Balancing act – India’s journey to net zero

Balancing act – India’s journey to net zero

COP26 saw India commit to achieving net zero by 2070. We explore its proposed route and the challenges it faces.

One of the breakthrough pledges at last year’s COP26 summit came from India’s Prime Minister Narendra Modi, who pledged to cut emissions to net zero by 2070. But, unlike the more developed nations that have set out 2050 net zero ambitions, India is still in a growth stage. It faces a fine balancing act to meet increasing power supply demands and raise a significant proportion of its population out of poverty while reducing emissions.

Climate risk and India

India’s rising incomes, growing and young populations and business-friendly policies offer a fantastic opportunity for emerging market investors. There are plenty of high-quality companies with strong business models, competitive advantages and capable managers. But, like many developing countries, India’s people and businesses are particularly vulnerable to the impacts of climate change. Less predictable monsoons, increasing average temperatures and more frequent extreme weather events could halt economic activity, impact consumption expenditure and displace millions of its citizens. Additionally, as an emerging economy, India has lower capacity to mitigate the effects.

India: CO2 Emissions in a Global Context

Annual CO2 emissions (billion tonnes)
Annual CO2 emissions (billion tonnes)

India accounted for 7% of the world’s CO2 emissions in 2019, up 40% from 2009 levels indicating the rapid development of the country.

Per capita emissions (billion tonnes)

Per capita emissions (billion tonnes)

With its huge population, India’s per capita carbon emissions are well below Europe’s. India’s energy use and emissions are less than half the world average.

GHG emissions by source (million tonnes)
GHG emissions by source (million tonnes)

Electricity and heating account for the greatest share of India’s carbon output, while transport emissions are below the world average.

Total primary energy demand in India, 2000-2020
Total primary energy demand in India, 2000-2020

India is heavily reliant on coal and other fossil fuels for its energy needs. Traditional use of biomass such as wood or charcoal has been falling but an estimated 50% of people still do not have access to clean cooking facilities.

Source: Our world in data, International Energy Agency India energy outlook 2021. 2020 saw a drop-in emissions and energy consumption due to the Covid-19 pandemic, in most cases 2019 data has been used.

Economic growth verses emissions reductions

The challenge for India will be juggling economic growth with reducing emissions. Pre-pandemic, the World Bank estimated India’s poverty headcount ratio at 22% of the population. However, disruption from the Covid-19 pandemic aside, India has made great strides in improving the lives of its 1.4 billion inhabitants. For example, in 2018, Prime Minister Modi announced that every village in India now has access to electricity. While not all households are linked up to the supply, the scale of the electrification is impressive and will improve the lives of millions.

India is heavily reliant on coal to meet its growing energy demand. Reducing emissions from fossil fuels will not be easy. Many livelihoods depend on coal so reduction might not be a vote winner and a large investment is needed to improve and adapt the electricity grid for renewable energy sources.

There are positives though: the country has taken significant steps towards initiating a low-carbon economy across various sectors and is emerging as a leader in renewable energy capacity. As technology improves, renewable energy sources are becoming more economical in comparison to traditional fossil fuels and India has some of the lowest costs for solar PV projects in the world. Although shy of the government’s target of 100GW by end 2022 installed solar capacity has increased almost 500% since 2016 to 40.1GW.

Installed solar capacity (GW)
Installed solar capacity (GW)

Source: Ministry of new and renewable energy

India’s climate policy

As the third-highest energy consumer in the world, India’s steps to lower emissions are essential to meet global reduction targets. Alongside the net zero by 2070 target Modi pledged to do the following by 2030:

  • increase its renewable-energy capacity to 500GW
  • meet 50% of energy demand from renewable energy sources
  • reduce the economy’s carbon emissions intensity by 45%
  • reduce its total projected carbon emissions by 1 billion tonnes

India’s 2021 budget announcement was also more climate-friendly, with two-thirds of the USD120bn earmarked for energy heading towards renewable energy. However, one of the biggest disappointments at COP26 was the watering down of the coal power commitment led by India and backed by China from “phase out” to “phase down”.

We believe a key priority for India is to provide additional details around their net zero targets. The additional detail is needed to properly evaluate their plans, and for companies to understand the role they are expected to have and the associated commercial risks and opportunities. India has a key role in achieving global carbon reduction targets and Modi’s commitments at last year’s COP26 marked a visible shift in the way India views its role in the global climate action. Modi also stressed that developed countries will need to make climate finance available to developing countries. Given that India has only contributed to 3.2% share of global CO2 since 1750 (verses 4.6% contribution from the 20 times smaller, by population, UK) perhaps he has a point.

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Risk warnings

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Investing in emerging markets is generally considered to involve more risk than developed markets.

Views and opinions have been arrived at by Columbia Threadneedle and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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