India Could Halve Emissions Growth, at a Cost

 McKinsey & Company recommends a rapid expansion of energy-efficiency programs and a massive scale-up of renewable energy implementation in India, such as these wind turbines in the western state of Maharashtra. Photo courtesy Harshad Sharma.

Growth in India's carbon emissions could be nearly halved by the year 2030 through the use of known practices and technologies, according to a new report from McKinsey & Company.

Through a "step-change in...efforts to lower emissions," India's carbon output could grow from 1.6 billion tons in 2005 to only 2.8 billion tons in 2030 as the country's population expands and its economy develops, the report said. This is down from a previously projected 5-6 billion tons for 2030.

If achieved, this dynamic shift could significantly enhance India's energy security by reducing energy import requirements and shrinking domestic power demand by a quarter, the report concluded. Such measures would also make India one of the world's most carbon-efficient countries, spawning new high-growth industries, increasing environmental sustainability, and improving the quality of life, particularly in rural areas.

"Eighty percent of what India could be in 2030 is yet to be built, providing the country an opportunity to effectively manage the economic and environmental costs of growing energy requirements," said McKinsey & Company Director Rajat Gupta, a co-author of the report.

Despite the potential, 90 percent of the identified emissions-reduction opportunities for India will prove difficult or expensive to achieve, the report said. Just to implement the solutions, the country will require additional investment of between US$869 billion and $1.1 trillion between 2010 and 2030-roughly 1.8-2.3 percent of India's GDP over this period. The projection also exceeds India's expected energy infrastructure investment needs of $1.3 trillion between 2006 and 2030, according to data from the International Energy Agency. 

The McKinsey study analyzed more than 200 ways to reduce carbon emissions across 10 major economic sectors, including power generation, industry, agriculture, and transport. Clean power and energy-efficiency measures in industry were identified as the largest opportunities for India, with the potential to collectively reduce emissions 28-34 percent by 2030.

Capturing these opportunities could help India become a global leader in emerging "clean" technologies, the study concluded. With its strong engineering talent and ability to provide low-cost manufacturing, the country could be "at the cent[er] of intellectual property right creation and a leader in manufacturing" in the areas of clean coal, solar energy, smart grids, and energy-efficient building technologies. The global market potential for clean technology investment is projected to top US$1.4 trillion between 2010 and 2030.

The cost challenge

The anticipated high cost of India's low-carbon transition lends support to the government's insistence on financial help from industrialized countries to help the country combat climate change while also lifting more than 455 million people out of poverty. At the July 2009 G8 summit in L'Aquila, Italy, India joined many other developing nations in resisting proposed mandatory emissions reduction targets in the absence of additional financial support.

The McKinsey analysis broke down the US$869 billion-$1.1 trillion into those solutions that ultimately bring about cost savings even if they are expensive to implement, and those that carry a long-term cost to implement. Putting in place the cost-saving measures would require US$333 billion through 2030, whereas the more-costly measures would require US$535 billion through 2030, as well as some US$38 billion annually in additional financing to support the operational costs of these solutions, the report found.

The study also emphasized the need for a strong national policy push to make such significant change possible, noting that "Long term planning and timely action will be critical."

Other challenges that India would face in such a transition include the need for behavioral change among the population, difficulties in the effective distribution of goods and services, the lack of education and training around new technologies or practices, and the need to ready different technologies for mass rollout. Combined, these factors render up to 90 percent of the opportunities that India faces either difficult or expensive to implement, McKinsey concluded.

"Time is of the essence" said Sahana Sarma, a McKinsey & Company partner and co-author of the report. "Even a five-year delay in making the necessary investments could result in a loss of one-fourth of the identified abatement potential."

Next steps

The McKinsey report outlines ten recommendations that India could adopt over the next 18 months to help realize up to three-quarters of the proposed emission reductions. These include a rapid expansion of energy-efficiency programs, massive scale-up of renewable energy implementation (complete with demonstration projects, enabling legislation, and incentivizing tariffs), accelerated establishment of nuclear and hydropower projects, measures to improve agricultural practices and reforestation initiatives, and the creation of a fund to promote national innovation and research into clean technology solutions.

Notably absent from the report's cost estimates is any modeling of adaptation costs-the costs associated with responding to the impacts of climate change that are already being experienced. McKinsey insiders, when questioned, acknowledged that there is little certainty about the potential scale of adaptation costs, noting that even prominent U.K. economist Nicholas Stern steered clear of such estimates in his seminal 2007 review of the economics of climate change. Yet these costs could be significant: one report recently estimated the real costs of adaptation worldwide to be 2-3 times greater than the US$40-$170 billion figure calculated by the Secretariat of the United Nations Framework Convention on Climate Change.

Adaptation costs could have a significant impact on India's economic growth-expected to continue at an average annual rate of 7.5 percent-as well as its emissions growth. National adaptation costs are currently estimated at around 2.6 percent of India's GDP.

The McKinsey study is the latest installment in an expanding portfolio of so-called "cost curve analyses" that examine the most promising technology-based solutions for reducing carbon emissions economywide. The analyses map the potential impacts of these measures against their associated financial costs, whether positive or negative.

Anna da Costa is a Worldwatch Institute fellow based in New Delhi.

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