Rational Expectations: Vital to understand costs of ‘net-zero’

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Updated: Mar 30, 2021 10:15 AM

Electricity costs will rise as subsidies have to go; lakhs of jobs will go if aggressive moves not made on hydrogen to replace coal/oil.

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Given India has already achieved more than 60% of its 2030 commitment at Paris of cutting energy-intensity by 33-35%, most expect it to announce a net-zero date of 2050, or a decade ahead of China’s commitment. Indeed, India is just two percentage points short of its 2030 target—also at Paris—of having 40% of electricity generation capacity via non-fossil-fuels.

But, as a study by Council on Energy, Environment and Water (CEEW, bit.ly/3w0K8Sc) makes clear, Paris and net-zero are entirely different. India’s Paris commitment was to cut energy-intensity of GDP. So, if GDP rises 2.5 times between 2015 and 2030, India’s greenhouse gas emissions can double while still meeting the Paris targets.

In the case of net-zero, on the other hand, once a year is fixed, the emissions will have to peak in that year and then decline to zero; so, net-zero is Paris-plus. Put another way, if all countries, including the US, had met their original Paris commitments, the world would have heated by around 3+ degrees by 2100; if the net-zero commitments are reached, we have a reasonable chance of staying below two degrees by 2100.

This is where the story gets interesting, or frightening if India doesn’t do the right thing. As CEEW points out, most other countries have had a much longer time to adjust. US emissions peaked at 19.2 MtCO2 per capita in 2007, but its net-zero year is likely to be 2050. EU emissions peaked at 9.8 MtCO2 and its net-zero year is likely to be 2050. A long transition period implies the industries in these countries have more time to adjust to newer—and initially costlier—low-emission technologies. China is looking at peaking in 2030 and getting to net-zero in 2060.

The pace at which the economy is growing is critical; a fast-growing economy will find it that much harder to achieve a peak and net-zero as compared to one that is already slowing. While the EU, US, UK and Japan all have seen their GDP growth slow down, even China’s economy will slow substantially by 2030; at that point, India’s economy is expected to be growing at more than twice China’s.

So correctly choosing both the peak as well as net-zero year is critical. If, for the sake of argument, India chooses a peak year of 2030 and it has not, by then, made big strides in low-emission technologies, it will have to bear significant economic costs. And yet, given the reality of global warming, it cannot afford to settle for either a very delayed peak or net-zero year.

CEEW does important simulations on the impact of the choices India makes. Given just around 20% of India’s industrial production uses electricity—the rest burns coal—moving to a lower emission path needs much greater electrification. In case India adopts a 2030 peak and 2050 net-zero, this share will have to rise to 70%; a 2040 peak with a 2070 net-zero, on the other hand, requires a lower 43% usage. Since a big reason for low use of electricity is its high costs, greater use requires dismantling of the subsidy regime as it is high agriculture and household subsidies that keep industrial tariffs high.

Similarly, the share of non-hydro renewables in electricity generation has to rise from around 10% right now to a whopping 83% in a 2030-peak-2050-net-zero scenario and this gets lowered to 65% in 2040-peak-2070-net-zero.
Since CEEW’s model suggests India’s usage of coal will have to come down from 900 mn tonnes right now to 25 mn tonnes in 2050, this has major implications. Since coal is a big revenue earner for the Railways, passenger fares will need to be hiked to make up for the loss; in any case, if the freight share is to rise, as it needs to, freight rates need to fall significantly. More important, lakhs employed in coal mining will lose their jobs.

Dealing with this then requires fixing pricing of rail services and electricity, and a combination of re-skilling and income support for miners, but there are many more reforms India needs to meet any aggressive peak-cum-net-zero target. India needs at least $40 billion a year just to meet its renewables and mobility targets over the next decade. Achieving this requires not just lower fiscal deficits—that itself requires a large set of reforms—it also means India must genuinely open up to foreign capital and that, in turn, requires a sea-change in how foreign capital is treated.

So, no more retrospective tax changes, no rejecting of global arbitration awards like the Cairn one, etc.
Most important, India needs to take the lead in working on new technologies like hydrogen-based energy and also carbon-capture and storage. India needs to work with OECD nations to be part of the global R&D process.

Gurugram-based ACME, for instance, is setting up a 2,200 tpd solar/green ammonia plant in Oman, and thanks to the Japanese government’s help, Fukushima will have a solar-power-based 10MW green hydrogen plant. In Sweden, investors including Spotify’s founder, are looking at building a 5 million tonne per year steel plant based on hydrogen.

India’s hydrogen mission, which the Cabinet will probably clear over the next few months, will need to be catalysing such work by aligning India’s R&D efforts with those of global players; large-scale government-led purchase plans, as was done for solar/wind energy, is another way to spur the development since it is only scale that will lower costs to manageable levels. Among other things, this will also probably require a different approach towards, for instance, patent rights.

Investors will also need to know the direction India is headed in if they are to realign their plans. There may not be options to setting up coal-based power or steel plants right now, but the government has to indicate the dates by when the switchover to new technologies will have to take place; it could say, right now, that all new steel/cement plants need to be hydrogen-ready and the 16,000-km of gas pipelines that are yet to be laid can be fibre-reinforced so they too are hydrogen-ready. How fast India can make these governance changes will determine the years it chooses for peaking and net-zero, but the choice isn’t entirely up to India either as the world is running out of time.

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