Budget 2023: Develop Carbon Markets To Fast-track Energy Transition

INDIA STEPPED UP at the COP27 climate conference, reiterating its intent to reach net-zero emissions by 2070. In the near term, it committed to half of its electric power capacity coming from non-fossil fuel-based sources by 2030.

The practicalities, however, are daunting. Looking specifically at power, since 2017, non-hydro renewables (RE) like wind and solar have outpaced coal in terms of new installed capacity. This progress is due to effective government initiatives over the past decade to encourage RE investment, which reached $14.4 billion in 2020-21. Nevertheless, coal still accounts for about 74% of electricity generated. To get to net zero, McKinsey estimates that wind and solar capacity would need to increase from 100GW currently to over 1,000GW by 2050, incurring an estimated cost of $2.5 trillion until 2050.

But there could be benefits as well. One is cleaner air: India is home to 10 of the 15 most polluted cities in the world. Moving to low-polluting sources will save lives and improve the urban environment.

There is also considerable economic promise. India imports over 80% of its crude oil, 60% of gas, 20% of coal, and 85% of its solar panels. An accelerated energy transition pathway could break this paradigm, reduce our exposure to commodity price volatility, and accelerate domestic technology innovation. It would also require the build out of a global scale integrated manufacturing value chain (and the needed ecosystems) in areas such as solar and energy storage, which can position India as a green manufacturing hub.

We think India is well placed to become a leader in the development of green hydrogen. The 2022 Green Hydrogen Policy is a good start. This waives interstate transmission charges for producers and sets up manufacturing zones. But more will need to be done. Its development could be kickstarted in a number of ways, such as demand mandates, R&D investment, production-linked incentives to support electrolyser manufacturing, and technology tie-ups.

Adoption of green hydrogen could abate 900 MtCO2e (metric tonnes of carbon dioxide equivalent) a year by 2050. Hydrogen could also play a critical role in addressing hard-to-abate sectors like steel and cement — and thus position India to export greener versions of those products. Green hydrogen can also be the solution for accelerating the decarbonisation of industrial energy usage, over 80% of which is in the form of coal, oil, gas and diesel.

Development of carbon markets could also hasten the transition. India is in the process of developing a compliance carbon market which will set a CO2e price for the highest-emitting sectors. It can also accelerate investment into low-carbon technologies beyond RE.

The automotive sector accounts for 7-8% of India's total emissions, and is almost fully dependent on fossil fuels. Accelerating the transition of automotive towards electric mobility, low carbon fuels and eventually sources such as hydrogen presents a significant opportunity. If India accelerates interventions to address adoption challenges and drives reforms to encourage investments, along with targeted affirmative actions, near-net-zero tail-pipe emissions may be possible by 2050. India imports oil worth $100 billion currently. An accelerated transition pathway can save $1.2 trillion cumulatively till 2050 and $2 trillion till 2070 in forex for oil imports. Netting off higher battery and battery material imports would still lead to substantial savings — $0.9 trillion till 2050, $1.7 trillion in savings till 2070.

A shift to renewables would mean lower imports of oil, gas, and coking coal, saving as much as $3 trillion in foreign exchange by 2070. Finally, determined decarbonisation could position India as a global energy transition leader and an exporter of green technologies, such as solar panels, electrolysers, and batteries.

India has a stake in stabilising the global climate, and as the world's third-largest emitter, it has an important role to play. But decarbonisation should not be seen as an end in itself, but as a powerful engine that can drive sustainable and inclusive growth.