Brexit – what would happen if Britain left the EU?

Original link is here

The Guardian, London, May 14, 2015

Katie Allen, Philip Oltermann, Julian Borger and Arthur Neslen in Brussels

Growth, trade, immigration, jobs, diplomacy: what would the impact be if a 2017 referendum pushed UK towards the exit?

Going it alone: some argue that freedom from EU rules would make Britain more prosperous.

Going it alone: some argue that freedom from EU rules would make Britain more prosperous. Photograph: Alamy

David Cameron’s electoral triumph has brought the prospect of a British withdrawal from the EU one step closer. The prime minister has vowed to reshape Britain’s ties with Europe before putting EU membership to a vote by 2017.

But what would “Brexit” – a British exit from the 28-nation EU – look like? Eurosceptics argue that withdrawal would reverse immigration, save the taxpayer billions and free Britain from an economic burden. Europhiles counter that it would lead to deep economic uncertainty and cost thousands, possibly even millions, of jobs.

Our writers have drawn on the best available expertise to assess what Brexit would mean for growth, jobs, trade, immigration and Britain’s position in the world.

The broad economy

There have been a few attempts to quantify what an exit from the EU would do to the size of the UK economy, despite the obvious pitfalls of trying to put a figure on a hypothetical situation that has a number of variables – such as what sort of trade deals are negotiated post Brexit (more of that below). Given the range of potential post-Brexit circumstances there is a broad range of estimates. Some argue the economy will suffer permanent losses on the back of weaker trade and investment. Others say freedom from the rules, as well as the costs, that come with EU membership would make Britain more prosperous.

Starting with the estimates that leaving would be a net loss to the UK economy, one analysis often cited is from researchers at the National Institute of Economic and Social Research in 2004. They found an exit from the EU would permanently reduce UK GDP by 2.25%, mainly because of lower foreign direct investment. That estimate is now old and, as the thinktank’s current head, Jonathan Portes, has pointed out, the world economy has changed considerably in the past decade.

Another analysis by economists at the Centre for Economic Performance (CEP), part of the London School of Economics, calculated the UK could suffer income falls of between 6.3% to 9.5% of GDP, similar to the loss resulting from the global financial crisis of 2008-09. That is under the researchers’ pessimistic scenario, in which the UK is not able to negotiate favourable trade terms. Under an optimistic scenario, in which the UK continues to have a free trade agreement (FTA) with the EU, losses would be 2.2% of GDP.

Overall, the authors state:

Our current assessment is that leaving the EU would be likely to impose substantial costs on the UK economy and would be a very risky gamble.

There have also been attempts to collate various pieces of research on how much a Brexit would cost, and come up with an educated guess of what is at stake. This was the approach of business group the CBI, which has lobbied for the UK to stay within a reformed EU. It said in November 2013 that by aggregating research already available it has came to a “conservative” estimate that the benefits of EU membership amount to 4-5% of GDP, or as much as £78bn a year, making each household £3,000 better off.

In between those who see a net loss or a net gain from Brexit, are those keen to stress the economic consequences could go either way. The thinktank Open Europe noted in March, for example, that an exit might boost UK GDP under certain circumstances. It said:

On the one hand, UK GDP could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or reverts into protectionism. In a best-case scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, while pursuing large-scale deregulation at home, Britain could be better off by 1.6% of GDP in 2030.

There is similarly a more nuanced analysis from economist Roger Bootle in his book, The Trouble with Europe (2014). His perspective is that the EU is not worth staying in without fundamental reform. But Bootle cautions against boiling the argument on either side down to numbers. His useful analysis on the UK money flowing to Brussels underlines that warning.

In 2012, the UK economy made payments of £16.4bn, just over 1% of GDP , to EU institutions, says Bootle. On the other hand, the UK government received a rebate on its contributions to the EU budget of £3.1bn and £0.9bn in other receipts. The private sector received £2.9bn from EU institutions. So overall, the UK paid a net £9.6bn into the EU, about 0.6% of nominal GDP. He concludes:

These are not the sort of sums on which the fate of great nations depends – nor on which momentous decisions about EU membership should be made.

The pro-Europe thinktank, the Centre for European Reform (CER), says that although the UK is a net contributor to the EU, after Brexit the country would face pressure to replace EU regional funding and agricultural subsidies with domestic spending. There would also be a dent to the public finances if immigration is cut upon exit, given migrants are large net contributors to the Treasury and rejuvenate Britain’s ageing population, according to a report by a CER commissionlast year.

Finally, there are the voices noting the costs to the UK of EU regulations.

Tim Congdon, economist and runner-up in Ukip’s 2010 leadership election, publishes an annual report for the party on what he sees as the costs of being in the EU. His latest edition again highlighted the “damage that excessive and misguided regulation is doing to British business, particularly to small- and medium-sized businesses” and concluded:

The UK is roughly 11.5% of GDP – about £185bn a year – worse off because it is a member of the EU instead of being a fully independent sovereign nation.


The Liberal Democrat leader, Nick Clegg, has been quick in debates to reach for a jobs number when arguing for the UK to stay in the EU. He has in the past claimed that 3m jobs depend on British membership of the EU.

As the Guardian has reported previously, in a detailed reality check of Clegg and Nigel Farage’s radio debate last year, the Lib Dems said the EU safeguards British jobs because it provides access to a market of 500 million consumers and because Britain’s membership attracts foreign firms keen to be part of that market. Then like now, those politicians supporting EU membership cite business bosses who say they may take their companies out of the UK in the event of a Brexit.

Firms that have contemplated scaling back in the UK in the event of a Brexit include food maker Nestlé, car companies Hyundai and Ford, and US investment bank Goldman Sachs.

Two sectors get particular mention: the car industry and financial services.

On the first, the Society of Motor Manufacturers and Traders (SMMT) has argued Europe is fundamental to the success of the UK automotive industry, a sector employing more than 700,000 people and accounting for 3% of GDP. A report for SMMT by consultants KPMG last year argued:

The attractiveness of the UK as a place to invest and do automotive business is clearly underpinned by the UK’s influential membership of the EU.

In the broader manufacturing sector, business leaders make the case for the boost to UK businesses, and therefore employment, from EU money that funds research and development here. The manufacturers’ organisation EEF says the EU invests £11bn a year on innovation programmes, of which 15% is invested in the UK.

Production line of the Nissan Qashqai

The Nissan Qashqai production line at the Japanese motor manufacturer’s Sunderland plant. Photograph: Christopher Thomond for the Guardian.

In financial services, 250 foreign banks employ 160,000 people in the UK, according to lobby group TheCityUK 2014.

Its chairman, Gerry Grimstone, said alongside TheCityUK reports into EU membership last year:

Our research clearly shows that leaving the EU would seriously damage economic growth and jobs in the UK. But the EU can and must be improved. It must not interfere in things which it does not need to do and it must make a better job of doing the things it has to do. We need to continue saying this loudly and clearly. London is Europe’s financial centre so there is a strong national interest in getting this right.

But a large dose of caution is needed. First, even though company bosses have raised this as an issue, there are no guarantees they would leave in droves. Second, talking about a certain number of jobs being dependent on the EU is misleading. Implying millions of jobs would simply disappear is downright mischievous.

The free market thinktank, the Institute of Economics Affairs, makes this point in its paper The EU Jobs Myth. Author Ryan Bourne comments:

Politicians who continue to claim that 3m jobs are linked to our EU membership should be publicly challenged over misuse of this assertion. Jobs are associated with trade, not membership of a political union, and there is little evidence to suggest that trade would substantially fall between British businesses and European consumers in the event the UK was outside the EU.

He also notes the UK labour market is dynamic and so would adjust:

It would adapt quickly to changed relationships with the EU. Prior to the financial crisis, the UK saw on average 4m jobs created and 3.7m jobs lost each year – showing how common substantial churn of jobs is at any given time. The annual creation and destruction of jobs is almost exactly the same scale as the estimated 3-4m jobs that are associated with exports to the EU.


This area is fraught with assumptions that are so broad as to have fuelled a chain of claims and counter-claims on what a Brexit would mean for the UK’s exports.

Nigel Farage makes the argument that by withdrawing from Europe, the UK frees itself from EU rules and regulations, and will make its way in the world as a strong, independent trading nation, looking to faster growing markets such as Brazil and India.

Those most passionately opposed to a Brexit, meanwhile, say leaving the EU would shut the UK out of its most important market (the EU) and from other markets around the world that have trade agreements with the EU (but not with the UK in isolation).

Again, the most likely outcome is somewhere in between these scenarios. Much depends on what a UK government could negotiate once outside the EU.

The latest survey of about 3,500 businesses by the British Chambers of Commerce highlights this. More than half of businesses (57%) believe that remaining a member of the EU, with more powers brought back to Westminster, would be positive. However, 28% of firms also view withdrawal combined with a formal UK-EU free trade agreement as a positive scenario. But only half that proportion, 13%, view withdrawal without such an agreement as positive. This chart sums up responses:

Business attitudes to EU options

Positive impact on business?

The British Chambers of Commerce asked businesses whether various scenarios would have a positive impact on them. More than half of businesses (57%) believe that remaining a member of the EU, with more powers brought back to Westminster, would be positive. However, 28% of firms also view withdrawal combined with a formal UK-EU free trade agreement as a positive scenario. Only 13% view withdrawal without such an agreement as positive. The group received about 3,500 responses for the survey, conducted in November and December last year. Illustration: BCC

Before considering how a post-Brexit trade picture might look, it is worth getting an idea of how things stand now.

Office for National Statistics data show that goods exports to the EU were worth £147.9bn in 2014, compared with £154.6bn in 2013. Goods exports to non-EU countries were £144.9bn in 2014, down from £152.2bn in 2013.

The UK’s top six export trading partners are the US, Germany, Netherlands, France, Ireland and China, according to the latest figures [spreadsheet download]on goods exports (for the three months to the end of February 2015).

But considering only goods trade, on which figures are more readily available, overlooks the importance of services – the UK’s dominant sector. The UK’s trade in services, which covers areas such as IT and accountancy, ranks second behind the US in terms of its share of global exports, according to a report from the forecasting group EY ITEM Club.

In The Trouble with Europe, Bootle tries to assess what this all means for the UK economy. Looking at goods and services exports as well as what the UK earns on overseas investments, the proportion of total receipts from abroad that come from the EU is just over 40%, Bootle says. Although this probably exaggerates the true importance of the EU in British trade, says the economist, given distortions to the figures from factors such as UK companies exporting to ports in the EU only to re-export beyond the region.

Shipping containers at Felixstowe Container Port, Suffolk.

Shipping containers at Felixstowe container port, Suffolk. Photograph: David Levene for the Guardian

On what would happen after a British exit from the EU, Bootle is quite upbeat. The UK is the rest of the EU’s largest single export market, he notes, something that increases the chance of the UK securing a free trade agreement with the EU. Failing to get such an agreement would not be disastrous, he adds.

It would place the UK in the same position as the US is currently in, along with Indian, China and Japan, all of which manage to export to the EU relatively easily.

Some argue that the UK would get a boost from re-focusing its exports on faster-growing, emerging economies outside the EU. This was the position taken by Iain Mansfield, the winner of last year’s €100,000 IEA Brexit prize (which asks entrants to submit a blueprint for Britain outside the EU). He said that after an exit, the UK should pursue free trade agreements with major trading nations, deepen its engagement with organisations such as the G8, G20 and OECD and in Europe, and secure open trade relations. Mansfield found fewer regulations, coupled with greater trade with emerging economies, could provide an overwhelmingly positive outlook for an independent Britain.

He concluded:

Although the years immediately surrounding the exit are likely to feature some degree of market uncertainty, if the right measures are taken the UK can be confident of a healthy long-term economic outlook outside the EU.

But the UK’s ability to negotiate favourable trade deals is not a given. The Centre for European Reform warns trade costs would rise after a Brexit and the UK would have less bargaining power for trade agreements than it does as part of a bigger entity, the EU.

Business for New Europe [pdf], a coalition of business leaders pushing for the UK to stay in a reformed EU, is similarly sceptical about post-Brexit bargaining clout. It says:

There are a number of free trade agreements currently being negotiated by the EU, including with the US and Japan. The UK with 65 million consumers would not have anywhere near the negotiating power that the EU with its 500 million consumers would have.

The CBI foresees tricky negotiations if the UK wants to keep its current trading conditions after an EU exit.

The business group’s deputy director general, Katja Hall, says:

While we could negotiate trade deals with the rest of the world, we’d have to agree deals with over 50 countries from scratch just to get back to where we are now, and to do so with the clout of a market of 60 million, not 500.

Katie Allen

Ukip’s 2015 manifesto claims leaving the EU would allow Britain to “take back control of our borders”.

But would it? For a start, fewer people come to live and work in the UK from within the EU than from the rest of the world. 624,000 people immigrated to the UK in the year to September 2014, up from 530,000 the year before. The majority of them – 292,000, up by 49,000 – came from outside the EU and would already have been subject to complex visa restrictions. Some 251,000 people moved to Britain under the EU’s looser free movement rules, an increase of 43,000 over the previous 12 months.

Until it is clear what kind of new arrangement with the EU will replace the current terms of memberships, it is hard to say how the latter group can be “controlled”. Many experts view it as likely that British access to the single market will come at the price of a free movement arrangement similar to the one that is in place now. Norway, which is not in the EU but is a member of the European Economic Area, serves as a warning to enthusiastic “outers”: as a recent study by Open Europeshowed, in 2013 Norway was the destination of more than twice as many EU migrants per head as the UK.

Yet until such a replacement arrangement is put in place, migration in and out of the UK could theoretically be regulated purely by British national law. In such a scenario, moving to Britain would become considerably harder than it is now: EU citizens would face the same kind of long queues and border checks upon entering the UK as “third party” nationals.

Border Force officers

UK Border Force officers check the passports of passengers arriving at Gatwick airport. Photograph: Oli Scarff/Getty Images

Border staff would need to establish whether new arrivals meet the requirements for entry, requiring proof of income, intention to return and lack of intention to work. Those planning to stay for longer would need to present proof of employment – posing as a major disincentive for those in industries with low job security, such as the arts. At universities, EU nationals would have to pay full tuition fees and would have no access to student loans.

Britain draws up its own list of countries whose citizens need a visa to enter the country. In theory, it could make poor Bulgarians and Romanians fill in lots of forms before arrival, while allowing rich French and Germans to visit the UK relatively hassle-free. The problem with this, as Steven Peers, a professor of EU law at the University of Essex, points out, is that the EU has its own joint visa list:

The general rule is that if a country like Britain were to cherrypick and discriminate against individual EU member states, the EU would at least threaten to retaliate.

Potentially, Brits would end up having to apply for visas every time they travel across the Channel. Brits already living in other EU countries such as Spain may face integration rules, such as a requirement to speak the language of the host country, before gaining long-term residency status.

Within Britain, the border between Northern Ireland and the Irish Republic would by default become the obvious “back door” for entry into the UK from the EU, and some Irish commentators have said this would inevitably lead to the introduction of stricter passport checkpoints and customs controls on one of the most politically sensitive dividing lines in the country.

Philip Oltermann

A consensus holds that a Brexit would diminish the status of the UK and EU alike, by varying degrees.

If the dominant mood in Brussels remains “one of extreme irritation with Cameron, almost bordering on contempt”, as Roger Liddle argued in The Risk of Brexit – as seems inevitable – few favours will be offered.

A relatively rich offshore supplicant knocking on the doors of the single market would be ripe for caricature along the penny-pinching, antisocial and racist lines that Eurosceptic sentiment inspires.

Jacques Delors and Pascal Lamy may twinkle at the thought of an Efta-style free trade agreement with Albion, but the terms would probably be prescriptive. In that case, a need for new scapegoats in the UK could further erode its reputation,Fabian Zuleeg, head of the European Policy Centre, believes.

A more optimistic scenario sees the UK overtaking Germany as the most populous country in Europe by the 2040s, and channeling transatlantic influence as one of the EU’s biggest trading and political partners. But even Tim Oliver of the Center for Transatlantic Relations at Johns Hopkins University, who advances this vision, says the UK would be a junior partner, dependent on the caprices of European institutions, trying to negotiate bilateral free trade deals from a position of weakness.

An EU summit in Brussels

David Cameron watches while Luxembourg’s prime minister, Xavier Bettel, left, speaks with Dutch prime minister, Mark Rutte, second left, and Belgian prime minister, Charles Michel, centre, during a roundtable meeting at an EU summit in Brussels. Photograph: Geert Vanden Wijngaert/AP

The UK is one of Europe’s “Big Three” states and routinely punches above its weight – in the climate field, winning everything it wanted from the 2030, shale gas, tar sands and Hinkley debates, for example. Its size, imperial history, ceremony, financial clout and involvement in Europe over centuries bestow gravitas in Brussels. Its loss of influence, coupled with ongoing financial obligations for single market access and so forth would be stunning. Comparisons with other non-EU members such as Switzerland and Norway in this context are false and unhelpful.

But in terms of post-Brexit relations, it’s worth noting that, unlike Norway, the UK has little hard energy to export. Unlike Switzerland it has no land borders or linguistic connections with its neighbours. Unlike Iceland, it has consolidated enmities over decades of treaty negotiations. English is a lingua franca, and British music, literature and popular culture will doubtless still exert a pull on young Europeans. But with fewer opportunities to live and study there, this too may diminish over time.

David Marquand argues that a post-Brexit Britain would be a cross between a greater Norway and a greater Guernsey, abiding by EU norms without political influence to shape them. He posits “a market society, governed by a market state, presiding over a glorified tax haven and financial services hub”. With inequality, individualism and civic distrust rampant, Marquand hopes that a phoenix of post-imperial self-awareness might eventually rise from flames of national dissolution.

This perhaps neglects the degree to which the UK has succeeded in injectingderegulatory logic and free market imperatives into the corporatist heart of EU policymaking. It is fair to ask whether a UK exit would really change the austerity dynamics that underpin national standings on both sides of the channel. In an ageing continent incrementally losing its global market share and political reach, managing decline is not a purely British phenomenon.

Arthur Neslen

The dominant view among foreign policy analysts around the world is that a British exit from the EU would diminish rather than enhance the country’s standing and influence.

It is a view shared in Washington and Beijing, but it is not universal. Perceptions in countries such as India that have had longstanding historical – mostly colonial – relationships with the UK would be less affected, even if trade declined.

On the whole, however, voices from abroad give little comfort to the view that Britain would somehow regain a unique and resonant voice in world affairs once it breaks away from a collective European identity.

Ivo Daalder, a former US ambassador to Nato who is now president of the Chicago Council on Global Affairs, said:

The idea [the UK] could have influence in the world outside the EU is risible. Its power and effectiveness is from being a strong leader in Europe.

As seen from China, the UK is significant on its own as a financial centre. But as a world political and trading power its significance is seen as proportionate to its role in the EU.

Feng Zhongping, the assistant president of the China Institutes of Contemporary International Relations, said:

I think from China’s point of view we don’t think that the UK, or France or Germany or any single European countries can play a global role. But the EU is different. It is the biggest market, and China’s biggest trade partner. The EU is seen as a major power in the world. If the UK left, it would hurt the UK much more than the EU.

India is the most significant exception to the consensus of a lesser Britain outside the EU. For Delhi, Britain has many stronger associations than merely as an EU member, although those associations are not necessarily good ones, as Samir Saran, a political analyst from the Observer Research Foundation in Delhi, pointed out:

We have always been more comfortable dealing with countries individually than as part of a club. We don’t see the UK as part of the EU, but as a distinct identity because of its history and the Indian diaspora. So it plays a different role in the Indian psyche, a unique case. It is not always positive but it is always distinct. And some of the most strategic elements in foreign policy cannot be conducted through a club like the EU, but as part of a bilateral relationship.

The existence of a strategic relationship between the UK and India, made up of defence and hi-tech ties, is another element underlying a different approach to British identity. China, lacking those ties because of trading restrictions, is more prone to viewing the UK as little more than part of a larger European trading bloc. Washington maintains an intensely strategic relationship with the UK but has grave doubts about a British exit for other reasons. In American eyes, anything that fractures the cohesion among its allies is a bad thing.

Julian Borger


Indian leadership on climate change: Punching above its weight


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Indian Prime Minister Narendra Modi and others at the highest political level have outlined in recent statements India’s commitment to constructive engagement with the global effort to combat climate change. Taken at face value, these statements indicate that India wants to take a leadership role in addressing climate change. However, in the global discourse on climate change, India often gets singled out for resisting mitigation action and for its reliance on fossil fuels such as coal. In this paper we argue that in addition to the efforts directed toward coping with and adapting to climate impacts (e.g., recent floods in Kashmir and monsoon failure in 2014), India is also “punching above its weight” on mitigation.

India ratified the United Nations Framework Convention on Climate Change (UNFCCC) in November, 1993 and is a Non Annex 1 Party to the Convention. As a Non Annex 1 Party, India is not bound to mandatory commitments under the Convention. This is a central to the notion of “Common but Differentiated Responsibilities and Respective Capabilities” as enshrined in Article 3 of the Convention. [i]

Overall development of any nation is directly linked to its energy use and access: energy poverty is a good indicator of low levels of overall development. The United Nations Development Program’s Human Development Reports have established that energy access and development are interlinked. Energy poverty is defined as a lack of adequate access to “modern energy services.” Modern energy services include the access of households to electricity and clean cooking facilities­—fuels and stoves that do not cause indoor air pollution. The poor in India are spending more than the rich in the developed countries on energy generally and clean energy specifically. Around 306.2 million people in India lack access to electricity (Table 1), perhaps the largest energy access challenge anywhere in the world. At around 705 million, India also has the highest number of people without access to non-solid fuels.[ii]

Table 1: Access to Energy (Electricity and Non Solid Fuels)

COUNTRY Total Rural Urban Total Rural Urban
1990 2000 2010 2010 2010 1990 2000 2010 2010 2010
BRAZIL 92 97 99 94 100 81 89 94 64 > 95
CHINA 94 98 100 98 100 36 47 54 19 70
GERMANY 100 100 100 100 100 > 95 > 95 > 95 > 95 > 95
INDIA 51 62 75 67 93 13 29 42 14 77
JAPAN 100 100 100 100 100 > 95 > 95 > 95 > 95 > 95
U.S.A. 100 100 100 100 100 > 95 > 95 > 95 > 95 > 95

Source: Global Tracking Framework, IEA

Carbon dioxide (CO2) emissions from energy use account for the majority of greenhouse gas emissions. According to the International Energy Agency (IEA), “meeting the emission goals pledged by countries under the United Nations Framework Convention on Climate Change (UNFCCC) would still leave the world 13.7 billion tons of CO2—or 60%—above the level needed to remain on track for just 2ºC warming by 2035.”[iii] There are at least two ways to tackle this problem. The first is to scale up clean energy efforts, whether in the form of fuel switching from coal to gas or installation of renewable energy capacities. The second option is perhaps harder: lowering energy consumption dramatically by altering lifestyles in developed countries.

For India, the viable solution to address the global climate change challenge is clear. Given its low base, India’s demand for energy will increase manifold in the decades ahead (energy consumption will increase by 128 percent by 2035 according to BP[iv]). India will have to scale up efforts on the clean energy front: an enabling global agreement and domestic investment environment are critical for this.

Renewable Energy Framework

Development of renewable energy has been one of the pillars of the Indian Government’s strategy to improve energy access to tackle energy poverty. India’s Integrated Energy Policy, formulated in 2006, lays down a roadmap for harnessing renewable energy sources. [v] The extant policy framework for promoting renewable energy follows from this, with a target of adding 30 gigawatts (GW) by 2017 as per the 12th Five Year Plan. The sector specific developments are:

  1. Solar Energy: The National Solar Mission, being implemented by the Ministry of New and Renewable Energy, increases utilization of solar energy for power generation and direct thermal energy applications. The long-term goal is to generate 20 gigawatts (GW) of grid connected solar power by 2022. The government has recently announced its intentions to increase the target for installed solar capacity to 100 GW.
  2. Wind Energy: Wind energy is the largest source of renewable energy in the country.. According to the meso-scale Wind Atlas (yet to be validated through field measurements), India has a potential of generating around 102 GW of wind power at 80 meters above sea level. Around 22 GW of wind power capacity had been installed by November 2014. Fiscal incentives in the form of a Generation Based Incentives (GBIs) on a per unit generated basis and Accelerated Depreciation (AD) that allow greater tax deductions early on in the project cycle have been reinstated recently. In the latest Union Budget, the Government has specified a 2022 target of 60,000 MW on wind energy capacity.
  3. Biomass: The government has been supporting grid-interactive biomass power and bagasse co- generation in sugar mills in India, with a target of 400 megawatts (MW) between 2012 and 2017. Central financial assistance is provided for this. A 2022 target of 10,000 MW of installed biomass capacity has been announced recently.
  4. Waste to Energy: The Indian government, through the “Swachh Bharat Mission,” under the Ministry of Urban Development, has provided support for up to 20 percent of project costs linked ‘Viability Gap Funding[vi]’ for waste processing technologies.
  5. Small Hydropower: Hydropower units of less than 25 MW are classified as “Small Hydropower” projects by the government. As of December 2014, a total capacity of around 3,946 MW was available from such projects in India. Section 7 of the Electricity Act of 2003 stipulates that “any generating company may establish, operate and maintain a generating station without obtaining a license/permission if it complies with the technical standards relating to connectivity with the grid.”[vii] The government is targeting an installed capacity of 5000 MW by 2022.

At the end of the fiscal year in March 2014, the total cumulative installed capacity for renewable energy in India was around 13 percent of the total electricity share at 31,707 MW. The average per capita electricity consumption in India for the year 2013-14 was 957 kWh[viii]: around seven per cent of the per capita consumption of the United States between 2010 and 2014 (13,246 KWh).[ix]  This is a stark reflection of India’s energy poverty challenge. Despite a very low base of per capita electricity consumption, the scope and ambition of India’s renewable energy initiatives is remarkable.

Assuming a solar energy capacity addition of 100 GW by 2022 as per the government’s plan, India’s per capita renewable energy installed capacity, not accounting for any capacity growth in wind, biomass, and waste to energy, will be around 92.6 watts per person, well over today’s global average of around 80 watts per person.[x] This is a conservative estimate since currently wind power accounts for the largest share of renewable energy, at around 67 percent of total installed capacity, whereas solar accounts for only around 8 percent.

We should also note here that the large hydro (25 MW and above) potential and installed capacity is also significant and is not counted in the renewable energy estimates above. Large hydro potential in the country is around 145,320 MW of which 36,080 MW has been commissioned as of December 2014. [xi] This is more than the entire renewable energy installed capacity in the country. Power from large hydro can also provide base load power to mitigate intermittency challenges of renewable energy.

Per Capita Spend on Renewable Energy

At the Conference of Parties (COP) to the UNFCCC in Paris (COP-21) in 2015, global leaders will decide if an international renewable energy and energy efficiency bond facility will be established.[xii]  Securing financing for mitigation and adaptation efforts is key to any meaningful attempts to address climate change. Promoting renewable energy offers a clear pathway for reducing greenhouse gas emission from the energy sector.

The key constraint to the development of renewable energy has been the historically higher costs associated with it. There are wide divergences in the Levelised Cost of Electricity (LCOE), as defined by the International Renewable Energy Agency (IRENA), depending on location. The cost of generation in non-OECD countries for both wind and solar power tends to be lower than for OECD countries owing to various structural factors such as cheap labor rates that lower project costs. For illustration purposes, the range of LCOE as assessed by IRENA in 2012 has been used.[xiii] In the case of Solar Photovoltaic systems without batteries the estimated LCOE is between 0.25 to 0.65 KWh. For onshore wind energy (projects larger than 5 MW), the costs are between 0.08 and 0.12 KWh.[xiv]

Assuming a weightage of 94 percent wind power and 6 percent solar power generation in India, the costs per KWh of electricity generated through renewable energy is between 0.09 and 0.135 (Table 2). Costs in USA, Germany, China, and Japan have also been estimated and summarized in the Table 2.

Table 2: Cost of Renewable Energy (USD) per KWh, 2012

Lower End 0.09 0.09 0.11 0.09 0.08
Upper End 0.1356 0.1356 0.185 0.1356 0.224
Weightage in Renewables Mix 94% (W), 6%(S) 94% (W). 6% (S) 75% (W), 25% (S) 94% (W), 6% (S) 60% W, 40% (S)

*Rough estimations (assuming that renewable energy is largely a combination of wind and solar, particularly given the relatively negligible growth in other sources over 2012-2040) following from electricity generation shares specified in the World Energy Outlook 2014, for countries (EU figures used as a proxy for Germany) in 2012

100 GW of installed solar energy capacity by 2022, run at a plant load factor of 13 percent,[xv]will produce around 113,880 GWh or 113,880,000,000 KWh of electricity annually. Under this scenario India would be spending between USD 28.4 billion and USD 74billion on its LCOE for solar power based generation (using solar photovoltaics). The Indian government estimates that the additional overall investments required to facilitate this would be to the tune of USD 100 billion.[xvi] To further put this into perspective, 100 billion USD is around a third of the total budgeted expenditure of India’s Union Government in 2015-16 (INR 17.77 lakh crores). Based on the lower end estimates in Table 2, the LCOE will be over a tenth of the total amount of 100 billion USD that the Green Climate Fund is to make available by 2020.

Given the fiscal challenges, India punches well above its weight in terms of its expenditure on renewable energy (Solar Photovoltaic and Wind Energy). Using verifiable approximations for 2012, the average Indian spent about one and a half times what the average Chinese spent, between 2.2 and 4.3 times what the average Japanese spent, and around 2 times what the average American spent. Indians spent between two thirds and half of what average Germans spent.

Table 3: Per Capita Income Spent on Renewable Energy (in % of Daily Income) in 2012*

Per Capita Renewable Energy Consumed (KWh per day) 0.1080 1.95 4.146 0.3007 0.776
Lower End (% of daily income spent) 0.26 0.12 0.40 0.17 0.06
Upper End (% of daily income spent) 0.44 0.21 0.82 0.29 0.20

*Calculated on the basis of per capita incomes and country populations in 2012 as specified by the World Bank; renewable energy consumption as available in the BP Statistical Review of World Energy 2014 for the category ‘other renewables’ (2012) which is based on gross generation from renewable sources including, wind, geothermal, solar, biomass and waste, and not accounting for cross-border electricity supply and converted on the basis of thermal equivalence assuming 38 per cent conversion efficiency in a modern thermal power station; and the estimates in Table 2

Over the next 7 years until 2022, India has a target of renewable energy capacity of 175 GW and most of this capacity addition is to come from solar and wind energy. [xvii]As India ramps up its solar capacity to 100 GW and wind to 60 GW, which is close to the total wind and solar installed capacity in the EU in 2012,[xviii] the average Indian per capita spending on renewable energy as a percentage of daily income should positively compare with average EU levels.

Energy in the Paris Agreement

The future of global energy and the climate change challenge is contingent on a number of political and economic factors. This last year has been proof that even well-formed trends, such as in the case of the global price of oil, can change drastically. Current estimates suggest that coal, oil, and gas will contribute around 81 percent of primary energy consumption until 2035.[xix]However, these estimates are based on benchmark prices of commodities and current technologies.

Changes in both prices and technologies associated with oil, coal, and gas are essentially unpredictable. However, the cost of renewable energy will certainly continue to decrease consistently in the coming years. The cost competitiveness of renewable energy in the form of onshore wind is already at par with fossil fuel based systems for generating electricity, and the LCOE for solar has halved between 2010 and 2014.[xx]The costs of utility scale solar energy are likely to become competitive with fossil fuels in the future. Indeed this competitiveness narrative of renewable energy remains highly nuanced, and depends on a variety of factors such as existing grid infrastructure and labor costs. For instance, since the penetration of renewable energy in India is high, a substantial grid infrastructure cost will be involved in scaling up electricity generation through renewable energy.

As part of the domestic financing framework, recent measures have helped transition Indian policies from a carbon subsidization regime to a carbon taxation regime.  From October 2014, a de facto carbon tax equivalent of USD 60 per ton of carbon dioxide equivalent in the case of unbranded petrol and around USD 42 per ton in the case of unbranded diesel has been introduced. In addition the clean energy cess[xxi] on coal has been doubled and is now equivalent to a carbon tax of around USD 1 per ton.[xxii]

However the fiscal space to maneuver is limited given that the proportionate per capita spend on renewable energy in India is already much higher than developed and developing countries and does divert resources from necessary social and infrastructure spending.

The main barrier for increasing renewable energy penetration will be a lack of financial and technological flows; India’s achievements in renewable energy have occurred in spite of such flows. For instance, Clean Development Mechanism-linked flows, which could potentially subsidize renewable energy development dried up a few years ago owing to the oversupply of Carbon Emission Reduction certificates which are now trading at near zero levels.[xxiii]Similarly, transfer of cutting edge clean energy technologies has been limited by international trade law and protectionist policies of innovating countries. Capital flows can be unlocked by a new global agreement and robust bilateral cooperation on clean energy could potentially prove to be the most effective medium for government—government technology transfer.

In an important 1991 report on global warming, Anil Agarwal and Sunita Narain made a compelling case that “those who talk about global warming should concentrate on what ought to be done at home.”[xxiv] It seems that the conversation at the UNFCCC has inevitably evolved to reflect this discouraging reality. The centrality of the Intended Nationally Determined Contributions in the draft negotiating text of the Lima Call for Climate Action is indicative of the renewed focus on domestic action.[xxv]

Gauging by the renewable energy thrust alone, India’s response at home has been more than commensurate with its economic weight. It must, at the very least, demand similar levels of per capita renewable energy spending by way of commitments from OECD countries. India is already among the countries leading the clean energy transition and must demand that much of the developed world catch up when the Conference of Parties meets at Paris.

[ii] Common solid fuels used in India include dung cakes and firewood

[vi] Viability Gap Funding is a grant to support infrastructure projects become financially viable

[viii] As per the provisional figures of the Central Electricity Authority:

[x] Population in 2022 = 1.42 billion assuming a 17.64 per cent growth rate as seen in the decade 2001-2011 as per the Census of India

[xii] As per the draft negotiating text for COP 21: http://unfccc.int/resource/docs/2014/cop20/eng/10a01.pdf#page=2

[xiv] Concentrated solar power systems generate solar power by using mirrors or lenses to concentrate a large area of sunlight, or solar thermal energy, onto a small area;

[xvi] Economic Survey of India, 2014-15, Available at: http://indiabudget.nic.in/es2014-15/echapter-vol1.pdf

[xix] BP Energy Outlook

[xxi] A cess is a form of an indirect tax

  • Samir Saran

    Senior Fellow and Vice President, Observer Research Foundation

  • Vivan Sharan

    Consultant, Observer Research Foundation