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India’s current policies may help achieve 2030 emission targets, but there may be a rebound in greenhouse gas emissions post-2030, warns an IMF working paper.

The paper underscores the necessity for additional intervention while recognising unavoidable trade-offs.

The combination of a renewable subsidy, coal excise tax and a carbon price is proposed to alleviate the fiscal strain associated with funding renewable power subsidies.

While current policies may help India achieve its emission targets by 2030, there will be a rebound of greenhouse gas (GHG) emissions in 2031 which will continue rising until 2040, according to a working paper published by the International Monetary Fund (IMF). It advocates for more policy intervention, which, however, comes with trade-offs.

India’s Nationally Determined Contributions (NDC) target is to reduce the emissions intensity of its GDP by 45% by 2030 from the 2005 level.

In estimating policy impact, the paper considers five major emitting sectors – power, agriculture, manufacturing, transportation and residential – and the policy interventions to reduce emissions in these sectors.

It analyses existing policies to promote manufacturing and use of renewable energy such as Production Linked Incentive (PLI) schemes, Renewable Purchase Obligation (RPOs) and the Perform Achieve and Trade (PAT) schemes, among others as well as the more recently introduced carbon trading market policy.

The IMF paper notes that more effort is needed to reach the 2070 net-zero goal that India committed to at the climate conference COP26.

Head of the Center for Sustainable Finance (CSF) at Climate Policy Initiative (CPI), Labanya Prakash Jena says, “It is true that India must intensify its efforts to attain net-zero emissions by 2070. The anticipated government interventions beyond 2030 hinge on the pace at which the costs of crucial low-carbon technologies, including green hydrogen and storage, are decreasing. Additionally, the availability of rare earth materials, crucial for these technologies, is a determining factor. India, lacking the financial prowess of the developed countries, is poised to wait until the costs of low-carbon technologies decline before implementing policies and regulations.”

India, the third-largest global emitter of greenhouse gases (GHG), has the lowest per capita emission levels among G20 nations. Because India’s modern economic development began later than that of advanced economies, its contribution to the historical cumulative GHG emissions stands is small, at around 3%. In the coming two decades, India aims for ambitious growth, which could shift it from the current lower-middle-income status to a higher-middle-income status, notes the report. With this anticipated increase in average incomes, the electricity demand is also expected to surge, driven by the needs of both businesses and households for amenities like air conditioners and refrigerators.

Emitting sectors

Among the key high-emitting sectors in India, the electricity sector takes the lead, according to the report, constituting almost 40% of total emissions because of the heavy dependence on coal for electricity generation. Coal contributes over 70% to the electricity output.

The industrial sector, including broad sub-sectors such as metals, minerals, machines, rubber and plastics, accounts for around 22% of total GHG emissions in India. The sector is less efficient than equivalent sectors in other countries, says the report.

Agriculture contributes 14% to total GHG emissions, with emissions stemming from livestock’s enteric fermentation, rice cultivation (methane) and manure and residue burning (nitrous oxide). Despite a decline in cattle population since 2014, the sector remains a major source of methane emissions, constituting about 74% of the country’s total, significantly impacting temperatures. The agriculture sector also accounts for 20-25% of electricity consumed in the country, predominantly for irrigation, despite only 40% of arable land being irrigated.

India’s transport sector, predominantly reliant on oil, contributes approximately 9% to the nation’s GHG emissions, with road transport singularly responsible for 90% of sectoral emissions. The prevalence of smaller vehicles, mainly two- and three-wheelers, helps the country lower the sector’s emissions intensities. Petrol or diesel fuels about 97% of road transport, jet fuel powers air transport entirely and electricity predominantly fuels rail transport. Despite a rise in the absolute use of electricity as a fuel source, its share of overall final transport fuel consumption has declined in recent years due to the sharp increase in petrol and diesel consumption, as highlighted in the paper.

In the residential sector, contributing 4% to national GHG emissions, solid biofuels remain the primary fuel source. However, the rising consumption of electricity, driven by improved access, poses a dual challenge as electricity generation is still predominantly coal-powered despite being a cleaner household fuel source.

Jena from CPI says that India is actively seeking to transfer low-carbon technology and share patents from developed nations, particularly for sectors like industry and energy efficiency. Furthermore, India is looking for concessional international climate finance to support certain industries or segments (e.g. MSMEs) who may find the adoption of low-carbon technologies financially challenging.

Transition strain

India’s electricity demand is projected to rise from about 1500 Twh (terawatt hour) in 2020 to almost 5500 Twh in 2040, estimates the IMF paper. Under current policies, part of this demand is met by expanding renewable energy, nuclear and hydropower sources, which grow to meet 44% of total electricity demand in 2040 and 49% from coal, the paper projects.

The IMF paper highlights that, under a business-as-usual scenario, India’s greenhouse gas (GHG) emissions are projected to deviate significantly from the near-linear trajectory needed to achieve net-zero emissions by 2070.

The paper explores three policy packages aimed at lowering the emissions trajectory to meet the green Alternative Emissions Trajectory line. These scenarios, closely aligned with India’s existing policy mix, include a renewable subsidy, a renewable subsidy + coal excise tax, and a renewable subsidy + coal excise tax + a carbon price.

While all three scenarios lead to lower emissions, increased renewable energy and enhanced energy security, each has distinct trade-offs. In all three scenarios, coal imports decrease, but oil and petroleum imports continue to rise due to international emissions mitigation efforts affecting global fuel prices. The policy packages represent a nuanced approach to balancing emission reduction with economic considerations.

Exclusively providing subsidies for renewable power without additional measures for mitigation is more economically burdensome. The paper predicts that it would result in a 0.45% reduction in GDP by 2030 compared to the baseline. The other two policy packages also lead to a decrease in output, albeit to a lesser extent.

According to the report, the introduction of complementary mitigation policies helps alleviate the fiscal strain of funding renewable power subsidies, resulting in more moderate GDP costs ranging from 0.18 to 0.3%.

The paper says that reducing GHG emissions is expected to negatively impact short-term growth and pose significant distributional challenges for individuals and communities dependent on coal. Nevertheless, these costs can be significantly minimised by implementing appropriate policies. For required finance, it highlights the importance of carbon tax as a major tool to mobilse the finance beyond what India is supposed to get from rich countries.

While talking to Mongabay India, Associate Professor at the National Institute of Public Finance and Policy (NIPFP), Suranjali Tandon says the report emphasises the estimated gap in climate finance and how current international flows have fallen short. Among the strategies listed, the paper identifies that “under 2 °C consistent pathways compensating the abatement costs of countries with per capita income below $4,500 would cost $60 billion in transfers annually in 2030.” These transfers, funded by taxes and prices on carbon in high-income countries, would generate transfers to India under all alternative scenarios due to its large size and small per capita emissions. Yet, India must cover the distance from the estimated requirement to fund net zero through different instruments, including bonds, bank loans, and concessional finance. More importantly, she said, it needs a domestic strategy to price and tax carbon.