This will be a decisive decade. With intentional action, India can accelerate decarbonization at scale while pursuing economic growth.
At COP26, India announced its ambition to become a net-zero emitter by 2070—an important milestone in the fight against climate change. Despite low per-capita emissions (1.8 tons CO2), India is the third-largest emitter globally, emitting a net 2.9 gigatons of carbon-dioxide equivalent (GtCO2e) every year as of 2019. The bulk of these emissions (about 70 percent) are driven by six sectors: power, steel, automotive, aviation, cement, and agriculture.
In this report, we propose more than 100 decarbonization levers across these key sectors and take a deeper look at four cross-cutting decarbonization opportunities: green hydrogen; carbon capture, usage, and storage (CCUS); natural climate solutions; and material circularity. We modeled outcomes on India’s net-zero journey along two scenarios: first, the current line-of-sight (LoS) scenario with current (and announced) policies and foreseeable technology adoption; and second, the accelerated scenario with far-reaching polices like carbon pricing and accelerated technology adoption, including technologies like CCUS. Our analysis shows that the benefits of a well-planned, orderly, accelerated transition could outweigh the downsides, given India’s growth outlook.
Eight important messages underlie this report.
India has the potential to create 287 gigatons of carbon space for the world. This amounts to almost half of the global carbon budget for an even chance at limiting warming to 1.5°C. The current pace of emissions intensity reduction is insufficient for India’s emissions curve to bend with the expected growth outlook. In the LoS scenario, India could reduce annual emissions from a historical trajectory of 11.8 GtCO2e to 1.9 GtCO2e by 2070, a 90 percent reduction in economic emissions intensity compared with 2019. It can reach 0.4 GtCO2e by 2050 in the accelerated scenario (Exhibit 1), with a potential to get to its net-zero-by-2070 commitment through new technology developments (such as direct air capture) over the next few decades.
LoS scenario reductions are challenging, and the accelerated scenario reductions even more so. There are emerging tailwinds in the form of reducing costs of renewables and electric vehicles (EVs), and the progressive policies being implemented (for example, the implicit carbon tax on transportation fuels of $140 to $240/ton CO2e) are helping the electrification of mobility. Yet, several other actions with significant scale-up potential are needed (Exhibit 2). For example: renewable capacity addition needs to increase from ten gigawatts (GW) to 40–50 GW per year; a hydrogen cost reduction and carbon price of $50/ton CO2 is needed by 2030 to make green steel competitive (could lead to 211 metric tons (Mt) of steel capacity being built on the low-carbon hydrogen route instead of the coal route by 2045); battery costs have to decline by 40 percent by 2030 and green hydrogen by two-thirds by 2035; a nationwide rollout of charging infrastructure is needed; farmers have to adopt new practices for rice cultivation; targets for circularity have to be met and higher targets set.
There is an urgency to prepare India for an orderly and accelerated decarbonization within the current decade. Over three-fourths of the India of 2050 (and 80-plus percent of the India of 2070) is yet to be built. Developing this robust infrastructure in India will multiply demand across sectors: power (eightfold), steel (eightfold), cement (threefold), auto (threefold), and food (twofold). If policies are set in place to create the right demand signals within this decade, then India could add low-carbon capacities in the next two decades thereafter. For example, a carbon price of $50 per Mt by 2030 makes green steel competitive (could lead to 211 Mt of steel capacity being built on the low-carbon hydrogen route instead of the coal blast furnace route by 2045).
India benefits from an orderly transition. India’s transition from thermal power to renewables is expected to decrease the average cost of power supply from INR 6.15 per kilowatt-hour (kWh) in financial year 2020 to INR 5.25 per kWh and INR 5.4 per kWh by 2050 in the LoS and accelerated scenarios, respectively (Exhibit 3).1 Sustainable-farming practices could help generate additional farmer income of INR 3,400 per hectare/year in the LoS scenario, which could increase to INR 4,800 per hectare/year in the accelerated scenario. India may save a cumulative $1.7 trillion in the foreign exchange, which may otherwise be spent on energy imports until 2070. In addition, India will have the opportunity to build itself right the first time, minimizing asset stranding. Finally, if India can start manufacturing in newer technologies, it has the potential to be a world leader in batteries, electrolyzers, green steel, and other areas.
Energy system shifts. Fossil fuels, which comprise 75 percent of India’s commercial energy mix today, decline to one-half in the LoS scenario and to one-sixth in the accelerated scenario by 2050 (Exhibit 4). In the accelerated scenario, over 60 percent of India’s refining capacity, 90 percent of its coal mining capacity, and 100 percent of its coal power generation would not be needed. Tax collections from auto fuel could decline to $36 billion by 2050 (from $85 billion currently). Ensuring resources are used appropriately will be vital. For example, the biomass currently being used by households for cooking, and which in future can be used for thermal-power generation, might potentially need to be directed to hard-to-abate sectors like cement.
Pressure on land systems. In the accelerated scenario, growth and decarbonization combined may require 45 million more hectares of land than is available, of which nearly ten million hectares would be needed for renewable power and eight million for carbon sinks and forests. Innovative land optimization techniques such as maximizing barren land use for renewable power, vertical urbanization, and improved agricultural productivity would be needed to ensure sufficient land for decarbonization.
Moderate impact on household spending and jobs. A critical consideration is the impact of the accelerated decarbonisation on Indian household spending and jobs. We estimate that by 2040, the increases in housing costs resulting from decarbonisation would, for the most part, be balanced by the limited impact on food costs (excluding impact on yields from direct climate change) and decrease in the costs of energy and transport, assuming an orderly transition. If the transition is disorderly (that is, if the initiatives are carried out at the wrong time or incorrectly), the economically disadvantaged would suffer a more adverse impact. Accelerated decarbonisation could transform over 30 million jobs (24 million new jobs could be created while six million existing jobs could be lost) by 2050. While important, the scale of workforce reallocation may be smaller than that from other macro trends (for example, 60 million new workers entering the workforce by 2030). That said, specific communities (such as coal mining and associated enterprises in Eastern India) could be adversely impacted, requiring support, reskilling, and alternative industrial development in particular areas.
Large funding needed (3.5–6 percent of GDP), frontloaded, but ‘in the money.’ India may need an estimated $7.2 trillion of green investments until 2050 to decarbonise in the LoS scenario and an additional $4.9 trillion in the accelerated scenario. Fifty percent of the investments needed for abatement between the LoS and the accelerated scenario is in the money, particularly across the renewable-energy, auto, and agriculture sectors; other sectors would likely need policy support from the government. The net spend (capex minus opex) will need to be frontloaded. As an illustration, net of operational savings, $1.8 trillion would be needed from 2030–40 and $600 billion from 2040–50 between the LoS and accelerated scenarios.
All stakeholders need to come together and act now to accelerate India’s decarbonization. The government could provide policy and regulatory support to make projects across sectors economically viable. These could include providing incentives for the use of EVs and fuel cell EVs by balancing taxation, simplifying regulations for authorizing and installing new power and grid installations, creating demand signals for higher-cost green materials like steel, and generating support for localizing electrolyzer manufacturing. Support would also be required to ensure a just transition that minimizes impact on low-income households. These actions need to happen in the right sequence to avoid energy shortages, price increases, and transition disorderliness.
Achieving technological breakthroughs would require consistent public and private investment. It would also require willingness among business leaders and policy makers to adopt new technologies, for example, long-duration storage technologies to capture seasonality of renewable sources, advancement in fuel cell technology, and improvements in recycling technologies.
Against this backdrop, we propose the following ten actions to accelerate India’s decarbonization:
- Lay out a detailed medium-term decarbonization plan with sector-specific priorities and policy frameworks that account for interdependencies across sectors and provide demand signals to guide corporates to invest.
- Accelerate implementation of a compliance carbon market (within three years). This would also require the creation of demand signals, especially in hard-to-abate sectors, and incentives linked to investments in newer technologies like CCUS.
- Enable banks to support the transition, catalyzed by a green-transition bank. Banks could be asked to come up with their investment glide paths within one to two years and build the necessary capability for assessing risks in these new spaces.
- Accelerate renewable adoption in the power sector to scale up capacity addition by four times and to deepen market reforms with a 30-year outlook in a manner that ensures a stable grid fed predominantly by infirm power.
- Empower a nodal authority to define a national land-use plan. Lay clear land-use guidelines for optimized use across urbanization, industrial needs, carbon sinks, agriculture, and renewables.
- Create a resilient indigenous manufacturing capability and increase investment in cleantech R&D. Efforts would be needed to develop local raw-material resources (such as rare earths), secure materials from elsewhere in the world, and produce equipment locally through mechanisms like production-linked incentive (PLI).
- Evaluate five carbon capture and storage hubs in Gujarat (Jamnagar), Odisha (Paradeep), Rajasthan (Barmer), Maharashtra (Pune), and Andhra Pradesh (Vizag) potentially in public–private partnership for utilization and storage of captured carbon.
- Create a national circularity mission with recycling hubs in the top 20 Indian cities (contributing 35 percent of municipal solid waste), mandated targets on recycling rates, recycled raw-material use (for example, blending norms), and landfill levies.
- Enhance the National Hydrogen Mission with government playing a key role in accelerating demand through blending mandates, boosting cost competitiveness via capital subsidies and
- R&D investments, and enabling export opportunities via international trade agreements.
- Empower companies to play on the front foot, evaluating investment opportunities that this green trend will unlock, aligned with India’s national plans or opportunities opened up by decarbonization of other countries (for example, green-hydrogen derivative exports).
India needs to take thoughtful actions now to set itself up for an accelerated and orderly transition. Looking beyond the short term and laying the foundation for this transformation within this next decade is the imperative for a decarbonized India and world.
Source: mckinsey
