Cost Of Net Zero

A policy document outlines the economic impacts of low-carbon policies

Meeting India's short- and long-term climate commitments at COP26 calls for a complete economic transformation. However, such a transformation can give rise to significant developmental tradeoffs.

While many long-term energy and climate models that project low-carbon pathways for the country consider the gross domestic product (GDP) to be exogenously driving growth, it is to be noted that low-carbon policies or technologies will also have an impact on GDP and other economic variables. This necessitates a sound understanding of the multiplier impacts (or spillover effects) of low-carbon interventions on the economy to effect an equitable transition to net zero, without compromising on the development objectives.

In this context, CSTEP performed an analysis using multiplier models to gauge the macroeconomic and distributional impacts of low-carbon policies. A social accounting matrix (SAM) extension exercise was conducted to disaggregate the energy sector and then build multiplier models.

The study analysed three scenarios — Increased RE Scenario, Increased Solar Subsidy Scenario, and Increased Fossil-Fuel Tax Scenario — to understand the associated impacts on the economy.

It found that the Increased RE Scenario has an overall net positive impact on the economy even without any demand-side measures or technological changes, while the Increased Solar Subsidy Scenario has an overall positive impact on the various sectors and households, and the Increased Fossil-Fuel Tax Scenario leads to increased cost of production and market price for all industries, though market prices do not rise as much as production cost, suggesting that the tax burden is borne mainly by the industries.

On the basis of the above insights, the study puts forth policy recommendations for making clean energy transition beneficial and equitable for the economy. These include investing in RE and the related subsidies over increasing the fossil-fuel tax; decarbonisation of key industries (iron, cement), in addition to the reduction in the share of coal-based electricity, for significant emissions reduction and phase-out of coal; and shifting to RE and subsidising solar electricity for increased profits for key industries.

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