Decarbonising India

India has to grow in a world that can survive only by reducing greenhouse gas emissions to reduce global warming and damaging climate change. As a recent comprehensive report from consulting firm McKinsey puts it, India has to decarbonise.

GDP, economy
In the accelerated scenario, green investment will be 6% of GDP, which is not enormous in the context of an overall investment rate of 30%. (IE)

If we give India its own personality, we can assert that India has to grow, and India wants to grow. Economic growth can get people out of poverty, create livelihoods, and improve their lives in many ways. When people in countries around the world are asked about their levels of life satisfaction, the most important factor that predicts their average satisfaction—the World Happiness Index—is GDP per capita. Social support and quality of governance also matter, and India has a negative residual that perhaps reflects its people’s unfulfilled expectations, the promises not kept by its leaders.

But India’s growth will have to take place in a very different situation than the past eight decades that followed the massive destruction of the Second World War. India has to grow in a world that can survive only by reducing greenhouse gas emissions to reduce global warming and damaging climate change. As a recent comprehensive report from consulting firm McKinsey puts it, India has to decarbonise. The report offers a detailed quantitative assessment of a pathway for decarbonising India, produced by McKinsey’s Sustainability Practice there.

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Perhaps the most important message of the analysis is that an accelerated scenario that gets India to zero emissions by 2050 is feasible and has some advantages. An accelerated pathway requires setting up the needed transition within this decade, and an additional 2.4% of GDP in investment, front-loaded, compared to what the report calls a “line-of-sight” (LoS) scenario based on existing and announced plans and policies. The additional cumulative savings in greenhouse gas emissions will be 40% greater by accelerating over the LoS case. While the report estimates that half of the additional investment will pay for itself, it is certainly possible that the gains will more than make up for increased costs, since learning by doing will be accelerated, and investment in non-green infrastructure that will have to be replaced soon will be avoided. Indeed, the report points out that three quarters of the India of 2050 has yet to be built. Building it greener as soon as is reasonable makes sense. A more pragmatic reason for choosing an accelerated pathway, of course, is that if there is slippage, the fall-back will not be disastrous.

The areas where green investments will be needed are dominated by the electric power, and transport sectors, accounting for 70%, with agriculture and industry making up another quarter. The technologies needed will include ones that are relatively mature, such as solar power generation, but also many where there is considerable room for innovation and cost reduction, including batteries, green hydrogen, and carbon capture. The latter are riskier, and less likely to attract private funding, so public sector and global multilateral institutions will need to play a major role in taking over and spreading the risks. The question of intellectual property will also have to be addressed, to make sure that patent monopolies do not slow adoption or raise its costs.

The current annual financing for India’s decarbonisation is only about 10% of what is needed in the accelerated scenario, so clearly an enormous amount needs to be done. Introducing explicit and implicit carbon prices, through taxes or other mechanisms, will help to create the right investment incentives, and, if it generates new tax revenue, provide financing for investment to make it worthwhile. In the accelerated scenario, green investment will be 6% of GDP, which is not enormous in the context of an overall investment rate of 30%. Much of the 6% would replace other forms of investment, so that the marginal funds needed will be less. But even 1% of GDP represents 10% of Indian government revenue, so the sums will not be trivial. But they are not unrealistic. And both private sector and multilateral finance will be important.

The McKinsey calculations are based on their own models and model assumptions. But they are not out of line with other analyses that have suggested an accelerated pursuit of zero emissions by 2050 is achievable. India’s GDP is now about $3.5 trillion, so 1% of that is $35 billion annually. FDI flows are hard to pin down, but a current figure of $60 billion annually would suggest that looking to increased FDI for green investment is not unreasonable. Currently, though, FDI goes mostly to software and to the service sector, so India will have to pay close attention to creating the conditions for new money to flow into green investment. Clearly, some kinds of green investment will be more attractive for the private sector.

Also read: Can happiness be bought?

Last, but not least, addressing climate change also requires a strong new focus on more rational and strategic management of resources. Forests have to be protected and expanded, water use for agriculture has to be dramatically improved—including changing crop choices in many cases—and land use as a whole has to be planned much better, especially to accommodate new infrastructure for renewable energy sources. All of these actions would be socially beneficial even without the threat of climate change, but they will now be vital components of the decarbonisation strategy, whether that is accelerated or not. Indeed, environmental improvements by themselves might raise India’s happiness index from its current lowly level.

The writer is professor of economics, University of California, Santa Cruz

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First published on: 28-03-2023 at 04:15 IST
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