Mapping the climate transition by identifying policy interventions

RBI has ventured out of the normal hunting ground of central banks to foray into the much longer time periods relevant for climate change. (Photo: BLOOMBERG NEWS)
RBI has ventured out of the normal hunting ground of central banks to foray into the much longer time periods relevant for climate change. (Photo: BLOOMBERG NEWS)


RBI’s report lays down a buffet of choices. Policymakers must now pick what is nutritious but also conforms to political taste.

In the latest Report on Currency and Finance, the Reserve Bank of India (RBI) has ventured out of the normal hunting ground of central banks, which is short-term macro-economic analysis, to foray into the much longer time periods relevant for climate change. It deserves applause for producing an excellent report that spells out the wide range of policies and programmes that we need to consider if we want to manage climate change.

The need for action is urgent. Global warming is bad news for the world and we know that India is among the countries worst affected. Limiting global warming is, therefore, clearly in our interest. But we cannot achieve much on our own. Only concerted global action can cut the accumulation of green house gases (GHGs) in the atmosphere.

All countries have now voluntarily adopted targets for transitioning to net zero by different years around mid-century. The trouble is that the current targets are insufficient to limit warming to the desired +1.5°C above the pre-industrial level by 2100. Experts project that with the current policies and commitments, the temperature rise is likely to be around +2.4°C (range of 1.8–2.8°C). If we want to achieve the 1.5°C target, each country will have to tighten its net zero trajectory. This will be on the agenda of subsequent COP meetings. Meanwhile, it is important for each country to ensure that it will at least meet its commitments. In fact, most countries are off-track.

The report draws attention to the fact that the effort we have to make depends on the growth target. The report considers a baseline scenario that has GDP growing at 6.6% per annum, which is the average over the past 10 years. It also considers a more ambitious target of making India “a developed country" by 2047-48. This requires a much higher growth rate of 9.6% per annum up to 2047-48, slowing down to 5.8% per annum thereafter.

Any given growth trajectory can be made consistent with net zero emissions if we can (a) increase the level of energy efficiency i.e. reduce the energy used per unit of GDP and/or (b) increase the greenness of energy i.e. reduce emissions per unit of energy. The following changes are needed to bring both scenarios net zero by 2070.

(i) Energy efficiency has been improving at 2.3% per annum over the last 10 years. It needs to be accelerated to 5% in the lower growth scenario, or 5.4% in the higher growth scenario.

(ii) The share of green energy in primary energy has to be increased to 70% of the total by 2070 in the low growth scenario or 82% in the higher growth scenario.

(iii) The capacity to absorb carbon can be increased from 0.3 gigatonne per year at present to 3.3 gigatonne through rapid afforestation.

Gross emissions would peak around 2032 in the lower growth scenario and then decline gradually to net zero by 2070. They would peak later around 2045 in the higher growth scenario.

To achieve the changes targeted in aggregate parameters such as “energy efficiency" and “greenness of energy", it is necessary to intervene in different parts of the economy via specific policies. Chapter IV of the report offers many such suggestions. A practical way of proceeding is to identify some major interventions that need to be implemented over the next 10 years, assigning responsibility for implementation to the relevant ministries and also levels of government.

Since almost half of the reduction in emissions will come from shifting power generation away from coal-based thermal power towards solar, wind and other green sources, this is an obvious priority area. If emissions are to peak sometime in the next decade, we need to work out a plan to ensure that there will be no more new coal-based thermal power plants after a certain date. There is merit in biting the bullet on this one and announcing a date.

The decision to phase down coal-based power also implies a corresponding phasing out of coal mines. This has implications for employment and state finances, which must be planned well in advance and states affected taken on board.

Raising the share of green energy to 70% or 82% of total energy by 2070 will involve massive investments in building electricity generation, storage and transmission capacity and also in developing infrastructure for green hydrogen. Some of these investments will be undertaken by the public sector, but a large part must be undertaken by the private sector. This will require a policy environment that will encourage such investment. The financial situation of most distribution companies, or discoms, is not consistent with attracting such investment. Nor is the tendency of state governments to announce cancellation of projects approved by earlier governments.

The report rightly draws attention to the controversial issue of introducing a carbon tax to reflect the social costs of using coal, or alternatively adopting an equivalent cap-and-trade system. A large number of developing countries have introduced one or the other mechanism. The recent Electricity Amendment Act makes provision for introducing a cap-and-trade system, but the question of whether an explicit carbon tax would be better needs to be carefully examined.

Either option would raise the cost of coal to users and this would be reflected in the price of coal-based electricity. This is a logical consequence of rational energy pricing. It would make green electricity more competitive without having to resort to command-and-control initiatives such as forcing renewable purchase obligations on discoms.

Raising energy prices runs counter to the political perception that energy must not only be available but also affordable. Politicians have to be persuaded that keeping energy prices artificially low is not the way of ensuring affordability. That is best done by targeting a high and inclusive growth rate, which raises incomes across the board, enabling most households to pay. This can be combined with some targeted cash transfers aimed at those who are really poor.

A big advantage of carbon taxation is that it raises revenue. The climate transition will impose a burden on both central and state budgets, neither of which have fiscal space. Carbon taxation will provide resources consistent with the principle that the polluter must pay.

Improvements in energy efficiency are also critical to reduce emissions. Several studies suggest that as much as one-third of the reduction in emissions will come from higher energy efficiency. To the extent that this involves choosing a more energy efficient appliance, it can be helped by rational energy pricing. However, much of the energy efficiency has to come from switching to more energy-efficient systems, e.g, passengers shifting from cars to public transport (EV buses and metros), goods shifting from trucks to railways, which could become fully electric in traction, and from implementing more energy-efficient building designs. Putting these systems in place is the responsibility of governments and regulatory bodies.

The RBI report has laid out a long menu. It is not possible to cover all that is presented in an oped. The challenge of policymaking is to convert this menu into a meal, perhaps for a decade at a time, ensuring adequate nutrition and also conforming to political taste.

Montek Singh Ahluwalia is former deputy chairman, Planning Commission, and currently distinguished fellow at the Centre for Social and Economic Progress


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