The costs of a net-zero emission target

The 2021 United Nations Climate Change Conference (COP26) starts in Glasgow on November 1. The big push is the adoption of net zero (removal of greenhouse gas emissions through reduction measures) by 2050, not just as the global goal but also as a national commitment for every country.

With the G7 nations on board, pressure is building on developing economies in the G20, Brazil, South Africa, India, and China, plus Saudi Arabia, Russia, Indonesia, and Turkey, to sign on to the net-zero target. The pressure on G20 nations is escalating, even though rich countries continue with their high emission levels and eat into the limited carbon budget available for developing countries. The developed world is also failing to meet its commitment to climate finance for developing countries.

Within G20, India will find it challenging to agree to the net-zero individual country commitment, given its substantial development needs. At the same time, India is one of the few nations in G20 that is on target to meet its nationally determined commitments (NDCs) under the Paris climate accord and undertake some of the biggest climate actions anywhere in the world.

However, not much is being said about the costs of a highly accelerated decarbonisation plan to reach net-zero by 2050, other than bland assertions that the costs would be easily manageable and nothing in comparison with the costs of "inaction". Technologies such as Carbon Capture, Utilisation and Storage (CCUS) and hydrogen as a fuel are being seen as solutions, even though they have much distance to cover.

Recently, The Energy and Resources Institute (TERI) did a study for Shell that focused on technology solutions for India to move to net zero in the energy sector by 2050. The study's way forward scenario demanded a four-fold rise in electricity's share in the country's energy mix from 18% today to 45% in 2050, and raising the share of renewables in the electric power generated to 90%.

However, even after following this path, around 1.3 gigatonnes (GT) of carbon emissions will remain unabated. India's carbon emissions today are about 2.5 GT and are estimated at 6 GT by 2050 under a business-as-usual scenario. To reduce this, the country will need to undertake massive forestation of around 30-40 million hectares (the size of Rajasthan) and/or significant deployment of CCUS.

While cost estimation was not part of the study, quick use of the MARKAL model, which assumes exogenous GDP growth rates unaffected by diversion of investment to green house gas mitigation at constant prices, suggests that the additional discounted energy system cost (2015-2050) of the net zero scenario as compared to a baseline scenario (business as usual) is around ₹256 trillion ($3.41 trillion).

This is around 25% more than India's GDP in 2019 (roughly ₹200 trillion). If spread over time, this works out to about 3% of the current GDP per year till 2050. This appears reasonable and is possibly the reason for assertions that cost of transition to net zero is modest but it must be noted that it is a discounted estimate, using a 10% discount rate for the entire period (a discount rate of 10% over 30 years brings down ₹100 in 2050 to just ₹5.73 in 2020). Discounting, of course, implies that today's policymaker decides the entire pipeline of investments till 2050.

However, if in the TERI study there was no discounting, ie, the actual year-to-year costs were totalled (implying policymakers deciding at each point of time), the cumulative undiscounted additional investment costs would be around $81 trillion or about 35% of incremental GDP by 2050, and, roughly, the undiscounted additional energy systems costs for net zero transition (2020-50) could be over $110 trillion. This excludes investment costs associated with electric charging, biofuel production, and hydrogen-dispensing infrastructure. Moreover, the trajectory of additional investment costs is such that it demands a sharp uptick in the coming years, even crossing 50% of GDP in 2030.

The objective of this article is not to suggest a definite figure for the cost of transition for India or that a social discount rate should be applied. That is for the policymakers to decide. However, they need to consider the political risk of accelerated decarbonisation since the additional investment that will be required for it would have to be diverted from development investments.

Climate negotiations are not just environmental and energy discussions, but strategic talks with many international pulls and pressures and decisions will have to be taken accordingly. Suffice to say that the cost of net zero transitions by 2050 will be significant for India.

Manjeev Singh Puri is a former ambassador who has served as India's climate negotiator and is currently distinguished fellow, The Energy and Resources Institute.

Garima Vats is associate fellow, TERI. Ritu Mathur and Prodipto Ghosh contributed to the article