Preparing for unexpected shocks, especially to the public accounts, would be a useful next step
India’s commitment to a net zero carbon economy by 2070 is a welcome, positive surprise. It balances global political economy and market forces with domestic compulsions of an economy rooted in fossil-fuels, the need to maintain and advance living standards of a large population, financial constraints, amongst others. Forty years is a long time to visualise structural shift to a green economy with surety. But there’s fair predictability about the 2030 pathway in some aspects, while in others, uncertainties surrounding climate mitigation technologies are high and could throw up unanticipated challenges. A useful next step would be to prepare for any shocks, especially for the long-term health of public finances.
The net zero pledge accomplishes two objectives. One, it is consistent with the political economy, removing India, the world’s third-highest emitter (lowest per person), from climate blame. Two, it is realistic in accepting that faster decarbonisation is inevitable given the radically altered positions of markets, investors, shareholders, and global finance to climate risks, where voices speak with unity. India’s private sector had begun responding to these positions, changes in relative prices, capital availability and costs, and the looming carbon levies. To follow suit was unavoidable. India had to decarbonise if it didn’t want to risk losing competitiveness in the transformed settings.
From an economic standpoint, the latter forces aligned to climate mitigation solutions are the most significant for us in this decade. How quick or slow technological developments are in the spheres eluding these until now is extremely uncertain; innovations could surprise or disappoint. Therefore, it is useful to separate the predictable from the uncertain in the way to 2030. The aim to source half the country’s energy from renewables is rational and reasonable: A faster switch to green electricity generation lowers carbon intensity of both production and consumption in varying extent, and enlarges the clean-fuel base for enhanced electricity demand likely to arise from the shift to electric mobility ahead. The 2070 goal of carbon neutrality allows for gradual passage from coal, avoids harsher costs to employment and existing investments, and makes the shrinkage and eventual death of the vast coal economy (national and sub-national) more manageable.
Challenges posed by renewable electrification relate to scaling up clean-grid investments, power sector overhaul, and policies to safeguard private investments, i.e., all in the domestic realm. There’s complete certainty about technology (mainly solar), which is viable, well-diffused, and relative prices inclining in favour compared to coal. Private sector response for scaling-up future capacities has accelerated, with large corporates increasing the momentum. Arguably, the only uncertainty is that public response may fall short; if the government can do what it has to do, there’s possibly not much ambiguity in this regard.
Comparably, the twin goals of reducing carbon intensity of the economy by at least 45% (from 2005 levels, existing target being 33-35%) and 1 billion tonnes of total projected carbon emissions by 2030 are riddled with uncertainties. Presuming the additional reductions will come from industrial decarbonisation and transport, the evolution of technologies and costs are unsure, which raise the risks to investments amongst other things. The relevant technologies are either feasible but unviable (e.g., carbon capture storage, green steel) or still to achieve scale viability (EVs, batteries). Innovations can take long; solar technology took nearly 50 years to reach its present status. Or they could be much faster in the light of the exceptional focus, scale of human and capital resources pouring into climate-tech, market and investor inclinations, and voter preferences across countries.
If technology were to surprise on the upside, say, available for mass deployment to replace fossil fuel-fired production processes in heavy industry and/or transport, the pace of adoption could grow faster than perceived. Technological developments are largely exogenous, while investment decisions in response are private-sector-led. Much like past technology adoptions, private initiatives respond to returns on investments, consumer demand, and, above all, the need to stay competitive in settings in which respective firms operate, export and borrow. Endogenous learning or technology diffusion is very fast. An example is the current developments in the electric two-wheeler segment, where the decline in acquisition costs has drawn overwhelming private investment, production and consumer responses. Manufacturers are shifting unexpectedly fast with some even asking for an end-date for ICE-scooters in recent months. It demonstrates how EV-adoption could catch-on rapidly as the price-conscious Indian consumer compares the minimal running costs with that of petrol and diesel.
Faster technological solutions cannot be ruled out (e.g., Covid vaccines). If industrial decarbonisation and/or the electric mobility shift take hold earlier-than-expected, unanticipated challenges could surface. There are those triggered normally by technology disruptions such as labour market churns, changes in ancillary industries and supply-chains, etc, which are unlikely to be qualitatively different than those before or ongoing such as digitization, aggregation platforms, ecommerce, amongst some. There could also be a risk to the public accounts: If technology refinements lower the upfront costs of four-wheel and heavy electric vehicles much earlier than understood, a faster transition could lower oil demand and hence, taxable volumes. And if heavy industries decarbonise faster-than-expected, that could undermine the base for carbon taxes conceived in future. Such fundamental disturbances could also be concurrent with the extreme poor fiscal health where even a modest repair is not expected in the next few years.
The logical next step after the climate commitments therefore would be to prepare for structural change, reorganise public finances for an alternate tax base to dissociate from fossil-fuel levies. Especially as transformation of the world economy from simultaneous decarbonisation is ambiguous.
The author is New Delhi-based economist