At the COP26 climate change conference in Glasgow, Prime Minister Narendra Modi made bold commitments. India joined other G20 countries in making a ânet zeroâ commitment, setting 2070 as the target year. For the more foreseeable future, it has made concrete commitments: a reduction of one billion tonnes of carbon emissions planned for 2030, bringing its non-fossil energy capacity to 500 GW by the same year, when it would also meet 50 per 100 of its energy needs through renewable energies. This is not only important to the world, but we also believe it is a huge economic opportunity for India. The challenge now is to overcome the obstacles along the way.
Why was it important to register for net-zero? India’s topography – its 7,000 km-long coastline, the Himalayan glaciers to the north, and its rich forest areas that are home to natural resources like coal and iron ore – make the country particularly vulnerable to climate change. . Much of the population also remains unprotected. An IMF study suggests that if emissions continue to rise this century, India’s real GDP per capita could drop 10% by 2100.
India’s traditional position is that since its per capita energy consumption is only one-third of the world average and must continue to grow to fight poverty, costly targets for poverty reduction energy should not be applied to it. However, India is the third largest emitter in the world and technological development allows economic growth to be decoupled from emissions growth by switching to renewable energies.
It is important to recognize that the country has already taken several important steps towards a greener future. For example, it is a signatory to the Paris Agreement and is on the verge of exceeding certain targets. For example, 40% of its installed power generation capacity was expected to come from non-fossil fuel sources by 2030. India has already reached 39% in September 2021.
Unfortunately, in a business-as-usual scenario, carbon emissions showed no signs of peaking, and there was pressure to hit a net zero target within a set year.
The new net zero approach will require dramatic changes in the power mix and industrial processes. Some studies that discuss the outlook for emissions peaking in 2040 and reaching net zero by 2070, have found that this will require the share of fossil fuels to rise from 85% today to 20% by 2070, in assuming a strong use of hydrogen technology. and carbon capture strategies.
But at the same time, a net zero approach could bring more benefits over time. This could give a clear signal of India’s intentions and provide better access to technology, finance and international markets. And this is where the opportunity lies.
Much of India’s wealth remains to be created. We estimate that 60 percent of India’s registered capital – factories and buildings that will exist in 2040 – have yet to be built. The country can potentially jump into new green technologies, rather than being burdened with âredevelopmentâ obligations. If India can now switch to green growth, it could create a more responsible and sustainable economy.
Additionally, if Indian exports get a âgreen stampâ, they could gain better market access, especially if the world imposes a carbon tax on exports from economies where carbon emissions remain high. Despite India’s large domestic market, exports are a key driver of overall GDP growth. They not only open up new markets, but also spark international competition, forcing domestic industry to become more efficient, while increasing FDI inflows and technical know-how. In fact, close examination reveals that all periods of strong growth in India have been supported by fast growing exports.
We estimate that an additional 2 to 2.5 million jobs can be created in the renewable energy sector by 2050, bringing the total number of people working there to more than 3 million. This is not surprising given that renewable energy technologies tend to be more labor intensive than conventional energy technologies. In fact, âdistributed renewablesâ such as small-scale hydropower, rooftop solar power and biomass create the most jobs per unit of installed capacity. But some jobs will also be lost. The coal industry is now a major employer in states such as Bihar, Jharkhand, Odisha and Chhattisgarh. Overall, with the right skills efforts and âdistributed renewablesâ, the transition could create jobs.
But some obstacles must be overcome. The finances of electricity distribution companies must be improved to finance the grid upgrades necessary for the development of renewable energies. This would require a host of reforms, including the establishment of a truly independent regulator that ensures market pricing of electricity tariffs, incentives that speed up smart meters and compensate for T&D losses, and policies that lead the privatization of nightclubs.
India needs a coordinated institutional framework that can help overcome several levels of complexity such as federalism, fiscal constraints and bureaucracy. This is particularly important because the green transition will be a multi-step process. This will involve switching from fossil fuels to electricity, producing electricity from renewable energies and eliminating emissions from the atmosphere. It will impact all economic agents.
Energy investment needs will be high, rising from around $ 70 billion to $ 80 billion per year now to $ 160 billion per year. At the same time, a similar amount will be needed for transport and other infrastructure. While the private sector will be required to fund much of this, government can play a central role, especially in the early days. We find that government incentives and partnerships are acting as a catalyst for half of the industrial transition.
The years of transition will be chaotic. Inflation could be volatile until renewables reach their full potential. The central bank will have to work hard to anchor inflation expectations. Oil and coal tax revenues are expected to decline gradually, but this can be offset by reforms on the revenue side. The trade deficit could increase if the transition to electric vehicles is faster than the increase in domestic production of batteries. Careful sequencing will help.
The hope is that once the transition is complete, the macro variables will stabilize, but at
improved levels of GDP growth, sustainability and stability.
A good start is half done. India is on the right track but needs to redouble its efforts to remove obstacles.
This column first appeared in the paper edition on November 10, 2021 under the title “India’s green transition”. The author is the Chief Indian Economist of HSBC Securities and Capital Markets (India) Pvt Ltd.