Well Done, Prime Minister!

India did the unexpected and committed to (a) Net Zero by 2070, (b) reduction in carbon emissions till 2030, (c) greater use of renewable energy by 2030 than previously targeted (d) committing to meeting half of all energy requirements from renewables by 2030 and (e) reducing the carbon intensity of Indian economy to less than 45 percent from that in 2005 by 2030. 

This is brave, ambitious, and doable only with extensive reforms across domains. Going forward, India will be able to keep to these commitments only if it is able to manage solid economic fundamentals and political pushback in case things don’t work out well. Most importantly, this is not merely a commitment to clean energy, but one that confirms India's place as a responsible global leader.

What all did India not do? It did not commit to reducing the use of coal, reducing carbon emissions from current levels in the next few years, and becoming net-zero by 2060 or 2050 as many were pushing for. Indeed, there will be many who would question the Indian government on that as well. However, after this announcement, India’s glass is more than half full and this is what the bulk of this week’s My Take is about.

First, my joint work done with Aasheerwad Dwivedi shows that total state and central government revenues from fossil fuels exceed India’s defense budget, are similar to all of India and state governments' combined education budget, and about 3.2 percent of India’s GDP (I will be sharing the study shortly.)  Currently, greater than eighty percent of India’s energy used is derived from fossil fuels. This will fall to fifty percent as per the Prime Minister's commitment. Where will the resources to govern India come from? Increasing direct tax revenues is not feasible and GST rate increases are unlikely. 

How will the government manage this? It will need to undertake serious reforms to ensure that the organized sector’s (that pays taxes) share of the economy rises fast and the non-taxpaying unorganized sector becomes smaller. The best way of doing that is by a sequence of legal, regulatory, and tax reforms that make it easy for the small unorganized sector entrepreneur and the self-employed, to convert their business to the organized sector. This is happening to some extent but will require continued and focused effort from the finance and other ministries.

Second, with the Net Zero commitment, India will have to aggressively expand solar, wind, and biofuels as energy sources. The problem with solar and wind energies is, as their share of the total energy portfolio increases, their unit costs go up. Yes, we get diseconomies of scale, and the government knows this. To get around this, it would need to put up large battery storage facilities. Moreover, the infrastructure investments would also rise up as these energy sources have different infrastructure specifications. Since there are also many commitments on efficiency and renewable energy by 2030, all of this will need to happen very fast. I can’t help but repeat, very fast.

Third, biofuel will be the next big thing, and a range of government initiatives would be undertaken to catalyze its production and use. The problem is that if 2030 is even half a target, we are talking about changing a substantial part of India’s food-oriented agriculture and shifting some of it towards being fuel-oriented agriculture. As the ‘angry’ farmer movement of 2020-21 shows, fast changes have many political and political-economic ramifications. 

Fourth, food prices are going up globally, and with the changing climate and greater frequency of extreme weather events, in all likelihood, it will continue on that trajectory. Some of that will occur in India as well, and while all of this is occurring, India will also be putting in place a mechanism to divert its carbohydrate production towards biofuels. This is not going to be an easy task, and there will be many ups and downs on this path, especially those related to food prices. If that occurs, many will criticize the government for being unable to address fluctuating food prices.

Reduction of carbon intensity to less than half its level in 2005 means that for every unit of GDP in 2030 we would use up less than half of the energy we used in 2005. I find this to be a very tough one. There are two critical challenges. India used less than its share of energy in the past simply because it was a service sector-driven economy, but the government is trying to change that. Manufacturing typically uses a lot of energy, and services less so, and the traditional economy uses even less so. As India ‘modernizes’, mechanizes, automates and becomes more and more capital intensive it will be using that much more energy. Moreover, lifestyles are changing rapidly, we are using much more of personal mechanized transport than we used in the past, also air-conditioning is among the fastest rising consumers of power. If therefore we want rapid growth, it would be difficult to control energy usage by productive sectors. 

I believe this commitment was made due to an error by those who are estimating India’s energy intensity. There must have been some underlying assumptions and projections where the government got wrong feedback (this is admittedly a conjecture, and I would be happy to be wrong). If my guess is right, this will be a commitment that India will find very difficult to keep to, however hard it tries.

Finally, the planet needs countries to do more than usual, and India’s Prime Minister has definitely committed to that. No doubt some of the PMs advisors would have pushed for a more ‘practical’ approach, one where India plays a game of quid pro quo. That India did not, goes to the PMs credit. And now the ball is in the court of his cabinet colleagues to deliver.

References:

India will reach net-zero emissions by 2070, PM Modi says at COP26 as he promises ‘panchamrit’, The Print, November 2, 2021