Energy, Environment, Writing

The Geopolitics of Energy Transition: A Guide for Policymakers, Executives, and Investors

This report was co-authored with Dr. Alexis Crow

As the price of natural gas reached record highs in the UK and Europe—trading at the equivalent of $200 per barrel of oil,[1] and as economic activity in China has been curtailed by the country’s power supply crunch, central bankers and policymakers from across the globe are forced to confront significant challenges to price stability, with a focus on shielding households and businesses from an increase to the cost of transport and basic goods, while monitoring the potential for price pressure and supply chain bottlenecks to upend the global economic recovery. This is important at this time, for the ripple effects of disruptions to energy markets could amplify social and political fissures that are visible across the global landscape, and which might portend complex domestic politics as many countries head into elections in 2022.

Surging demand for natural gas—and shortages and bottlenecks to supply—have resulted in a corollary demand for oil products (referred to as gas-to-oil switching), thus driving up the price of WTI crude to seven-year highs.[2] The skyrocketing commodity price environment has led one observer to point to the “revenge of the old economy”, according to which the collective noble efforts to move toward a cleaner, greener future fuelled by renewable energy have been stymied by a recent past of inadequate investment into the capacity and infrastructure of the hydrocarbons that power our economies.[3]

Thus, even as COP26 has drawn to a close, and as policymakers, business leaders, and investors have left Glasgow with firm commitments to ostensibly advance the decarbonisation agenda, we are reminded of the extent to which our entire energy infrastructure still hinges upon the use of fossil fuels. This includes oil used for transport or power generation, or natural gas (or coal) for power generation, as well as natural gas deployed as “bridge fuel” to support the growth of renewable energy, including wind, solar, and hydrogen. This is effectively captured by what transpired in Germany earlier this year. In the first six months of 2021, the country increased its coal-based generation, which contributed 27 percent of the country’s electricity demand.[4] The need to resort to coal-fired power generation is not unique to the case of Germany: the US has also posted the first annual increase in coal use for power generation since 2014.[1] The combination of an asynchronous economic recovery, attendant shocks to demand, curtailments of supply, and surging prices in natural gas are contributing factors to rich income countries’ pivoting toward the use of coal. This illustrates one stark reality: hydrocarbons continue to underpin our  global energy infrastructure.[5] For all the talk of “stranded assets” and potential “dinosaurs of investment”,[6] hydrocarbons still compose the lion’s share of energy consumption on a global basis.[7]

What are the lessons to be learned from the recent power crunches? And what are the potential macro, socio-economic, and geopolitical implications as we navigate the energy transition? Amidst so much uncertainty and volatility, where are the opportunities for accord, as well as bright spots for investment?

Humility is also requisite as governments confront their energy interdependence with one another: again, despite record growth in renewable energy capacity,[8] and surging climate financing, countries within the European Union are poignantly aware of their dependence upon natural gas imports—whether from Russia, Norway, or the US. And even despite its own domestic shale and conventional oil and gas production, the US continues to import hydrocarbons from countries such as Canada, Colombia, and Saudi Arabia. Similarly, even despite trade tensions, resource ties still bind China with Australia, with the latter having exported a record volume of natural gas to China in 2020.[9] Thus, geopolitics remains at the very heart of the changing energy landscape. The inverse is also entirely true.

In the past, resource ties have been a source of tension; but, as we shall see, such bonds also have the potential to become a geopolitical salve, provided that the relationship is designed to be mutually beneficial to both parties. As we navigate the path toward net zero, and by seeking balance and diversification, our continued energy interdependence can actually spur opportunities for cooperation amongst policymakers, and for long-term investment and profit generation for enterprises and economies around the world.

Geopolitics and fossil fuels: tension and salve

The quest for resources to fuel industrial growth, military campaigns, and transport and urbanisation lies at the very heart of geopolitics. In considering the relationship between energy and geopolitics, the existence of resources is often associated with tension, be it in the form of border disputes, armed conflict, trade disputes resulting in embargoes, or interstate conflict or war. Access to strategic reserves of coal in Romania was a pivotal part of the campaign on the Western front during the Second World War. During the 1970s, energy-importing countries experienced the oil shocks related to the OPEC crises in the wake of the Arab-Israeli War, the Yom Kippur War, and the Iranian Revolution.[10] Indeed, research shows that if a resource-rich country has an endowment of oil along its border with an “oil-less” country, then the probability of conflict between these two countries is higher than if there were no oil at all.[11] Recent data also indicates that the presence of onshore oil might even portend a higher rate of conflict than the presence of offshore oil, as the potential for production and output to be seized by rebel groups is far higher on land than it is in deep-sea projects.[12]

And yet, while asymmetric access to resources might spur tensions between countries, it can also be a geopolitical salve, by underpinning ties of trade, development, and civic diplomacy and even employment. Japan’s quest for resources to fuel its extraordinary manufacturing era from the 1960s onwards resulted in a mutual export of ODA (overseas development assistance) to southeast Asian countries such as Vietnam. One might also argue that Israel’s relatively recent discoveries of natural gas—and successive exports to Egypt—have also underpinned a normalisation of relations with Cairo, — a diplomatic rebalancing which has also been a key facet of improving relations between Israel and the UAE. 

A crude awakening: our enduring energy interdependence, and continued reliance upon fossil fuels

Such positive examples of resource ties are swiftly forgotten in times of crises. The underlying conditions that led to positive benefits to the political relationship in these two instances are also ignored. And so it is with the present power crunches ricocheting across the globe. With the asynchronous reopenings of economies in the wake of the COVID-19 pandemic—and amidst ongoing disruptions to supply (be it from underinvestment in hydrocarbons, weather-related events such as flooding, pandemic-induced stoppages to production, or port congestion)— we are reminded not only the extent to which our economies depend upon fossil fuels for power generation and for transport, but also, of the extent to which many countries remain deeply interlinked in patterns of energy interdependence.

The European dilemma regarding natural gas supply from the Russian Federation is instructive, but it must also be recognised that energy interdependence cuts both ways. As long as Russian gas is a competitive source for energy, then energy-hungry European manufacturing powers will need to engage with the leadership in Moscow; equally, as long as Europe has access to alternative sources of fossil fuels – even if not as cheap – Russia will need to retain an understanding of European red lines. This is what interdependence means. This insight is equally applicable to the energy interconnections of the future: China can be a useful partner in the energy transition, even if it is not the only one.

Indeed, for some policymakers, part of the allure of developing domestic renewable energy capacity was that it ostensibly would lead toward more enhanced energy independence. Ostensibly, extraordinary efforts in diplomacy might not be needed in such a green future, as countries would, in theory, no longer be reliant upon conflict-ridden territories to secure energy supply. Even in a net-zero future, this is perhaps to view the world through rose-coloured glasses: for the development of wind, solar, and hydrogen energy—or indeed techniques of greater energy efficiency—at an affordable cost is intrinsically related with garnering supplies, inputs, R&D, and human capital from different jurisdictions. Overly halcyon scenario-planning for domestic renewable energy capacity development often fails to incorporate these facts.

The shift from fossil fuel-based to renewable energy capacity does not end interdependence; it merely pushes interdependence to a different part of the energy mix. The dependence now shifts from hydrocarbons to metals and from ores to rare earths. Countries in Africa, Asia, Americas and Australia are likely to emerge as global mineral hubs, and the routes to ship these new commodities might pave new geostrategic highways.

In recent years, control over the production of rare earths has become a familiar site for geopolitical tension. In 2021, the Biden administration in the United States ordered a review of the country’s critical mineral supply chain; the recommendations included prioritising development financing for “international investments in projects that will increase production capacity for critical products, including critical minerals”.[13] The administration’s concern is readily understandable, as shown in Table 1.

Table 1: China’s share in the rare earths supply chain

Source:World Mining Data,

*Disaggregated data for neodymium was not available; the data for Rare Earth Concentrates (REO) has been used since neodymium is a rare earth metal.

Yet it is not just production of rare earths that will be relevant, but also the locations of their processing and other forms of value addition. These might emerge as the equivalent of present-day refineries and petroleum complexes, and their distribution potential linked to key consumption centres might lead to the birth of new geostrategic lynchpins such as the Straits of Malacca and of Hormuz. The notion that domestic renewable energy production would free countries from the intricacies of dependence is misguided – and a seminal mistake if it was to be the basis of new energy order.

Sunset on Malthus?

Part of the reason why the aspiration of energy independence retains its sheen is that our energy economics and policymaking continues to be suffused with a Malthusian legacy.[14] Said another way, the spectre of scarcity continues to inform the way we think about energy and resources. The fear that “there will never be enough” renders misgivings about dependence—or else outright denial. A sense of energy insecurity –no matter how much it is brushed under the rug might also prompt a premature and imprudent vaunt into a disorderly energy transition, with a disproportionate focus on bolstering capacity at home. Such a policy would have little regard for the fact that climate change has been branded as humanity’s largest negative externality: in order to mitigate the situation, global actions ought to be in concert. Humility is thus needed not only in recognising the endurance of hydrocarbons within the energy mix, but also, but it is also implicit in our interconnectedness as we navigate the green transition. For the rich income countries, part of this humility also requires understanding the various ways in which the energy transition has the potential to deepen the chasm between the ‘haves’ and the ‘have nots’.

The haves and the have-nots: is the energy transition deepening the chasm?

The energy transition has the potential to create a deeper chasm between the standings of the ‘haves’ and the ‘have nots’ in the global macroeconomic environment. First, if we consider the traditional trajectory of industrial growth—that is, from agrarian activity to textile production, and then from heavy industry to light manufacturing, eventually segueing to services-oriented economies—the case can be made that for developing countries earlier on the maturity curve (such as Vietnam and India), stringent measures toward decarbonisation might actually thwart what would otherwise unfold as a full evolution of robust domestic industry. For the ‘price takers’ and for commodity-hungry countries, this might take the shape of premature restrictions on access to or use of resources to fuel domestic manufacturing activity.

And for the ‘price makers’—that is, commodity-rich exporting countries—the case can also be made that swift or unrealistic moves toward decarbonisation might rob oil and gas exporters from a significant base of output as well as a source of gross national income. In a country in which resource wealth underpins GDP, export activity, employment (both directly related to exploration, extraction and production of natural resources, as well as indirectly, via civil service salaries), national income, and sovereign and pension funds, the potential for social fissures to either manifest or to be exacerbated is clear.

It should be noted that history indicates that access or proximity to natural resources is not perfectly correlated with a trajectory of sustainable economic growth—hence the “Dutch resource curse”. Research from Brazil also indicates that oil endowments within a province or a municipality do not necessarily result in improved livelihoods for members of that community.[15] Indeed, even in a lofty commodity price environment, such as at present, windfalls potentially reaped from higher export prices of oil and gas do not always translate into higher incomes for households within the exporting country.[16]

This tension between environmental and the development agendas within emerging markets and developed economies (EMDEs) is also evident in the debate surrounding the potential carbon border adjustment tax (CBAT), as well as recent agreements on deforestation in COP26. 

Home game: mitigating the domestic bias of climate finance

An effective, secure energy transition is currently undermined by the “domestic preference” evident within the realm of climate finance. In recent years of tracking climate finance flows, data from one leading industry body evidences that 76 percent of capital is invested in the same country in which it is sourced.[17] Thus, despite various commitments and guarantees from bodies such as the G7 or the G20, a significant challenge remains regarding the ability for much-needed climate finance to cross borders.[18] Certainly, a long-running trend of a domestic bias for investment is not limited to climate and infrastructure investments. Rather, it extends across sectors and asset classes, including real estate, energy, private equity, and venture capital. Whilst managing ‘sticky capital’ and the prospect of generating long-term returns, and building up enterprise and asset values, investors might harbor an inclination to place their money close to home—in other words, “where home-country risks are well-understood.”[19]

As these authors have highlighted previously, playing close to home in infrastructure investing may not always be the least risky option.[20] And yet, we have already motioned that the dawning age of renewables is not one of energy independence, but of a new kind of interdependence. Policymakers operating under the illusion of energy sovereignty are otherwise missing out on the opportunity to cultivate positive structures of interdependence which could potentially support their own geo-strategic aims – such links, might, in turn, spur opportunities for private investment.

Thus, we might witness a shift in incentivisation for private finance and the climate problem: such that sticky capital not only supplies the domestic market, but that it is directed outwards as well, perhaps even towards the geographies where host countries of finance might find mutually beneficial resource ties – such as the model of Japan and ODA in Southeast Asia, discussed earlier. As argued above, interdependence can be a salve for geopolitics as long as both sides gain in the energy or in the development equation. Such a value exchange – or what Michael Oakeshott refers to as an “enterprise association” – rests upon an understanding of interdependence – again, something that has been jettisoned in the lack of humility in the energy transition (something which is mirrored in the “domestic bias” of climate capital).

Such misconceptions have the potential to divert policymakers from a future of true sustainability, which involves the creation of resilience through diversification. Redirecting long-term flows of investment—including private capital—towards emerging market/developing economies will not necessarily be easy. Large sources of private capital in the global north – whether institutional capital or banks – will need a fresh set of incentives to invest in the energy supply chains of the future.[21]

Moreover, recognising that these investments will likely be in new minerals, new processes, and new geographies, it is clear that old regulatory risk models may no longer be suitable. New market mechanisms to help enable a level playing field of investment in new energy materials are needed—which might take inspiration from the industry bodies which have developed over time in support of oil markets around the globe.

Conclusion: The Green Marshall Plan

The scale of the rebalancing required – of investment, attention, and financial flows – is vast. If anything, it should be compared to the Marshall Plan. That enormous effort, after all, had both pragmatic and idealistic motivations. On the one hand, it was necessary to assist a Europe devastated by war; on the other, it was essential that a liberal community be built that was strong and resilient in the face of the Soviet challenge. There are similar overlaps today between the realist search for security and the idealist requirements of climate action. A Green Marshall Plan has the potential to both stabilise international relations and create the diversification and resilience necessary to allow for durable interdependence during the energy transition. 

For the energy transition to act as a geopolitical salve rather than as a source of discord, a Green Marshall Plan must have four characteristics.

First, it should be genuinely global in character. A global net-zero approach would understand that some regions might take longer on the fossil fuel transition because of the specifics of their development or their energy landscape. Nor should geographical factors be ignored: An archipelago like Indonesia will take longer to transition to solar energy and away from natural gas than a continental country.

Second, legacy energy infrastructure will need attention to help enable the success of the Green Marshall Plan, to make it implementable, and to scale it. As is evident in energy consumption patterns across the globe, fossil fuels remain a part of the energy mix, and a way of working toward a balanced and global green transition. Nor can sectors like mining be ignored: the Green Marshall Plan will likely have to go into a “dirty” sector, invest in new ways of mining and new materials to mine.

Third, the Green Marshall Plan is not just about blue-sky research into the possibilities of the future. It is about increasing investment in nuts-and-bolts manufacturing in underserved geographies as well – whether energy efficiency in the Asian steel producers of the future or new cobalt mining technologies in sub-Saharan Africa today. It is about enabling development of critical frontier technologies, as well as swiftly and sustainably spreading a green ‘know-how’ which is globally benchmarked.

And fourth, the Green Marshall Plan should embed energy resilience at its heart. Areas which have sped up their energy transition are those where it is seen as assisting in energy security. As these authors argued, dependence on a single source or vendor is antithetical to achieving long-term and sustainable energy security. As such, the strategic mapping of a secure energy future cannot exclude a China, with its strong presence in the rare earths supply chain, or a Russia with reserves of natural gas, or the countries of the Gulf, abundant in oil and gas reserves. Again, humility as well as diversification might render each actor a more responsible and empathetic participant in the global energy transition.

What we are recommending is an all-inclusive future. That will require the leaders of key nations to invest political capital in a new institutional framework that supports the energy landscape of the future. The International Energy Agency, OPEC, commodity exchanges and others defined and shaped the hydrocarbon world. The global energy transition requires new frameworks, organisations and political arrangements to underwrite our common journey ahead, which reflect the needs of multiple stakeholders, in both the private and public spheres. The G7’s B3W, the European Union’s Global Gateway, and the Indo-French International Solar Alliance all point to one imperative: of green arrangements underwriting green transitions. The world needs a new institutional structure: one that keeps the lights on in the 21st century.

Endnotes

[1] Today in Energy; Annual U.S. coal-fired electricity generation will increase for the first time since 2014.

[1] David Sheppard and Tommy Stubbington, “Record gas prices hit bonds as investors fear wider damage,” Financial Times, October 6, 2021.

[2] Stephanie Kelly, “Oil prices reach multi-year highs on tight supply,” Reuters, October 26, 2021.

[3] Jeff Currie, “The revenge of the old economy,” Financial Times, October 21, 2021.

[4] “Germany: Coal tops wind as primary electricity source,” DW, October 13, 2021.

[5] See also, Vivan Sharan and Samir Saran, “India’s Coal Transition: A Market Case for Decarbonisation,” ORF Issue Brief No. 505, November 2021, Observer Research Foundation.

[6] Steve Fuller, “Are fossil fuel companies a dinosaur of an investment?” Ellsworth American, February 14, 2015.

[7] “Statistical Review of World Energy,” 70th Edition, 2021, p. 12.

[8] Elizabeth Ingram, “World adds record new renewable energy capacity in 2020,” Renewable Energy World, June 4, 2021.

[9] Damon Evans, “Australian LNG exports to China hit record,” Energy Voice, August 8, 2021.

[10] Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power (US: Simon & Schuster, 1990).

[11] Francesco Caselli, Massimo Morelli and Dominic Rohner, “Asymmetric oil: Fuel for conflict,” VOX EU, July 19, 2013.

[12] Andrea Tesei, Jørgen Juel Andersen and Frode Martin Nordvik, “Oil price shocks and conflict escalation: Location matters,” VOX EU, October 26, 2021.

[13] “FACT SHEET: Biden-⁠Harris Administration Announces Supply Chain Disruptions Task Force to Address Short-Term Supply Chain Discontinuities,” The White House Statements and Releases, June 8, 2021.

[14] For an excellent discussion of how Malthus continues to cast a long shadow on economics in advanced economies, see J.K. Galbraith, The Affluent Society (US: Houghton Mifflin, 1958).

[15] Francesco Caselli and Guy Michaels, “Oil windfalls and living standards: New evidence from Brazil,” VOX EU, January 20, 2010.

[16] Bryan Harris, “Brazil’s GDP surges back to pre-pandemic levels,” Financial Times, June 1, 2021.

[17] CPI 2019, 2020, 2021.

[18] Sophie Yeo, “Where climate cash is flowing and why it’s not enough,” Nature, September 17, 2019.

[19] Barbara Buchner, Alex Clark, Angela Falconer et al., “Global Landscape of Climate Finance 2019,” Climate Policy Initiative, November 2019.

[20] Alexis Crow and Samir Saran, “Geopolitics and investment in emerging markets after COVID-19,” World Economic Forum, September 25, 2020.

[21] IANS, “Modi’s supply chain mantra: trusted source, transparency and time frame,” Business Standard, November 1, 2021.

Standard
Energy, Research, Writing

Financing the end of coal: The market case for decarbonising India’s energy sector

This article was co-authored with Vivan Sharan.

This piece is part of the essay series, Shaping our green future: Pathways and Policies for a Net-Zero Transformation.

Progress, as the world has designed and defined it, requires material production which, in turn, requires energy. Historically, therefore, fossil fuels like coal were key in economic growth across geographies. Today, the developed economies stand on the edifice of fossil fuels, carbon-intensive industries, and lifestyles that have resulted in global warming. The same growth path is now being questioned, and the poor and developing countries are being asked to build, find, and fund newer low- and no-carbon models to lift their people out of poverty and achieve their development goals.

As global climate finance has both under-performed and been subject to clever redesignation, countries such as India remain in dire need of green financing.

Consequently, there are growing calls for India to declare a net-zero year: To offset its carbon emissions by various processes of GHG absorption and removal. India is aware that such calls are irrational, and despite international pressure, has avoided making pledges or setting hard targets, beyond its commitments at the Paris Climate Conference in 2015. Indeed, “net zero” is not possible with India’s current levels of reliance on coal. Its shift away from this fuel will depend largely on the quantum of additional money and resources that can be invested into alternative energy. However, as global climate finance has both under-performed and been subject to clever redesignation, countries such as India remain in dire need of green financing.

In August 2020, UN Secretary-General António Guterres urged India to give up coal immediately. He asked that the country refrain from making any new thermal power investments after 2020, and criticised its decision to hold auctions for 41 coal blocks earlier that year. Similarly, in March this year, in a message to the Powering Past Coal Alliance  Summit, the Secretary-General urged all governments to “end the deadly addiction to coal” by cancelling all global coal projects in the pipeline. Pre-pandemic, India had the second largest pipeline of new coal projects in the world. He also called the phasing out of coal from the electricity sector “the single most important step to get in line with the 1.5-degree goal of the Paris Agreement.”

For much of human history, photosynthesis was the primary source of mechanical energy. Human and animal muscles powered by food and fodder, made the world go around. Photosynthesis was also at the root of heat energy derived from burning wood. Eventually, coal replaced wood as the dominant source of heat energy, but still represented the energy of photosynthesis stockpiled over hundreds of years. The advent of the steam engine in the 17th century helped humans change the heat energy released from coal, to mechanical energy.

This development also upended the paradigm of material production. According to a recent estimate, coal was accounting for well over 90 percent of energy consumption in England by the mid-19th century, owing in large part to the steam engine. For long, researchers had been divided over the question of whether coal was pivotal to the industrial revolution. Scholars such as Wrigley (2010) regarded the switch to coal as a “necessary condition for the industrial revolution,” while others like Mokyr (2009) held that the “Industrial Revolution did not absolutely ‘need’ steam…nor was steam power absolutely dependent on coal.”

A November 2020 paper by Fernihough and O’Rourke might just settle the question: Using a database of European cities spanning the centuries from 1300 to 1900, the authors found that those located closer to coal fields were more likely to grow faster. Those cities, the researchers wrote, “located 49 km from the nearest coalfield grew 21.1 percent faster after 1750 than cities located 85 km further away.”

It is no wonder then, that in March this year, International Energy Agency (IEA) chief Fatih Birol said it will not be fair to ask developing nations like India to stop using coal without giving international financial assistance to address the economic challenges that will result from such a move. He noted that “many countries, so-called advanced economies, came to this industrialised levels and income levels by using a lot of coal,” and named the United States, Europe, and Japan.

This article explores this line of enquiry by examining the consumption of coal across developed and developing countries, and mapping it against key metrics of energy transition. It finds that countries such as India—with their high dependence on coal and a simultaneous growth spurt in renewables—can be the most effective location for climate finance. This is plausible given that per capita coal consumption in India is still far below that of the developed world, and economic transitions are both inevitable and required to be ‘green’.

To be sure, India is struggling with a coal shortage, which has the potential to derail its post-COVID-19 recovery; the same is true for China. Consequently, there is growing scepticism in developed countries, that both India and China will double down on coal and increase production to overcome supply challenges in the future. While such concerns are not unwarranted, they are not unique to the developing world.

To be sure, India is struggling with a coal shortage, which has the potential to derail its post-COVID-19 recovery; the same is true for China.

Germany, for instance, in the first six months of 2021 ramped up its coal-based generation, which contributed 27 percent of the country’s electricity demand. Three factors contributed to this rise: Increase in energy demand amidst the successive waves of the COVID-19 pandemic, increased prices of natural gas, and reduction in electricity generation from renewable energy (particularly wind). Coal is often the bedrock of energy generation, and its use is impacted by complex market processes that cannot be reduced to normative choices.

Energy Use and Coal 

Countries of the Organisation for Economic Cooperation and Development (OECD) are using progressively less energy to power their societies. Multiple factors can contribute to this trend, at least in theory. First is the technical improvements in energy efficiency—i.e., the use of less energy to perform the same tasks. Second is the “activity effect”, or the changes in energy use because of changes in economic activity. This would also encompass a “structure effect” which relates to changes in the mix of human activities that are prompted by changes in sectoral activity, such as transportation. And finally, there could be weather-related changes in energy use—for instance, more temperate weather can reduce the need for heating or cooling.

The IEA quantifies these effects, and consistently finds that the reduction in energy consumption in the OECD countries is largely a result of technical improvements in energy efficiency. This means that the reduced use of energy in advanced countries is not on account of any significant changes in consumer behaviour—otherwise, the activity effect would be the primary determinant of the fall in energy use. While energy efficiency improvements have driven this fall, the IEA finds that the current rate of improvement is not enough to achieve global climate and sustainability goals. Consequently, the Agency has advocated for “urgent action” to counteract the slowing rate of improvement observed since 2015.

While energy efficiency improvements have driven this fall, the IEA finds that the current rate of improvement is not enough to achieve global climate and sustainability goals.

Conversely, developing countries have seen a rapid rise in energy use owing to the activity effect (see Table 1). The increase in economic activity in the developing world is also directly correlated to improvements in life spans and socio-economic progress. While energy use has approximately doubled in countries like India and China from 2005, a large share of global energy efficiency savings is also driven by technical improvements in these countries.  However, in the aftermath of the 2008-09 global financial crisis, China implemented a stimulus package that “shifted its manufacturing sector to more energy intensive manufacturing.” A similar trend may emerge in China’s recovery from the pandemic, that may reduce efficiency gains in the future.

Table 1: Total Energy Consumption (Exajoules)

Country2005200920142020
US96.4289.8892.9987.79
China75.6097.53124.82145.46
Germany14.1713.1513.1612.11
Japan22.4019.8119.2217.03
India16.5021.4527.7931.98
World456.62481.97539.56556.63
OECD238.34225.93229.65217.11
Non-OECD218.28256.04309.91339.52
EU67.3762.7059.5955.74

Source: BP Statistical Review of World Energy, 2021

Equity in Coal 

It would appear that OECD countries have managed to cut their dependence on coal over the last 15 years quite precipitously. In particular, this seems true of countries like the US and EU members. Japan, meanwhile, is an outlier, having turned to coal to provide base-load power to substitute nuclear energy. In most years between 2005 and 2020, the fall in coal consumption in OECD countries has outpaced the decline in total energy consumption. In 2020, for instance, coal consumption dropped by around 18 percent whereas total energy consumption fell by around 8 percent. 

While China has begun to reduce its dependence on coal, it still accounts for the largest share of coal consumption amongst all nations. China is also home to over half of the world’s thermal power plant pipelines—with around 163 GW in pre-construction stage, even discounting the 484GW worth of cancellations since the Conference of Parties at Paris in 2015. China is also one of the last of the biggest providers of public finance for overseas power plants with over 40GW of projects in the pre-construction pipeline. 

Simultaneously, coal consumption has remained relatively stable at just under 40 percent of primary energy consumption amongst non-OECD nations (see Table 2). In these countries, coal consumption tends to mirror total energy consumption. For instance, in 2018 and 2019, total energy consumption increased by three and two percentage points, respectively. India’s dependence on coal has also remained unvarying. These trends suggest that non-OECD countries such as India require to do much more to contribute to a global reduction in coal consumption and therefore towards net-zero GHG emissions. However, there is more to the OECD’s reduced coal consumption than meets the eye. 

Table 2: Share of Coal in Primary Energy Consumption (%)

Country2005200920142020
US24221910
China73726657
Germany24232515
Japan21222627
India54555855
World29303027
OECD20191913
Non-OECD38403937
EU17161711

Source: BP Statistical Review of World Energy, 2021 and author’s own calculations

Since the Earth Summit in 1992, India and other developing nations have argued for an equity-based approach to GHG reduction, commensurate with domestic capabilities and historical emissions. This approach has often been subject to cross-examination by OECD experts. For instance, in a 2019 report by the Universal Ecological Fund, high-profile experts including a former White House Adviser and a Harvard professor, ranked national climate commitments based on absolute emission curtailment targets. The report clubbed developed and developing countries together in its assessment of the general insufficiency of climate pledges to meet the Paris Agreement’s goal to keep global warming below 1.5 degrees Celsius above pre-industrialisation levels.[1] This should not be a surprise, however, as it is only in consonance with the overall trend of Western academic discourse seeking to dilute the equity principle. 

India and other developing nations have argued for an equity-based approach to GHG reduction, commensurate with domestic capabilities and historical emissions.

It is a principle that should not be set aside just yet, given the persistent differences in per capita fossil fuel consumption between the developed and developing worlds. Despite near doubling over 2005–2020, India’s per capita coal consumption is still below the global average (see Table 3). The global average, in turn, has remained static around this period because the decrease in the per capita consumption of coal in OECD countries has been partially offset by an increase in the per capita consumption in non-OECD countries. However, the per capita consumption of coal in OECD countries still exceeds that of non-OECD countries, despite much higher levels of wealth and, therefore, capability to transition to renewables and other fuels.

Table 3: Total per capita Coal Consumption (KWh)

Country2005200920142020
US22599.3418812.9215740.357756.85
China10872.4413601.4216797.0616300.13
Germany11578.8310182.1011423.136140.66
Japan11041.719882.6610891.4610088.89
India1868.882393.573480.003530.87
World5381.485621.296222.875425.69
OECD11013.629509.459009.385564.68
Non-OECD4049.024722.975600.735395.83
EU10960.709013.818207.714787.28

Source: BP Statistical Review of World Energy, 2021; World Bank and authors’ own calculations

Indeed, a large share of the decrease in per capita coal consumption in OECD countries is driven by transition to fuels such as natural gas, that are used to generate electricity, particularly in countries like the US. It accounts for around a 34-percent share of primary energy consumption in the US, and 25 percent in the EU, compared to seven percent in India (and a similar share in China). In contrast, the share of gas in India’s energy mix is amongst the lowest in the world. Even as Prime Minister Narendra Modi wants to more than double the contribution of natural gas to 15 percent of India’s energy mix by 2030, the Petroleum Secretary has said that the country cannot rely on natural gas. There are several reasons, including high landed costs relative to coal, complex domestic pricing mechanisms, a lack of pipeline infrastructure and stable supply/ import linkages, and the inability of financially stressed electricity distributors to enter into “take or pay” contracts.

India, therefore, requires relatively greater and more aggressive investments in alternative sources of energy than its developed country counterparts that have had decades to transition to fuels like natural gas. Such financial flows to India can prove to be much more effective vehicles for a net-zero trajectory, compared to similar investments in other parts of the world with higher per capita exposure to coal and relatively slower transition pathways to renewables.

Around 72 percent of India’s GHG emissions are linked to its energy sector. It is clear, that if OECD countries are aiming to accelerate a global reduction in GHG emissions, they will need to help India finance its energy transition and overcome the many resource-linked barriers to the wide-scale adoption of renewables. The high costs associated with renewable energy storage and grid upgrade requirements, are related resource challenges. Since developed countries are unlikely to be satisfied with per capita equity, they would do well to help India hurdle some of its obstacles.

Financing Energy Transition 

According to India’s Central Electricity Authority’s (CEA) Optimal Generation Capacity Mix, the country’s installed capacity will increase to 817 GW with an additional 27GW of battery storage, by 2029–30 (see Table 4). Of this, firm capacity will contribute approximately 395 GW while renewable sources, around 445 GW.  Additionally, a July 2021 study has concluded that more efficient use of existing thermal resources could lead to 50 GW of excess coal capacity with respect to current needs of the system. With limited expectations from nuclear and gas resources and deteriorating coal economics, investments in renewable energy storage options are crucial for managing India’s base load requirements. This requires unlocking of financial and technological flows from the OECD, particularly since there are several uncertainties associated with the cost of battery storage technology. These include risks linked to supply chains and exchange rates. 

Table 4: Optimal Electricity Generation Mix (2029-30)

Fuel TypeCapacity (MW)%
Hydro (large and imports)60,9777%
PSP (Pumped storage)10,1511%
Small hydro5,0001%
Coal + Lignite2,66,91133%
Gas25,0803%
Nuclear18,9802%
Solar2,80,15534%
Wind1,40,00017%
Biomass10,0001%
Total8,17,254
Total Non-Fossil Fuel5,25,26364%
Total Renewables (Solar, Wind, Biomass, Small hydro, PSP)4,45,301553%
Battery Storage27000MW/1,08,0000 MWh

Source: Central Electricity Authority; The cost trajectory for battery energy storage system is assumed to be reducing uniformly from 7 Cr in 2021-22 to 4.3 Cr (with basic battery cost of US $75/kWh) in 2029-30 for a four-hour battery system

Experts point out that the more renewable energy is introduced into the grid, “the harder and more expensive it will be to use” because of inherent factors such as intermittency. This will need to be offset by investments in a grid that is able to accommodate variable and increased flows of electricity across different regions. The IEA estimates that annual investments in electricity grids will need to “more than double” by 2030 in a conservative scenario where developed countries achieve net zero by 2050, China around 2060, and other emerging and developing economies, by 2070, at the latest. India will also need to explore much wider scale of privatisation of state distribution companies, which now owe generators around US $20 billion.

The capacity utilisation of India’s coal assets has also witnessed a significant decline over the past decade, with power plants running at 53.37 percent plant load factor (PLF) in FY 2020-21 compared to 77.5 percent in FY 2009-10. Several factors have contributed to this, including the rapidly expanding share of renewable energy generation. India’s coal story is beset with additional challenges including planned decommissioning of older coal plants (approximately 54 GW of coal plants by 2030). Research indicates that the cost of retirement ranges between US $0.41–0.59 million per MW, with older thermal units relatively cheaper to decommission. Consequently, maintaining India’s coal fleet also requires around US $106 million in investments, to retrofit existing thermal power plants with Flue Gas Desulphurisation units. The deadline for doing so has been extended several times in the past decade and has finally been fixed for 2022 for plants located in populous areas. The combination of underutilised coal plants, increasing costs of plant maintenance and reduction in costs of renewables, provides a unique opportunity to galvanise investments and strategic attention towards a low-coal pathway.

The technologies that will pave the way to such low-coal path are developing rapidly, with significant progress in renewables, battery storage, and green hydrogen, amongst others. They each require, however, large financial outlays. Moreover, India is still highly dependent on expensive bank lending, which is now hitting sectoral exposure limits, whereas long-term capital is required to finance energy infrastructure. As of April 2020, the exposure of banks and non-bank financial institutions to India’s power sector was already around US$ 160 billion, roughly the lending necessary to finance the country’s renewable energy targets for 2030.

According to the Government of India’s ‘Energy Compact’ submitted to the UN in September 2021, the country required a total investment of US $221 billion to set up 450 GW renewable generation capacity, including associated transmission and storage systems. However, other research has pegged this investment much higher at US $661 billion, to build both renewable energy systems and transmission and distribution systems. The IEA also estimates that India requires a total investment of US $1.4 trillion for clean technologies to help achieve a sustainable development path till 2040. In comparison, developed countries managed a transition away from coal over a longer period of time and with different costs. Investments for clean energy in the Global South needs to be consistently and significantly higher to help achieve the simultaneous goals of SDG 7 (Affordable and Clean Energy) and other development targets.

Advanced countries would do well to recognise that long-term institutional capital is urgently required to help India transition from coal to renewables at scale. What is needed is far more than lip service; nor will change happen only through negotiations at Glasgow at the COP26. Overall, mainstream sources of international climate finance such as the Green Climate Fund and the Global Environment Facility have managed to provide just over a billion dollars in finance for national projects. While there is enthusiasm around green bond financing, the absolute value of issuances towards relevant segments such as renewable energy, is still relatively low at around US $11.2 billion since 2014. To put it in context, the global issuance of green bonds totalled over US $305 billion in 2020 alone, specifically for climate-related and sustainability projects.

India, for its part, must bite the bullet on large-scale power sector reforms, to improve distributional efficiencies and facilitate inward financial and technological flows. 

A high sensitivity to the cost of capital means that other sources of institutional capital are needed to fill the gap, even as the Indian private sector learns to raise green bonds and co-develops green taxonomies with relevant parties.  Most OECD financing towards renewables in developing countries is conducted through debt instruments. According to the International Renewable Energy Agency, cumulative transactions and financial flows from the OECD countries towards renewables development in the rest of the world reached US $253 billion between 2009–2019, of which around US $228 billion was in the form of debt. India accounted for just under US $11 billion of the amount, which is less than 5 percent of the cumulative debt finance by OECD countries. 

Table: Cumulative Transactions by OECD Countries into Renewables (2009-2019, %)

Debt90
Grants5
Equity and Shares in Collectives4
Guarantees and Others1

Source: International Renewable Energy Agency

OECD members must aim to redirect institutional investments towards India. For instance, their sovereign funds and pension funds must adjust to new business models around energy storage and distribution. There are also many possible designs of new financial instruments that could be explored. These could recognise the different capacities and capabilities in developing countries at the outset. For instance, grants and debt funding could be combined in multiple ways to subsidise loans. The scale of grant involvement could be directly proportionate to relevant environmental, social and governance factors, and therefore could incentivise more aggressive low-carbon paths. Similarly, new kinds of investment management and rating modalities could be employed to scale up investments where they are most required to offset planetary risks. The availability of innovative long-term finance for India is critical to any meaningful realisation of global net-zero ambitions. India, for its part, must bite the bullet on large-scale power sector reforms, to improve distributional efficiencies and facilitate inward financial and technological flows. 

Conclusion 

India’s current per capita coal consumption is three-fifths that of the OECD average, and one-fifth that of China’s. This low per-capita coal consumption in a coal-rich country can and must remain the key feature of India’s growth, going forward. This article demonstrates, that for India to keep its coal in the ground, more and better financing is needed.

A market case for a green transition in India already exists. The last few years have demonstrated India’s appetite, amongst the public and the political class, for a move towards cleaner growth. What it requires now is what this essay calls for: A higher flow of capital towards crucial green sectors—in particular, a higher level of foreign capital inflows towards these sectors, and a better texture of such capital, moving towards a more patient and equitable finance.

Download the PDF of the report here


[1] This goal requires a 50-percent reduction in global GHG emissions by 2030.

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Energy, Research, Writing

India’s Coal Transition: A Market Case for Decarbonisation

This report was co-authored with Vivan Sharan.

Progress as the world has designed and defined it requires material production which, in turn, requires energy. Historically, therefore, fossil fuels like coal were key in economic growth across geographies. Today the developed economies stand on the edifice of fossil fuels, carbon-intensive industries and lifestyles that have resulted in global warming. The same growth path is now being questioned, and the poor and developing countries are being asked to build, find and fund newer low- and no-carbon models to lift their people out of poverty and achieve their development goals.

Consequently, there are growing calls for India to declare a net-zero year: to offset its carbon emissions by various processes of GHG absorption and removal. India is aware that such calls are irrational, and despite international pressure, has avoided making pledges or setting hard targets, beyond its commitments at the Paris climate conference in 2015. Indeed, “net zero” is not possible with India’s current levels of reliance on coal. Its shift away from this fuel will depend largely on the quantum of additional money and resources that can be invested into alternative energy. However, as global climate finance has both under-performed and been subject to clever redesignation, countries such as India remain in dire need of green financing.

In August 2020, UN Secretary-General António Guterres urged India to give up coal immediately. He asked that the country refrain from making any new thermal power investments after 2020, and criticised its decision to hold auctions for 41 coal blocks earlier that year. Similarly, in March this year, in a message to the Powering Past Coal Alliance  Summit, the Secretary-General urged all governments to “end the deadly addiction to coal” by cancelling all global coal projects in the pipeline.[1] Pre-pandemic, India had the second largest pipeline of new coal projects in the world. He also called the phasing out of coal from the electricity sector “the single most important step to get in line with the 1.5-degree goal of the Paris Agreement.”[2]

For much of human history, photosynthesis was the primary source of mechanical energy.[3] Human and animal muscles powered by food and fodder, made the world go around. Photosynthesis was also at the root of heat energy derived from burning wood. Eventually, coal replaced wood as the dominant source of heat energy, but still represented the energy of photosynthesis stockpiled over hundreds of years. The advent of the steam engine in the 17th century helped humans change the heat energy released from coal, to mechanical energy.

This development also upended the paradigm of material production. According to a recent estimate, coal was accounting for well over 90 percent of energy consumption in England by the mid-19th century, owing in large part to the steam engine.[4] For long, researchers had been divided over the question of whether coal was pivotal to the industrial revolution. Scholars such as Wrigley (2010) regarded the switch to coal as a “necessary condition for the industrial revolution,” while others like Mokyr (2009) held that the “Industrial Revolution did not absolutely ‘need’ steam…nor was steam power absolutely dependent on coal.”

A November 2020 paper by Fernihough and O’Rourke might just have settled the question: Using a database of European cities spanning the centuries from 1300 to 1900, the authors found that those located closer to coal fields were more likely to grow faster.[5] Those cities, the researchers wrote, “located 49 km from the nearest coalfield grew 21.1 percent faster after 1750 than cities located 85 km further away.”

It is no wonder then, that in March this year, International Energy Agency (IEA) chief Fatih Birol said it will not be fair to ask developing nations like India to stop using coal without giving international financial assistance to address the economic challenges that will result from such a move.[6] He noted that “many countries, so-called advanced economies, came to this industrialised levels and income levels by using a lot of coal,” and named the United States, Europe, and Japan.

This article explores this line of enquiry by examining the consumption of coal across developed and developing countries, and mapping it against key metrics of energy transition. It finds that countries such as India—with their high dependence on coal and a simultaneous growth spurt in renewables—can be the most effective location for climate finance. This is plausible given that per capita coal consumption in India is still far below that of the developed world, and economic transitions are both inevitable and required to be ‘green’.

To be sure, India is struggling with a coal shortage, which has the potential to derail its post-Covid-19 recovery; the same is true for China.[7] Consequently, there is growing scepticism in developed countries, that both India and China will double down on coal and increase production to overcome supply challenges in the future. While such concerns are not unwarranted, they are not unique to the developing world.

Germany, for instance, in the first six months of 2021 ramped up its coal-based generation, which contributed 27 percent of the country’s electricity demand.[8] Three factors contributed to this rise: increase in energy demand amidst the successive waves of the Covid-19 pandemic, increased prices of natural gas, and reduction in electricity generation from renewable energy (particularly wind.)  Coal is often the bedrock of energy generation, and its use is impacted by complex market processes that cannot be reduced to normative choices.

Energy Use and Coal 

Countries of the Organisation for Economic Cooperation and Development (OECD) are using progressively less energy to power their societies. Multiple factors can contribute to this trend, at least in theory. First is the technical improvements in energy efficiency – i.e., the use of less energy to perform the same tasks. Second is the “activity effect”, or the changes in energy use because of changes in economic activity. This would also encompass a “structure effect” which relates to changes in the mix of human activities that are prompted by changes in sectoral activity, such as transportation. And finally, there could be weather-related changes in energy use – for instance, more temperate weather can reduce the need for heating or cooling.

The IEA quantifies these effects, and consistently finds that the reduction in energy consumption in the OECD countries is largely a result of technical improvements in energy efficiency. This means that the reduced use of energy in advanced countries is not on account of any significant changes in consumer behaviour—otherwise, the activity effect would be the primary determinant of the fall in energy use. While energy efficiency improvements have driven this fall, the IEA finds that the current rate of improvement is not enough to achieve global climate and sustainability goals. Consequently, the Agency has advocated for “urgent action” to counteract the slowing rate of improvement observed since 2015.[9]

Conversely, developing countries have seen a rapid rise in energy use owing to the activity effect (see Table 1). The increase in economic activity in the developing world is also directly correlated to improvements in life spans and socio-economic progress. While energy use has approximately doubled in countries like India and China from 2005, a large share of global energy efficiency savings is also driven by technical improvements in these countries.  However, in the aftermath of the 2008-09 global financial crisis, China implemented a stimulus package that “shifted its manufacturing sector to more energy intensive manufacturing.”[10] A similar trend may emerge in China’s recovery from the pandemic, that may reduce efficiency gains in the future.

Table 1: Total Energy Consumption (Exajoules)

Source: BP Statistical Review of World Energy, 2021[11]

Equity in Coal 

It would appear that OECD countries have managed to cut their dependence on coal over the last 15 years quite precipitously. In particular, this seems true of countries like the US and EU members. Japan, meanwhile, is an outlier, having turned to coal to provide base-load power to substitute nuclear energy. In most years between 2005 and 2020, the fall in coal consumption in OECD countries has outpaced the decline in total energy consumption. In 2020, for instance, coal consumption dropped by around 18 percent whereas total energy consumption fell by around eight percent. 

While China has begun to reduce its dependence on coal, it still accounts for the largest share of coal consumption among all nations. China is also home to over half of the world’s thermal power plant pipelines – with around 163 GW in pre-construction stage, even discounting the 484GW worth of cancellations since the Conference of Parties at Paris in 2015.[12] China is also one of the last of the biggest providers of public finance for overseas power plants with over 40GW of projects in the pre-construction pipeline. 

Simultaneously, coal consumption has remained relatively stable at just under 40 percent of primary energy consumption among non-OECD nations (see Table 2). In these countries, coal consumption tends to mirror total energy consumption. India’s dependence on coal has also remained unvarying. These trends suggest that non-OECD countries such as India require to do much more to contribute to a global reduction in coal consumption and therefore towards net-zero GHG emissions. However, there is more to the OECD’s reduced coal consumption than meets the eye. 

Table 2: Share of Coal in Primary Energy Consumption (%)

Source: BP Statistical Review of World Energy, 2021 and authors’ own calculations

Since the Earth Summit in 1992, India and other developing nations have argued for an equity-based approach to GHG reduction, commensurate with domestic capabilities and historical emissions. This approach has often been subject to cross-examination by OECD experts. For instance, in a 2019 report by the Universal Ecological Fund, high-profile experts including a former White House Adviser and a Harvard professor, ranked national climate commitments based on absolute emission curtailment targets.[13] The report clubbed developed and developing countries together in its assessment of the general insufficiency of climate pledges to meet the Paris Agreement’s goal to keep global warming below 1.5 degrees Celsius above pre-industrialisation levels.[14] This should not be a surprise, however, as it is only in consonance with the overall trend of Western academic discourse seeking to dilute the equity principle. 

It is a principle that should not be set aside just yet, given the persistent differences in per capita fossil fuel consumption between the developed and developing worlds. Despite near doubling over 2005-2020, India’s per capita coal consumption is still below the global average (see Table 3). The global average, in turn, has remained static around this period because the decrease in the per capita consumption of coal in OECD countries has been partially offset by an increase in the per capita consumption in non-OECD countries. However, the per capita consumption of coal in OECD countries still exceeds that of non-OECD countries, despite much higher levels of wealth and, therefore, greater capability to transition to renewables and other fuels.

Table 3: Total per capita Coal Consumption (KWh)

Source: BP Statistical Review of World Energy, 2021; World Bank and authors’ own calculations

Indeed, a large share of the decrease in per capita coal consumption in OECD countries is driven by transition to fuels such as natural gas, that are used to generate electricity, particularly in countries like the US. It accounts for around a 34-percent share of primary energy consumption in the US, and 25 percent in the EU, compared to seven percent in India (and a similar share in China). In contrast, the share of gas in India’s energy mix is among the lowest in the world. Even as Prime Minister Narendra Modi wants to more than double the contribution of natural gas to 15 percent of India’s energy mix by 2030, the Petroleum Secretary has said that the country cannot rely on natural gas.[15] There are several reasons, including high landed costs relative to coal, complex domestic pricing mechanisms, a lack of pipeline infrastructure and stable supply/ import linkages, and the inability of financially stressed electricity distributors to enter into “take or pay” contracts.[16]

India, therefore, requires relatively greater and more aggressive investments in alternative sources of energy than its developed country counterparts that have had decades to transition to fuels like natural gas. Such financial flows to India can prove to be much more effective vehicles for a net-zero trajectory, compared to similar investments in other parts of the world with higher per capita exposure to coal and relatively slower transition pathways to renewables.

Around 72 percent of India’s GHG emissions are linked to its energy sector.[17] It is clear, that if OECD countries are aiming to accelerate a global reduction in GHG emissions, they will need to help India finance its energy transition and overcome the many resource-linked barriers to the wide-scale adoption of renewables. The high costs associated with renewable energy storage and grid upgrade requirements, are related resource challenges. Since developed countries are unlikely to be satisfied with per capita equity, they would do well to help India hurdle some of its obstacles.

Financing Energy Transition 

According to India’s Central Electricity Authority’s (CEA) Optimal Generation Capacity Mix, the country’s installed capacity will increase to 817 GW with an additional 27GW of battery storage, by 2029-30 (see Table 4). Of this, firm capacity will contribute approximately 395 GW while renewable sources, around 445 GW.  Additionally, a July 2021 study has concluded that more efficient use of existing thermal resources could lead to 50 GW of excess coal capacity with respect to current needs of the system.[18] With limited expectations from nuclear and gas resources and deteriorating coal economics, investments in renewable energy storage options are crucial for managing India’s base load requirements. This requires unlocking of financial and technological flows from the OECD, particularly since there are several uncertainties associated with the cost of battery storage technology. These include risks linked to supply chains and exchange rates.

Table 4: Optimal Electricity Generation Mix (2029-30)

Source: Central Electricity Authority; The cost trajectory for battery energy storage system is assumed to be reducing uniformly from 7 Cr in 2021-22 to 4.3 Cr (with basic battery cost of $75/kWh) in 2029-30 for a 4-hour battery system

Experts point out that the more renewable energy is introduced into the grid, “the harder and more expensive it will be to use” because of inherent factors such as intermittency.[19] This will need to be offset by investments in a grid that is able to accommodate variable and increased flows of electricity across different regions. The IEA estimates that annual investments in electricity grids will need to “more than double” by 2030 in a conservative scenario where developed countries achieve net zero by 2050, China around 2060, and other emerging and developing economies, by 2070, at the latest.[20] India will also need to explore much wider scale of privatisation of state distribution companies, which now owe generators around USD 20 billion.[21]

The capacity utilisation of India’s coal assets has also witnessed a significant decline over the past decade, with power plants running at 53.37 percent plant load factor (PLF) in FY 2020-21 compared to 77.5 percent in FY 2009-10.[22] Several factors have contributed to this, including the rapidly expanding share of renewable energy generation. India’s coal story is beset with additional challenges including planned decommissioning of older coal plants (approximately 54 GW of coal plants by 2030).[23] Research indicates that the cost of retirement ranges between[24] USD 0.41 – 0.59 million per MW, with older thermal units relatively cheaper to decommission. Consequently, maintaining India’s coal fleet also requires around USD 106 million in investments, to retrofit existing thermal power plants with Flue Gas Desulphurization units. The deadline for doing so has been extended several times in the past decade and has finally been fixed for 2022 for plants located in populous areas.[25] The combination of underutilised coal plants, increasing costs of plant maintenance and reduction in costs of renewables, provides a unique opportunity to galvanise investments and strategic attention towards a low-coal pathway.

The technologies that will pave the way to such low-coal path are developing rapidly, with significant progress in renewables, battery storage, and green hydrogen, among others. They each require, however, large financial outlays. Moreover, India is still highly dependent on expensive bank lending, which is now hitting sectoral exposure limits, whereas long-term capital is required to finance energy infrastructure. As of April 2020, the exposure of banks and non-bank financial institutions to India’s power sector was already around USD 160 billion, roughly the lending necessary to finance the country’s renewable energy targets for 2030. [26]

According to the Government of India’s ‘Energy Compact’ submitted to the UN in September 2021, the country required a total investment of USD 221 billion to set up 450 GW renewable generation capacity, including associated transmission and storage systems.[27] However, other research has pegged this investment much higher at USD 661 billion, to build both renewable energy systems and transmission and distribution systems.[28] The IEA also estimates that India requires a total investment of USD 1.4 trillion for clean technologies to help achieve a sustainable development path till 2040.[29] In comparison, developed countries managed a transition away from coal over a longer period of time and with different costs. Investments for clean energy in the Global South need to be consistently and significantly higher to help achieve the simultaneous goals of SDG 7 (Affordable and Clean Energy) and other development targets.

Advanced countries would do well to recognise that long-term institutional capital is urgently required to help India transition from coal to renewables at scale. What is needed is far more than lip service; nor will change happen only through negotiations at Glasgow at the COP26. Overall, mainstream sources of international climate finance such as the Green Climate Fund and the Global Environment Facility have managed to provide just over a billion dollars in finance for national projects.[30] While there is enthusiasm around green bond financing, the absolute value of issuances towards relevant segments such as renewable energy, is still relatively low at around USD 11.2 billion since 2014.[31] To put it in context, the global issuance of green bonds totalled over USD 305 billion in 2020 alone, specifically for climate-related and sustainability projects.[32] 

A high sensitivity to the cost of capital means that other sources of institutional capital are needed to fill the gap, even as the Indian private sector learns to raise green bonds and co-develops green taxonomies with relevant parties.  Most OECD financing towards renewables in developing countries is conducted through debt instruments. According to the International Renewable Energy Agency, cumulative transactions and financial flows from the OECD countries towards renewables development in the rest of the world reached USD 253 billion between 2009-2019, of which around USD 228 billion was in the form of debt. India accounted for just under USD 11 billion of the amount, which is less than five percent of the cumulative debt finance by OECD countries. 

Table 5: Cumulative Transactions by OECD Countries into Renewables (2009-2019, %)

Source: International Renewable Energy Agency

OECD members must aim to redirect institutional investments towards India. For instance, their sovereign funds and pension funds must adjust to new business models around energy storage and distribution. There are also many possible designs of new financial instruments that could be explored. These could recognise the different capacities and capabilities in developing countries at the outset. For instance, grants and debt funding could be combined in multiple ways to subsidise loans. The scale of grant involvement could be directly proportionate to relevant environmental, social and governance factors, and therefore could incentivise more aggressive low-carbon paths. Similarly, new kinds of investment management and rating modalities could be employed to scale up investments where they are most required to offset planetary risks. The availability of innovative long-term finance for India is critical to any meaningful realisation of global net-zero ambitions. India, for its part, must bite the bullet on large-scale power sector reforms, to improve distributional efficiencies and facilitate inward financial and technological flows. 

Conclusion 

India’s current per capita coal consumption is three-fifths that of the OECD average, and one-fifth that of China’s. This low per-capita coal consumption in a coal-rich country can and must remain the key feature of India’s growth, going forward. This article demonstrates, that for India to keep its coal in the ground, more and better financing is needed.

A market case for a green transition in India already exists. The last few years have demonstrated India’s appetite, among the public and the political class, for a move towards cleaner growth. What it requires now is what this essay calls for: a higher flow of capital towards crucial green sectors—in particular, a higher level of foreign capital inflows towards these sectors, and a better texture of such capital, moving towards a more patient and equitable finance.

This brief was first published in ORF’s monograph, Shaping Our Green Future: Pathways and Policies for a Net-Zero Transformation, November 2021.


Vivan Sharan is a Visiting Fellow at ORF.

Samir Saran is the President of ORF.


Endnotes

[1] “UN Chief Calls for Immediate Global Action to Phase Out Coal”. Unfccc.int. UN, March 2, 2021.

[2] T. Jayaraman, and Tejal Kanitkar. “Reject This Inequitable Climate Proposal.” The Hindu. The Hindu, September 18, 2020.

[3] Tony Wrigley. “The Industrial Revolution as an Energy Revolution.” VOX, CEPR Policy Portal, July 22, 2011.

[4] Wrigley, “The Industrial Revolution as an Energy Revolution”, 2011

[5] Alan Fernihough and Kevin Hjortshøj O’Rourke. “Coal and the European Industrial Revolution,” The Economic Journal, November 4, 2020.

[6] “IEA Chief Backs India on Coal, Says No Exit without Financial Support,” The Economic Times, March 3, 2021.

[7] Laura He and Manveena Suri. “China and India Face a Deepening Energy Crunch,” CNN, October 12, 2021.

[8] Deutsche Welle. “Germany: Coal Tops Wind as Primary Electricity Source,” DW.COM, September 13, 2021.

[9] “Energy Efficiency 2020,” IEA, 2020.

[10] “Energy Efficiency 2020”, 2020

[11] “Statistical Review of World Energy 2021,” BP, 2021.

[12] “China: Home to over Half the World’s Coal Pipeline,” E3G, September 14, 2021.

[13] “The Truth behind the Climate Pledges,” FEUUS, n.d.,

[14] This goal requires a 50-percent reduction in global GHG emissions by 2030.

[15] “High Prices Could Slow India’s Transition to Gas,” The Economic Times, October 20, 2021.

[16] M. Ramesh, “Why Gas Is Not Just Hot Air,” The Hindu BusinessLine, May 30, 2021.

[17] Angela Picciariello, Sarah Colenbrander, Amir Bazaz, and Rathin Roy, “The Costs of Climate Change in India – Cdn.odi.org.” ODI, June 2021.

[18] Karthik Ganesan and Danwant Narayanaswamy, “Coal Power’s Trilemma,” CEEW, July 2021.

[19] Jonathan Kay, “Tangled Wires: Preparing India’s Power Sector for the Clean Energy Transition,” Carnegie Endowment for International Peace, August 4, 2021.

[20] “Financing Clean Energy Transitions in Emerging and …” IEA. IEA, 2020.

[21] IEA, “Financing Clean Energy Transitions in Emerging and …”, 2021

[22] “Power Sector at a Glance ALL INDIA.” Ministry of Power, October 21, 2021.

[23] Aditya Lolla, “India – Peaking Coal?” Ember, February 16, 2021.

[24] Vaibhav Pratap Singh and Nikhil Sharma, “Mapping Costs for Early Coal Decommissioning in India …” CEEW, July 2021.

[25] “Flue Gas Desulphurisation: A Rs 80,000 Crore Investment Opportunity,” The Financial Express, June 11, 2020.

[26] Alan Yu, Kanika Chawla, and Rita Cliffton, “Renewed U.s.-India Climate Cooperation,” Centre for American Progress, February 18, 2021.

[27] “SDG7 Energy Compact of the Government of India … – Un.org.” UN, September 22, 2021.

[28] Rohit Gadre, Atin Jain, Shantanu Jaiswal, Vandana Gombar, and Dario Traum, “India’s Clean Power Revolution.” Bloomberg, June 26, 2021.

[29] “India Energy Outlook 2021,” IEA. IEA, 2021.

[30] “GCF Data- Interactive Map on Programme and Project-Level Data by Country,” Unfccc.int. UNFCCC, n.d.; “India at a Glance,” Global Environment Facility, August 24, 2016.

[31] Shreyas Garg, Rishabh Jain, and Gagan Sidhu, “Financing India’s Energy Transition through International …” CEEW. CEEW, August 2021.

[32] Mark D. Holmes and Elena Millerma, “Energy Transition: How to Finance the Race to Net-Zero,” White & Case LLP, August 5, 2021.

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Energy, Environment, Writing

Building Back Better together—Potential for an India-UK partnership for a Green Transition

This article was co-authored by Terri Chapman

While many have pinned their hopes on technology to solve the looming challenges posed by climate change, it is clear that this alone may not be the silver bullet, and other processes will have to be invested into. For example, one of the most ambitious technological efforts to date is the Climeworks Orca plant that was launched in Iceland last month. The plant is illustrative of the inadequacy of the hunt for the technology elixir. The plant can remove 4,000 tons of CO2 a year, which is equivalent to the annual emission from just 800 cars. To scale this up and make it accessible to different geographies is the hurdle for such innovation. The timelines to do this are incompatible with the urgency of responding to global warming.

It is time to do what we have known needs to be done for decades—which is to reduce greenhouse gas emissions. These reductions are complicated by the fact that industrialisation is still underway in much of the world. Countries in the global South rightly seek space to grow. However, the template for that development—backed and funded by international financial institutions—is heavily reliant on high-emitting activities with only limited finance being deployed towards cleaner and greener options. At the same time, countries of the global North are dragging their feet and, in some cases, still peddling the idea that climate change can be responded to without dramatic changes in consumption patterns or significant financial reconfiguration. The “blah, blah, blah,” approach to climate change described by Greta Thunberg, is as she says, not working. Instead, countries around the world, especially high-income countries, must realise that they cannot negotiate or talk their way out of the climate mess created by them. Instead, it is time to get their political approach right and to deploy the largest quantum of financial resources ever mobilised to enable equitable green transitions. And there is another complication; this climate war chest will have to be invested into developing countries, which challenges the credit risks and cost of capital logic that have defined the post-War financial flows.

Countries of the global North are dragging their feet and, in some cases, still peddling the idea that climate change can be responded to without dramatic changes in consumption patterns or significant financial reconfiguration.

The COVID-19 pandemic has created renewed opportunities and invigorated the demand to make our cities healthier, make our social protection systems more robust, make our societies more equitable, and to respond to climate change meaningfully. More people now get what “systemic risk” means and the devastation caused by the pandemic should make governments more eager to address such risks.

The United Kingdom (UK) and India are well placed to respond to these new opportunities as partners and to craft a road map together for Glasgow and beyond. This is a partnership with much merit. The leadership for green transitions is coming from countries like India (the only G-20 country living up to its ‘2 degree’ commitments made at Paris) even as control over capital and technology resides in developed countries like the UK. Leveraging their specific roles and strengths, the UK and India can work together as partners in three areas in particular. These include human capital development, climate finance and funding of clean energy and infrastructure, and green and smart manufacturing.

Partnership in higher education

The UK is a global leader in education, knowledge, innovation, and research, while India is one of the largest consumers of higher education and is a market for research and innovation. Higher education enrollment, for example, has tripled over the last 20 years in India but remains at just 28 percent. The opportunity is defined by a simple fact—nearly half of India’s population is below the age of 25 and that demand for higher education is likely to increase. As a result, there is significant demand for UK education opportunities in India. In 2019, more than 37,500 Tier 4 student visas were given to Indian students studying in the UK. While this is a large number of students, in the larger context, it is insignificant and amounts to very little beyond building and nourishing an Oxbridge community in India.

Efforts under the new policy could create greater access to high-quality higher education in India, deepen UK–India academic and scientific collaborations, and create new research initiatives and more significant innovation.

India’s New Education Policy 2020 makes it easier and more attractive for foreign universities to establish branch campuses in India. Efforts under the new policy could create greater access to high-quality higher education in India, deepen UK–India academic and scientific collaborations, and create new research initiatives and more significant innovation. All of these can support broader efforts to foster human capital, skills, and knowledge in India, which are needed to transition towards a more sustainable, knowledge-based economy. UK institutions must re-calibrate their global role by investing in overseas markets and partnering to build the campuses of the future in the geographies that matter. Human capital and research efforts in India will enable innovation and work forces, which will be deployed at the frontlines of global climate and development efforts.

Partnership in finance

The second area of potential for the UK–India partnership is finance. Mitigating climate change will require enormous financial investments. This is much larger than the US $100 billion annual commitment made by the Annex II countries. For example, just for meeting its renewable energy targets by 2030, India will require around US $2.5 trillion dollars. The common but differentiated responsibility for financing green transitions posits that industrialised countries must contribute to (small amounts) and help catalyse large financial flows towards this ambition of New Delhi. However, many are falling behind even on their abysmally small commitments. Unless these trillions of dollars can flow to India and other developing countries, we will lose the climate battle and what unfolds will be unpredictable and consequential.

There are significant and unrealised opportunities for investment in ‘green transitions’ more broadly and at retail scale. Unfortunately, financial institutions are only modest actors in the green spaces in India. Transformative interventions at scale will require new thinking, innovative financial products and more favourable borrowing terms. It will be a crime against humanity if the country with the largest potential to curtail future emissions borrows money from the developed world at exorbitant rates. If Climate Risk is seen as a clear and present danger, cost of funding for climate mitigation projects must remain the same across continents.

Transformative interventions at scale will require new thinking, innovative financial products and more favourable borrowing terms.

The Indian Railway Finance Corporation (IRFC) issuance of climate bonds in 2017 is illustrative of the potential. The bond raised US $500 million from investors around the world. Municipal bodies in India, including the Indore Municipal Corporation (IMC), are also considering raising ‘green masala bonds’ to fund climate responsive projects. Green bonds offer an opportunity for countries like India to access new pools of international funding for green projects, for which there appears to be demand in the UK. In September, the UK issued its first sovereign green bond, raising 10 billion GBP, with demand of nearly 90 billion GBP, indicating the magnitude of appetite for such investments.

Additionally, regulations and perverse laws will have to make way and allow pension and insurance funds to invest into emerging economies that are the ground zero of the climate battle. These funds hold the largest global savings, mostly derived from fossil fuel age businesses and there is justice in their being the patient capital that is deployed in building clean and green infrastructure in emerging and developing economies. Retail finance needs innovation too. Buying a solar facility for rooftops in any market must be at a discount (financial costs) to the credit available for purchase of cars and air-conditioners. Bulk finance and retail finance have not yet signed the Paris Agreement; can London and New Delhi partner to change this?

Partnership in green manufacturing and value chains

The third opportunity is around supporting green and smart manufacturing and green value chains. Again, the pandemic has revealed the risks of over-dependence on any single country to supply critical goods. China, for example, owns the largest solar and wind manufacturing companies. India offers an alternative and an opportunity to diversify supply chains and make them more resilient. This is a chance to invest in and build up India’s smart and green manufacturing capabilities and create more robust supply chains for renewables and other green technologies. The R&D and innovation out of the UK has recently served only Beijing. It is time to rethink this monochromatic value chain. An India and UK innovation and smart manufacturing bridge is needed. The potential of such collaboration is illustrated by the AstraZeneca vaccine, for which R&D took place in the UK, with mass manufacturing in India at the Serum Institute of India – the world’s largest vaccine producer. India is also ramping up its green production and manufacturing capabilities in areas such as hydrogen production and the manufacturing of next generation battery technologies to support green transitions. Indian companies are scouting for partnerships; and it is time to put some political weight behind it. The Build Back Better World and the Quad and the EU and India partnership all support this.

India is also ramping up its green production and manufacturing capabilities in areas such as hydrogen production and the manufacturing of next generation battery technologies to support green transitions.

We must act to save lives, improve health, protect livelihoods, and safeguard resources for current and future generations. But the single most important motivation has to be the collective will to improve the lives of billions who have been excluded from the economic mainstream and, indeed, from any access to dignity and livelihoods. These constitute the largest cohort on the planet and their continued misery must not underwrite the green-tinted splurges of the rich world. The UK and India are in a position not just to act but to act as partners to change this.

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Columns/Op-Eds, Energy, Politics / Globalisation

Trump’s stand on the Paris deal may help India

Trump’s belligerence towards the Paris accords may ironically become its undoing.

Original link is here

 Narendra Modi, Donald Trump, Paris climate agreement, climate pledges, international funding, environment, energy security needs, Paris proposal, developed world, poverty eradication, climate responsibility, climate negotiator, Modi, Paris Agreement, 2022, India, renewable energy capacity, EU, US, carbon space, climate negotiator, climate narrative, sustainability, ethics, morality, colonisation, exploitation, narratives, climate orientalism, OECD, fossil fuel, prudentialism, Basel norms, Old Boys Club, roadblocks, carbon imperialism, Paris accords, Western shackles, growth, development

The Prime Minister Narendra Modi-President Donald Trump summit offers an opportunity to place in context President Donald Trump’s outburst against India earlier this month, as he announced the decision of the US to step away from the Paris climate agreement. If Trump then alleged that India was making its climate pledges conditional on international funding, the India-US joint statement this week strikes a more sobering note, calling for a “rational approach that balances environment and.. energy security needs.”

Both leaders may have succeeded in moving past this moment of bilateral friction but the Paris proposal from the developed world to India was, and remains, simple and stark. First, India would have to create a development pathway that lifts its millions out of poverty, without the freedom to consume fossil fuels. Second, it would have to discover this new pathway by itself. And, finally, despite its self-financed attempt at balancing poverty eradication and climate responsibility, India would be monitored every inch of the way.

In the past India has been accused of being an intransigent climate negotiator. Under Modi, however, India decided to change its climate narrative. Modi positioned India as a country willing to lead in creating a green model that could then be exported to the rest of the world. It helped, of course, that India had already begun its transformation. Eight months before the Paris Agreement, India had installed 77 GW of renewable energy capacity. By 2022, India aims to expand its renewable energy capacity to 175 GW and will soon have built up the equivalent of German renewable energy capacity, despite having a size of economy a third smaller than Germany.

This transformation underway in India is accompanied by attitudes and decisions in the EU and the US that border on an imperialistic approach to monopolise all available carbon space.

In the past India has been accused of being an intransigent climate negotiator. Under PM Narendra Modi, however, India decided to change it’s climate narrative.

With a distinctly condescending tone, developing nations are told by their richer counterparts that demands for “sustainability” are premised on ethics and morality, discovered belatedly by the developed countries, after colonisation and exploitation of nations, communities and, indeed, of the carbon space. And as with acts of colonial egregiousness, reparations for carbon colonisation are unavailable.

President Trump’s outbursts, though disappointing, were part of a continuum of narratives emanating from the West in the recent past. The attacks against China, India and other developing countries prior to the Copenhagen meet in 2009 and their subsequent vilification sowed the seeds of “climate orientalism”, something that legitimised the current action of the US. In the last seven years, the OECD has added 58 GW of the ‘dirtiest’ form of energy. Germany still burns three times more coal per capita than India. And as of 2016, when measured against the US, India still obtained a higher percentage of its energy from renewable sources. And yet, the hypocrisy of the West has not stopped at the water’s edge of fossil fuel usage.

A small group of developed countries have taken control over the regulatory frameworks and financial flows of the world. The competitive prudentialism of the Basel norms has led to the prioritisation of capital adequacy over credit enhancement. The continued squeezing of sectoral limits driven by the ‘Old Boys’ Club’ in Basel has led to further roadblocks for the developing world to access capital. The risk assessment through black box techniques has meant that the capital that reaches the developing world is priced significantly higher. There is no denying that carbon imperialism exists.

But Trump’s belligerence towards the Paris accords may ironically become its undoing: By highlighting coal and gas, the US president has turned attention on the need for traditional sources. The India-US joint statement cleverly takes advantage of this political impulse and suggests that US energy exports (including coal and gas) should be available to fuel India’s economic development. If ever there was a window of opportunity to dismantle Western shackles on growth and development avenues for the developing world, Trump’s statement personifies it.

This commentary originally appeared in The Hindustan Times.

The views expressed above belong to the author(s).

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Energy, Water / Climate

The finance sector must sign the Paris pact

live mint, Dec 28, 2016

Original link is here

Without increased climate funding to the global South, the poor will end up underwriting a green future for a privileged few

paris-kkn-621x414livemint

The infrastructure gap, global financial sustainability, and a green future are recognized to be common global problems. Photo: Bloomberg


The Paris Agreement on climate action has an Achilles heel: the lack of a buy-in from the financial community. This absent and crucial signatory will need to play a significant role if any ambitious response to climate change has to be achieved.

This is easier said than done. “Sustainability” in financial market jargon has a very different meaning to when it is used in development-speak. In the market, this term largely disregards issues pertaining to employment generation, poverty eradication, inclusive growth and environmental considerations. Instead, it is monomaniacal in enhancing the “basis points” of the returns it generates for the community it serves—with only perfunctory interest in the “ppm (parts per million)” of carbon (mitigated or released) associated with the deployment of finance, or the human development index (HDI) effects of investments.

The regulatory responsibilities and the fiduciary duties that drive the functioning of this community are focused mostly on protecting the interests of investors and consumers (of financial instruments and banking services) by de-risking the financial ecosystem. Together, these present two specific hurdles, both of which make it difficult for the world of money to serve the ambitions of the Paris Agreement. The first hurdle pertains to geography, more specifically political geography. And the second pertains to democracy, more specifically the politics of decision making within institutions that shape and drive global financial flows.

Together, they have deleterious consequences. For instance, the major chunk of climate finance labelled as such finds it tedious to flow across borders. Thus, it is mostly deployed in the locality of its origin. This tendency is even starker for financial flows from the developed world to the developing and emerging world. An Organisation for Economic Co-operation and Development—Climate Policy Initiative (OECD—CPI) study found that “public and private climate finance mobilized by developed countries for developing countries reached $62 billion in 2014”. A separate study by CPI estimated that global flow of climate finance crossed $391 billion in the same year—implying that only about 16% of all flows moved from developed to developing countries.

This represents the most significant “collective action problem” that confronts the global community on the issue of climate change. While there is a near universal recognition that a) climate change is a global commons problem, b) the least developed countries are likely to be most affected, and c) significant infrastructure will need to be developed in emerging and developing countries to improve their low standard of living, the flow of money is (not surprisingly) blind to each of these. It recognizes political boundaries, responds to ascribed (and frequently arbitrary) ecosystem risks within these boundaries and flows to destinations and projects that enhance returns—as it was meant to.

The travails of this constrained flow of capital do not end here. In a discussion paper published by the climate change finance unit within the department of economic affairs at the Union ministry of finance, it has been highlighted that even this modest cross-border flow, which also accounts for pledges and promises made, does not adhere to the “new and additional” criteria. Flows of conventional development finance and infrastructure finance are on occasion reclassified as climate finance. And on other occasions these conventional flows are cannibalized to generate climate finance. The size of the pie remains the same.

Unless we are able to increase the total amount of resources available to cater to both the development priorities and climate-friendly growth needs of emerging and developing economies, we may only be able to build a future that is both green and grim. Everywhere, low-income populations will underwrite a green future for a privileged few.

Additional finance for meaningful climate action may be generated by simultaneously working on three fronts as we move to 2020. Successful climate action will first and foremost be predicated on the domestic regulatory framework within each country. Currently, a slew of regulations, from the flow of international finance into the domestic economy to those related to debt and equity markets, disincentivize capital from investing in climate action. It is imperative for policymakers to get their own house in order and create financial market depth and instruments that allow savings to become investible capital even as they continue to demand a more climate-friendly international financial regime.

Second, there currently exists a vast pool of long-term savings—which can be labelled “lazy money”. According to a recent International Monetary Fund report, much of this lies with pension, insurance and other funds, which have accumulated savings of approximately $100 trillion. Due to lack of political will and appropriate mechanisms, this money is neither invested in the climate agreement objectives nor in the sustainable development goals agreed to at the UN last year. This helps nobody. As a result of its inability to flow across borders, developed-world savers earn sub-par returns. And due to this source of finance remaining outside the climate purview, the investment gap in infrastructure, particularly in developing countries, has continued to increase. It now stands between $1 trillion and $1.5 trillion each year. Making this “lazy money” count will be extremely important.

And finally, it is time to bring the big boys controlling banking standards into the tent. The Basel III Accords, designed to create a more resilient international banking system through a suite of capital adequacy, leverage, and liquidity requirements, contribute little to global climate resilience. Given the dependency of emerging economies like India on commercial finance for capital-intensive projects, the Basel Accords need urgent review.

The infrastructure gap, global financial sustainability, and a green future are recognized to be common global problems. But the world cannot continue to solve them on three different tracks. If so, each of them will fail. Only once they are seen as inter-connected can they be addressed effectively.

Samir Saran is vice-president at the Observer Research Foundation.

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Books / Papers, Columns/Op-Eds, Energy

The false debate on India’s energy consumption

Economy & Society

Samir Saran & Vivan Sharan

Original link is here


Despite having among the largest coal reserves in the world, India lags far behind in consumption, at less than a fifth of China’s levels.[1]  The average Indian’s coal consumption is around 20 percent that of the average US citizen, and 34 percent that of the average OECD citizen. And yet, in international negotiations, India finds itself caught in a shrill and binary debate pitching growth against climate. This is a false debate, which stems from the inability of the current mercantilist system to grant all actors a fair share of the “carbon space” – the amount of carbon dioxide-equivalent emissions that can be released into the Earth’s atmosphere without triggering dangerous climate change.

In international negotiations, India finds itself caught in a shrill and binary debate pitching growth against climate

India’s position in climate negotiations is based on the importance of access to energy for human development. This is supported by data, including the positive correlation between energy access and the Human Development Index (HDI).[2]  Estimates vary on how much energy is needed to meet basic human needs (hereafter referred to as “lifeline energy”). The methodologies vary depending on whether these basic needs are considered through the prism of GDP growth targets, HDI levels, or calculations of the energy needed to meet a predetermined set of development goals.[3]

This essay will argue that, if the climate debates have allowed even a nominally equitable level of coal consumption towards meeting lifeline energy needs, India currently has immense room for manoeuvre. The analysis relies on a benchmark metric: that 2,000 watts (W) per capita is a basic level of lifeline energy, covering housing, transport, food, consumption (of manufactured goods), and infrastructure. This is based on a study by Novatlantis, which demonstrates that this level of consumption could power daily life in Western Europe.[4]  Therefore, lifeline energy is defined liberally in this study, as being high enough to cover the minimum lifestyle needs of citizens in developed countries.

Consumption after the financial crisis

While developed countries such as OECD and EU member states have reduced per capita coal consumption since the financial crisis, developing countries such as India have increased consumption over the same period. This reduction by developed countries does not necessarily reflect a greater degree of climate “responsibility”, and, conversely, the increase in consumption by India does not reflect “irresponsibility”, as this analysis will demonstrate. Table 1 shows the total per capita consumption of key regions and countries that are shaping the climate change discourse.

TABLE 1: TOTAL PER CAPITA COAL CONSUMPTION (W)

Countries/Regions 2005 2009 2014
US 2,580.8 2,147.5 1,887.6
China 1,324.4 1,674.4 1,909.6
Germany 1,308.9 1,162.7 1,269.7
Japan 1,260.2 1,127.9 1,321.5
India 217.2 279.3 377.3
World 640.9 675.7 717.3
of which:   OECD 1,316.0 1,143.0 1,100.6
                  Non-OECD 484.7 571.9 635.1
                  EU 846.8 705.6 704.8

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

Taking a closer look at coal consumption before and after the financial crisis, it is apparent that the trends are nuanced. Two key sub-trends are visible in Table 2, which tracks coal consumption against total primary energy consumption. The first is that, while developed countries have been cutting total energy consumption, developing countries have been increasing it, albeit at a gradually declining pace since the crisis. Second, while developed countries have cut coal consumption faster than total primary energy consumption, developing countries have increased coal consumption faster than total primary energy consumption. Clearly, then, coal consumption is very much part of the lifeline consumption matrix for developing countries since they require base load generation for industrial-driven economic growth (which is a prerequisite in countries such as India for improving the HDI and generating employment).

TABLE 2: CHANGE IN COAL CONSUMPTION VS. TOTAL PRIMARY ENERGY CONSUMPTION

Regions Category 2006 2009 2010 2011 2012 2013 2014
OECD TOTAL 0% -5% 3% -2% -1% 0% -2%
COAL 0% -11% 6% -2% -5% 0% -2%
Non-OECD TOTAL 4% 0% 4% 4% 2% 1% 1%
COAL 6% 2% 2% 6% 1% 1% 0%
EU TOTAL 0% -6% 4% -4% 0% -1% -4%
COAL 3% -12% 5% 2% 3% -3% -7%

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

Finally, Table 3 shows that the average citizen of the US and of China both consume nearly the entire 2,000W lifeline energy benchmark in the form of coal. Conversely, in India’s case, only about 19 percent of the 2,000W benchmark is consumed in the form of coal. In fact, citizens of OECD countries get a much larger proportion of their energy needs from coal than citizens of non-OECD countries. This is also a function of the disparity in per capita energy consumption as a whole between developed and developing countries – while coal consumption as a percentage of lifeline energy in developed countries is decreasing, the gap between the per capita coal consumption of developing and developed countries remains vast.

TABLE 3: PERCENTAGE OF LIFELINE ENERGY DELIVERED BY COAL, WITH A PER CAPITA NEED OF 2,000W

Countries/Regions 2005 2009 2014
US 129% 107% 94%
China 67% 84% 95%
Germany 65% 58% 63%
Japan 63% 56% 66%
India 11% 14% 19%
World 32% 34% 36%
of which:   OECD 66% 57% 55%
                  Non-OECD 24% 29% 32%
                  EU 42% 35% 35%

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

India’s twin imperatives

The World Bank’s Special Envoy on Climate Change recently stated that “clean energy is the solution to poverty, not coal”.[5]  This is a view that resonates within a number of development-financing institutions based in OECD countries. For instance, the US Export-Import Bank stopped funding greenfield coal power generation projects worldwide in 2013. The World Bank also seems to be moving in this direction, even though coal consumption has been increasing in developing countries and coal-based energy remains the most practical option at a large scale.[6]  This narrative isolates economic growth from lifeline energy and skirts over the role of growth in development.

The preceding analysis attempts to address some myths related to coal consumption. First, in per capita terms, developed countries in fact consume much more coal than developing countries: The average OECD citizen consumes about double the coal of the average non-OECD citizen. China is a notable exception. And if Chinese per capita coal consumption is a benchmark, the debate on India’s consumption is clearly redundant.

The average Indian already spends much more on renewable energy (as a proportion of income) than counterparts in China and the US

The per capita trends show that India will supply a larger proportion of its 2,000W benchmark through clean(er) fuels than developed countries. There is enough room for India to increase its coal consumption while continuing to accelerate its renewable-energy thrust. India has set a target renewable-energy capacity of 175 gigawatts by 2022. This means that it will be among a handful of countries to source a large proportion of its lifeline energy needs from non-conventional sources. The average Indian already spends much more on renewable energy (as a proportion of income) than counterparts in China and the US.[7]  To spend even more, purchasing power will need to grow, and so, in turn, will lifeline consumption.

This has clear implications for India, and for other similarly placed developing countries. Unlike developed countries, which have already seen peaks in their energy consumption, India must respond to two imperatives. First, to increase its lifeline energy as well as clean energy. This means that the country will have to ensure financial flows towards lifeline energy, make coal consumption more efficient, and engage with the international financial system to ensure that regulations do not make clean energy investments more costly than they already are. Second, and at the same time, lifestyle emissions need to start adhering to or approximating the Swiss model, which shows that “daily life in Western Europe could be powered by less than one-third of the energy consumed today&rd[8]  The estimated 20 million people at the top of India’s socio-economic pyramid, and large companies that consume as much energy as counterparts in developed countries, must be included within the paradigm of “climate responsibility”.


[1]   In 2014, China accounted for more than half the world’s coal energy consumption, at around 3.9 billion tonnes of oil equivalent, while Organisation for Economic Cooperation and Development (OECD) countries consumed just over half this figure. China’s target of capping coal consumption at 4.2 billion tonnes by 2020 was welcomed by OECD countries. See data from the BP Statistical Review of World Energy, June 2015, available athttp://www.bp.com/content/dam/bp-country/de_de/PDFs/brochures/bp-statistical-review-of-world-energy-2015-full-report.pdf; “China seeks to cap coal use at 4.2 billion tonnes by 2020”, Agence France-Presse, 19 November 2014, available athttp://economictimes.indiatimes.com/news/international/business/china-seeks-to-cap-coal-use-at-4-2-billion-tonnes-by-2020/articleshow/45205271.cms.

[2]   UNDP, 2013; The World Bank, n.d.

[3]   Shripad Dharmadhikary and Rutuja Bhalerao, “How Much Energy Do We Need?”, Prayas Energy Group, May 2015, available athttp://www.prayaspune.org/peg/publications/item/298-how-much-energy-do-we-need-towards-end-use-based-estimation-for-decent-living.html(hereafter, Dharmadhikary and Bhalerao, “How Much Energy Do We Need?”)

[4]   Novatlantis, “The 2,000-Watt Society”, 2007.

[5]   Rachel Kyte, “World Bank: clean energy is the solution to poverty, not coal”, theGuardian, 10 August 2015, available at http://www.theguardian.com/sustainable-business/2015/aug/07/world-bank-clean-energy-is-the-solution-to-poverty-not-coal.

[6]   Sunjoy Joshi and Vivan Sharan (eds), “The Future of Energy”, Observer Research Foundation, 2015, available at https://www.economic-policy-forum.org/wp-content/uploads/2015/02/ORF-EPF-Final-Report-The-Future-of-Energy.pdf.

[7]   Samir Saran and Vivan Sharan, “Indian leadership on climate change: Punching above its weight”, Planet Policy blog, The Brookings Institution, 6 May 2015, available athttp://www.brookings.edu/blogs/planetpolicy/posts/2015/05/05-indian-leadership-climate-change-saran-sharan.

[8]   Dharmadhikary, Shripad and Bhalerao, Rutuja, “How Much Energy Do We Need?”, Prayas (Energy Group), May 2015.

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Columns/Op-Eds, Energy, Water / Climate

Unbundling the coal-climate equation

October 7, 2015 03:47 IST | Samir Saran and Vivan Sharan, The Hindu

Original link is here

TH07_Global_Coal_e_2574097d

There is still enough room for India to grow its coal consumption while continuing to accelerate its thrust on the expansion of renewable energy.

Ahead of the Paris climate summit, India announced on October 2 its Intended Nationally Determined Contributions (INDCs) for climate change mitigation and adaptation. India intends to reduce its carbon emissions intensity by 33-35 per cent by 2030, from its 2005 levels. While this commitment has drawn fulsome praise from many, the green ayatollahs have predictably ignored its herculean clean energy ambitions and focussed on Indian dependence on coal. It is time to lay bare the ‘coal hypocrisy’ of these privileged ‘western greens’.

India’s total energy consumption is a fraction of that of China, the U.S., the European Union and the OECD. Its position at the climate change negotiations has continued to reflect the centrality of access to energy for human development. And India’s normative position is supported by data, such as the positive correlation between energy access and the Human Development Index (HDI).

Lifeline energy

While a number of estimates exist on how much energy is needed to meet development objectives (we call it ‘lifeline energy’), an interesting benchmark is that of the 2000-Watt (W) society, based on a Swiss research group’s findings. The research states that 2000-W per capita is a basic level of energy which accounts for housing, mobility, food, consumption (manufactured goods) and infrastructure. In a forthcoming paper for the European Council on Foreign Relations, we argue that if the ‘space’ allocated to India for coal consumption towards fulfilling lifeline energy needs is even nominally equitable, India does not have to compromise on its development and growth aspirations.

On an average, U.S. citizens consume nearly the full extent of this lifeline energy benchmark using coal, the ‘dirty fuel’. India consumes only 19 per cent of the benchmark through coal. In fact, citizens of OECD countries get a much larger proportion of their energy needs relative to the 2000-W benchmark from coal than non-OECD countries.

It is important to note that in 2014, the average Indian accounted for around 20 per cent of the average American’s coal consumption and around 34 per cent of those from the OECD. What has caused concern in the developed world is that while they have reduced per capita coal consumption relative to pre-financial crisis levels, India has increased consumption over the same period. In our analysis, we point out that just as reduced coal consumption of developed countries following the crisis does not necessarily reflect a greater degree of ‘responsibility’ towards the climate, the increase in consumption by India does not reflect ‘irresponsibility’.

This is better explained by two key trends, visible after the crisis. One, while developed countries have been cutting down energy consumption as a whole, developing countries have been increasing consumption, albeit at a gradually declining pace. Two, while developed countries have been cutting coal consumption faster than primary energy consumption, developing countries have increased coal consumption faster than primary energy consumption. Clearly then, industrial consumption (manufacturing and jobs) is very much part of the lifeline consumption matrix for developing countries.

Growth-development link

Many financial institutions such as the U.S. Exim Bank have stopped funding coal-based power generation projects. The World Bank also seems to be following in this direction even though coal consumption has been increasing in developing countries and coal-based energy remains the most practical option of scale. This tendency isolates economic growth from lifeline energy and skirts the central goal of development within growth.

India is neither in the same basket of per capita coal consumption as developed countries nor comparable to China. In fact, we have shown that India will meet a larger proportion of the 2000-W benchmark through ‘clean’ fuels than developed countries. Therefore, there is enough room for India to grow its coal consumption while continuing to accelerate its renewable energy thrust. And this is precisely what the Indian INDCs reflect.

India has set a target of renewable energy capacity of 175 gigawatts by 2022; and has promised to achieve 63 GW of nuclear energy if “supply of fuels is ensured”. It will be among a handful of countries to source a large proportion of its lifeline energy needs from non-conventional sources, across the developing and developed worlds.

It is worth emphasising that unlike developed countries that have already peaked their energy consumption, India must first strive to provide the 2000-W per capita lifeline energy to all, even as it seeks to clean this energy mix. India will continue to consume coal to grow its industrial base, improve HDI and develop its economy. This in turn will allow it the financial capacity to invest heavily in non-conventional sources. The Indian INDCs reflect this enduring paradox; India will need to grow its coal capacity if it is to successfully go green.

Developed countries such as those within the EU want to reduce their emissions to two tonnes per capita by 2050; which will in turn reflect the total carbon ‘space’ available per capita if the world is to limit global warming to manageable levels. While the road to Paris is paved with such good intentions, it is essential that each person on this planet begins to move towards an equitable carbon profile. This has two clear implications.

First, large developing countries such as India must invest in renewable energy benchmarks that match developed countries. Second, developed countries must pare down per capita coal consumptions to levels which would match India’s lifeline consumption through coal in the future.

Simply put, every time a new coal plant comes up in India, one should be shut down in the OECD. If coal use can be substituted by clean sources, then millions of tonnes of coal capacity in EU and the U.S. are low hanging fruits. India uses coal to satisfy less than a fifth of its potential lifeline energy needs, while OECD countries use this ‘nasty’ fuel to satisfy two-thirds of theirs. It is time to meet in the middle. No, we are not suggesting historic responsibility; only the one we jointly shoulder for tomorrow.

(Samir Saran is vice-president and Vivan Sharan is visiting fellow at the Observer Research Foundation, India)

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