief India economist, HSBC Securities and Capital Markets (India) Pvt Ltd.

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