According to the latest report by Mckinsey, to go net-zero would require a higher share of its GDP for India, which will be higher than the global average.
As India moves towards achieving the net-zero target, what does it mean in terms of investment, demand, production costs, and jobs in the country? Consulting firm McKinsey and Company in its latest report "The net-zero transition: What it would cost, what it could bring" provides some insights. The report examines the implications for demand, capital spending, production costs, and jobs in sectors that generate 85 per cent of overall emissions, with an in-depth analysis of 69 countries.
A higher share of India's GDP would go into building low-carbon infrastructure
Making transitions to achieve the net-zero target will be doubly tough for developing economies like India. According to the report, the country needs to invest 1.5 times or more than advanced economies of its share of GDP today to support economic development and build low-carbon infrastructure. Given India's over-reliance on coal, it is not hard to believe. The world's third-largest carbon emitter fulfils around 55 per cent of its energy needs through coal.
As compared to the global average of 7.5 per cent of GDP, India's annual capital spending on physical assets would be 11 per cent of GDP in the net-zero 2050 scenario. The annual capital spending on physical assets in India would rise from around $300 billion in 2020 to an average of $600 billion between 2021 and 2050.
Higher costs on climate adaptation measures
A large chunk of that capital would be dedicated to reducing the use of existing coal power and expanding renewable electricity capacity. As climate change would manifest through extreme weather conditions in India and pose physical risks, the country will incur higher costs on climate adaptation measures.
"It's not just about scaling up but also about reallocation of spending from high-emission assets to low-emission assets," reflected Mekala Krishnan, who has authored the report, at its launch.
An analysis done by climate and energy research firm, CEEW Centre for Energy Finance (CEEW-CEF) last year had noted that India will need close to $10 trillion (INR 700 lakh crore), to meet its goal of net-zero, or being able to effectively eliminate carbon dioxide emissions by 2070. CEEW is the Council for Energy, Environment, and Water Research, a think tank in Delhi.
Power generation would scale substantially. While sub-Saharan Africa will witness a sevenfold increase in power generation, for India, the increase will be fourfold whereas it will be threefold for emerging markets in Asia.
As coal-fired power plants are retired, India will also face the acute risk of asset stranding. The report mentions that the average age of coal power plants in India is less than 15 years, compared with more than 30 years in the United States.
“The economic transition to achieve net-zero will be complex and challenging, but India’s abundance of low-emission or critical transition resources and geographical position could allow it to become a leader in the transition. Our findings serve as a clear call for a well-considered, urgent, national plan, as an imperative for India to secure an orderly transition to net-zero,” said Rajat Gupta, Senior Partner at McKinsey and Asia leader of McKinsey Sustainability.
The report says that no country can escape the economic transformation that arises from the net-zero transition. For the world, the capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 would come to be at $9.2 trillion per year on average which means an annual increase of as much as $3.5 trillion.
The report states that the spending would be front-loaded, rising from 6.8 per cent of GDP today to as much as 8.8 per cent of GDP between 2026 and 2030 before falling. It notes that technological innovation could reduce capital costs for net-zero technologies faster than expected.
Electricity production costs would increase in the near term but then fall back from their peak. As for jobs, the transition could result in a gain of about 200 million and a loss of about 185 million direct and indirect jobs globally by 2050.
The transition is also likely to affect consumer spending habits, the report points out. There will be a need to replace goods that use fossil fuel like transportation vehicles, home heating systems, and even potentially modify diets to reduce high-emissions products like beef and lamb. It adds that the up-front capital spending for the net-zero transition could yield lower operating costs over time for consumers. For example, the total cost of ownership for EVs is expected to be lower than ICE cars in most regions by 2030.
But it's not all gloom and doom. The transition would serve economic opportunities and possibilities to solve global challenges in both physical and governance-related terms.