The economic challenge of growing fast while going green

What is the economic policy that India needs to follow to be able to achieve the green agenda that it has set for itself to combat climate change? To what extend can this policy work against the fundamental national goal of pursuing rapid economic development in order to alleviate poverty and become a developed economy? Resolving this contradiction is likely to remain at the core of economic decision-making for decades to come.

Rapid economic development to raise incomes will require a rapid rise in energy consumption and carbon emissions. To avoid this, the country needs to fuel its economic development with green or renewable energy, like solar and wind power, and the use of hydrogen fuel. What is the scenario on this front that lies ahead?

The government has announced plans to invest Rs 35,000 crore to enable the green energy transition that will help it reach its net-zero goal by 2070. This is part of the commitments made by countries at the Glasgow climate conference to achieve the overarching goal of keeping global warming to 1.5°C above the pre-industrial levels.

In order to get these funds, the government, suggests the RBI, needs to impose a carbon tax of $25 (in equivalent rupees) per tonne of carbon emission by any entity. Plus, there will be a ‘green credit programme’ which will offer incentives to companies, local bodies and individuals to act in an environmentally responsible manner. The principle is: pay a fine (tax) if you do wrong or earn a goody if you do right.

The RBI will not only have to maintain price stability as the bedrock of the economy, but also adopt a green monetary policy. As this is a newly emerging field, it will have to look at the monetary and liquidity management policies that other central banks are evolving in order to pursue the green goal and then devise its own agenda.

To get back to what the government needs to do, trade policy has to be reoriented to serve the green agenda. Countries across the world are looking carefully at the carbon content of what they import so as to discourage the import of carbon-intensive goods. Hence, India will need to meet the green standards of its major trading partners by focusing on green and clean energy products for exports.

As the economy cannot be divided into two parts that cater separately to the international and domestic markets, the carbon content rules that progressive countries and India’s major trading partners impose will need to be set for the domestic market, too. This can be done by labelling different industries as clean and dirty and putting the latter in the doghouse. Once this happens, dirty industries will find it difficult to attract investment and, so, will be forced to change their technologies.

One particular industry which has taken the hint and started to put its house in order is steel. India is the largest steel producer in the world after China; its steel sector accounts for 35 per cent of all industrial carbon dioxide emissions. For every tonne of steel produced, 1.4 tonnes of carbon dioxide is released into the atmosphere. Tata Steel and JSW Energy are seeking to go down the green hydrogen (made from renewable energy) path to manufacture green steel. If they can do this, they will be able to lead the rest of the industry along the green pathway.

Tata Steel is experimenting with injecting hydrogen into the blast furnace instead of coke. This will bring down the coke rate, but the challenge will be to secure not just cheap hydrogen but also green hydrogen which is made from renewable energy. For its part, JSW Steel is on the way to commissioning the country’s largest green hydrogen project to manufacture green steel.

For one thing, there is no lack of ambition in the Indian renewable energy industry. ReNew Power, India’s largest renewable energy company with 13.4 GW of clean energy assets, feels that the country has been quite positive in its approach to green energy and can act as an example for other developing countries. Though India gets over half of its energy from coal, its use of wind and solar energy is rising and now accounts for around 12 per cent of the total energy consumption.

India is poorly endowed with gas, but it can access wind and solar power very cheaply. So, if it can get a large part of its energy needs from renewable sources, it will not only meet its commitment to reduce carbon emissions but also lower costs in the economy as a whole, thus making it more competitive. Plus, while pursuing its high renewable energy goals, it will be able to fine-tune its renewable energy technology and become a robust exporter of it.

If ReNew is looking in one direction, Coal India has its head turned the opposite way. It is moving towards raising the annual capacity at its Gevra site in Chhattisgarh to 70 million tonnes, creating one of the world’s largest coal mines, making it the world’s single biggest source of fossil fuel.

As is to be expected, residents in the area are protesting the expansion plan because of their fear of the impact that it will have on air quality and the quality and quantity of groundwater.

India, thus, represents a contradiction. Both renewable energy and fossil fuel capacity are moving fast to meet the growing energy needs of the economy, which is now the fifth largest in the world and the fastest growing among large economies. It has also just become the most populous country in the world, surpassing China.

Economic policy needs to be geared to live with this reality of an inexorable rise in the emission of greenhouse gases in the foreseeable future even as there is a need to cut down on carbon emissions in order to meet the commitments made and timelines outlined to the rest of the world. Hence, the expansion of coal output is not only being allowed but also being encouraged.

It is hoped that the rapid rise in the output of green energy will enable a net movement in the right direction lower fossil fuel consumption per unit of economic output. This is the tightrope that needs to be walked.