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Low GDP, High Transition Costs: India's Net Zero Quandary

India will have to spend a larger portion of GDP towards decarbonisation compared to developed economies.

<div class="paragraphs"><p>The central chimneys at the coal-fired plant in Uttar Pradesh, India. (Photographer: Anindito Mukherjee/Bloomberg)<br></p></div>
The central chimneys at the coal-fired plant in Uttar Pradesh, India. (Photographer: Anindito Mukherjee/Bloomberg)

The global pursuit for net-zero emissions by 2050 will be unequal. And lower income countries like India will have to bear the economic brunt of the transition, according to a new study.

India will have to spend a relatively larger portion of their gross domestic product towards decarbonisation—11% of the GDP, according to a report by McKinsey & Company. That compares to a global average spending of 7.5% of the GDP.

The report highlights how poorer economies will be most vulnerable to the shifts in a net-zero transition. And it's not just higher investment that they require. India is already at high physical risk due to climate change if the world fails to keep the rise in temperature to less than 1.5 degrees Celsius by 2050. Now, it also faces the prospects of job losses and additional cost to consumers as sectors that contribute about 40% to the GDP are exposed to the net zero transition—double than that of many developed countries.

In a global net-zero by 2050 scenario, India will have to double its annual capital spending on physical assets to $600 billion by 2050, according to McKinsey. Much of that would be used to reduce the existing coal power and expand renewable energy capacity. About 40% of India's total spending will have to be in the power sector.

Another acute risk that India faces is of stranded assets. According to McKinsey, about $2.1 trillion worth of assets would be stranded by 2050—80% of them would pertain to fossil fuel power plants in operation today.

But that spells trouble for a country like India where most of their plants are relatively new, less than 15 years old. These would've normally have had many more years of operational life.

"Early retirement of these assets would potentially lead to the reduction of value and to bankruptcies and credit defaults, with potential knock-on effects on the global financial system," the report said. "Unsurprisingly then, the possibility of asset stranding has prompted concerns about financial sector risk and the need to build the capabilities to quantify and manage it."

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Who Pays?

The unequal exposure of poorer countries raises concern about growth and inequality, an issue that has plagued the climate policy debate over the years.

Low income countries are barely responsible for the historical emissions but are being burdened with high transition costs. India, though the third largest emitter right now, has one of the lowest per-capita emission footprints for an economy of its size. And being a developing country, it will only see its energy needs go up.

"Inequity concerns would grow as an issue, particularly as developing economies argue that they have contributed less than others to emissions and yet are being asked to shoulder a large burden in the net-zero transition," McKinsey noted.

Besides, India's emission footprint is magnified as for a number of countries it is the destination to outsource manufacturing to. A 2018 study had analysed the carbon emissions embodied in a country's exports and imports. It noted that in India's economically important sectors like leather, textiles, tea, industrial machinery, chemicals and electricals, up to 50% of the sector's full supply chain emissions are due to production for export.

"Increasing production of goods for export tends to increase a country’s own carbon emissions since most manufacturing still involves carbon-emitting processes or energy use," McKinsey said. The U.S. and China are the two largest importers of embodied emissions from India.

While McKinsey doesn't attempt to answer who should pay for the energy transition, it acknowledges that the question is indeed unavoidable.

"What is clear is that the transition will require collective and global action, particularly as the burdens of the transition would not be evenly felt," it said. "The prevailing notion of enlightened self-interest alone is unlikely to be sufficient to help achieve net zero, and the transition would challenge traditional orthodoxies and require unity, resolve, and ingenuity from leaders."

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