Investment Opportunities in India’s Transition to a Low-Carbon Economy

November 24, 2022 Posted by India Briefing Written by James Fox Reading Time: 6 minutes

India’s transition to a low-carbon economy will demand a vast amount of funding over the next five decades. The soon-to-be world’s most populous nation aims to reach net-zero by 2070, making it the last of the world’s largest emitters to do so. However, this enormous transition creates a wealth of opportunity for green investment in the energy sector, the carbon capture sector, and in electric vehicles, among others.

Climate change is rightly at the forefront of global cooperation. While climate fluctuations are a natural phenomenon, which have had profound economic and social impacts throughout history, human activities have been the main driver of climate change in the last two centuries. Experts have warned that climate change may be irreversible if the current trajectory is sustained.

In this article, we discuss the approach to climate action in India and emerging investment opportunities, whose scale and scope will be influenced by the country’s need to manage demographic factors, achieve economic growth, maintain energy security, and reduce net-carbon emissions.

Population growth and India’s emissions record

India is central to global efforts to reduce emissions. The country’s population is surging in parallel with its economy. In 2023, India is set to become the world’s most populous nation – overtaking China. The average age in India is nearly a decade younger than that in China, at 28.43 years old. One in every five Gen Zers in the world lives in India.

While India’s per capita emissions rate is low in relative terms (1.8 tons CO2), the country is the world’s third largest emitter – emitting a net 2.9 gigatons of carbon-dioxide equivalent (GtCO2e) per year – by virtue of its size, population, and reliance on carbon-intensive energies and industry. Around 70 percent of emissions are traced to six sectors: power, steel, automotive, aviation, cement, and agriculture.

India’s youth concerns over sustainability

India’s young population will likely play an important role in defining their country’s response to climate change. According to analysts at the consultancy firm McKinsey, 68 percent of Gen Zers in India reported feeling anxiety about climate change. The firm highlights that young people appear to be greatly concerned about the impact of climate change on work and living conditions. Of those surveyed by McKinsey, 30 percent have cited sustainability as a key concern when considering an employer.

India’s decarbonization potential

In 2021, India announced its ambition to become a net-zero emitter by 2070. The target marks an important milestone in the fight against climate change, but sees the nation lag China – which aims to reach net-zero by 2060 – and developed nations like the UK, which aims to reach it at 2050.

India has the potential to create 287 gigatons of carbon space for the world. This figure is substantial and amounts to half of the global carbon budget required to limiting warming to 1.5°C. However, as McKinsey notes in its report ‘Decarbonising India: Charting a Pathway for Sustainable Growth’, the current pace of emissions intensity reduction is insufficient. Taking the historical trajectory, India’s annual emissions could rise to 11.8 GtCO2e by 2070. Under the current Line of Sight scenario, emissions would be reduced to 1.9 GtCO2e by 2070, a 90 percent reduction in economic emissions intensity compared with 2019. Under an accelerated scenario, the emissions could fall to 0.4 GtCO2e by 2050 – partially dependent on new technology developments (such as direct air capture) – allowing net-zero by 2070.

Investment opportunities in India

In order to meet its carbon emissions promises, India requires funding and investment, much of it front loaded. The McKinsey report suggests that as much as 3.5–six percent of GDP will be needed. This anticipates US$7.2 trillion of green investments required under the current Line of Sight scenario in the years to 2050. A further US$4.9 trillion would be needed under an accelerated scenario.

How we can help companies navigate the environment and cleantech industry in India

While funding is one aspect, policy development is another. India’s government will need to make continuous improvements to the frameworks surrounding green energy, electric vehicle adoption, and new technologies. India currently lacks sector-specific targets in several areas and these will be needed to gauge progress and develop policies that can enhance investment and carbon emission reductions.

Despite this, it is worth noting that India’s decarbonization efforts are well and truly underway. The sector attracts plenty of investment, including US$2 billion in private capital that went into Indian climate change-related technology in the first half of 2022. According to the Washington Post, some of India’s biggest companies are looking to lead on indigenous sustainability efforts. The likes of Wipro Ltd., UltraTech Cement Ltd. and Reliance Industries are increasingly talking to their shareholders about sustainability, the paper highlighted.

However, it is clear that much greater levels of investment are required if India is to reach its climate change targets. Investment opportunities can be split by sector:

Sector	Details
Renewable energy	With wind and solar energy already available at scale, these sources represent some of the most viable areas for renewable energy investment. India’s solar and wind capacity would need to increase from its current 95 GW to 2700 GW by 2050. Hydropower is an area where India is deemed to have considerable potential. India has an estimated hydropower potential of 145,320 MW, excluding small hydro projects (SHPs). At the end of February 2020, installed capacity was about 45,700 MW. Hydropower could provide a near-term boost to renewable energy production. As renewable energy is not produced on demand, storage facilities will need to be developed in tandem. Government targets will require considerable investment to manufacture, install, and maintain facilities. India will require US$223 billion in investment to meet its goal of wind and solar capacity alone by 2030, according to BloombergNEF.
EV Adoption	Electric vehicles and hydrogen-power vehicles will play a huge role in taking pollution off the streets. As renewable energy generation develops, these vehicles should be carbon neutral assets. In India, electrification of mobility could deliver 7 GtCO2e of cumulative reduction over the next five decades to 2070. Policies are already in place to enhance EV adoption. In August, the government elected to reduce the GST rate on electric vehicles from 12 percent to 5 percent and chargers or charge stations from 18 percent to 5 percent to boost the electric vehicle market. On the production side, leading auto companies have made commitments to invest in the EV space in India, including Tata, which owns Jaguar Land Rover, at US$2 billion, and Hyundai US$500 million. Mahindra is also investing INR 30 billion in the development of its EV, Mahindra e2o PLUS. Investment into EV start-ups reached a record high in 2021, reaching US$444 million. Ola Electric (US$253 million), Blusmart (US$25 million), Simple Energy (US$21 million), Revolt (US$20 million), and Detel (US$20 million) were the EV firms that received the most financing in 2021.
Green hydrogen production	Green hydrogen is obtained by electrolysis of water and crucially it is a process that is powered entirely by renewable energy. Green hydrogen usage could enable an annual reduction of 900 MtCO2e for India by 2050. India is aiming to become a green hydrogen hub and produce five million tons of green hydrogen by 2030.
Decarbonization of agriculture	Agriculture is a significant contributor to anthropogenic global warming, driven by activities such as rice cultivation, the use of nitrate fertilizer and livestock rearing. Analysts suggest that decarbonization activities within India’s agriculture sector can lead to annual carbon abatement of 292 MtCO2e by 2050. The primary area for reducing emissions is rice cultivation, followed by reducing the use of nitrate fertilizers. Such developments will require investments in farming technology and the adoption of carbon diets, i.e., those with less meat.
Natural climate solutions	Natural climate solutions (NCS) are conservation, restoration, and improved land management actions that increase carbon storage or avoid greenhouse gas emissions in landscapes and wetlands across the globe. Analysts suggest that NCS could sequester 640 MtCO2e annually by 2050, nearly 300 MtCO2e higher than the 2019 levels. Investments in NCS, including offsets, are essential to accelerate climate change mitigation. Such offset programs can be highly lucrative in locations with lower land costs.
Carbon capture, utilization and storage	Carbon Capture, Usage, and Storage (CCUS) is a technology that can capture and make effective use of the high concentrations of CO₂ emitted by industrial activities. According to analysts, CCUS could help capture 11.4 GtCO2e across these sectors cumulatively by 2070 for utilization or storage.

Transition headwinds

India’s 2070 net-zero target leaves it dead last among the world’s largest emitters. However, as the least developed of the largest emitters, experts insist this is the way it should be. If managed poorly, decarbonization could leave millions of Indians struggling for access to basic staples as dirty, yet cheap, fuels are removed from the market.

A Look at India’s Long-Term Climate Action Strategy

The fragile nature of this transition is currently being highlighted in Europe as energy security has been compromised by Russia’s war in Ukraine. If renewables are unable to fill the void left by hydrocarbons, energy prices could skyrocket, leading to inflationary pressure across the economy. Policy enactments will need to ensure that India’s poorest are protected from inflationary pressure that the transition may cause.

The need to make provisions for India’s poor during the transition is accentuated by climate change, which has increased the frequency of extreme heat waves, droughts, and rains. In turn, this puts greater pressure on poorer farming communities, among others, as well as increasing the need for energy-intensive air conditioning and heating during weather extremes.

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