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Economy at risk from move to clean energy

GS Paper 3

Syllabus: Issues relating to Planning, Mobilization of Resources/Infrastructure-Energy/Environmental Conservation

 

Source: TH

 

Direction: The challenges, especially financial, that India faces as it prepares to transition from a high-carbon emission economy to a low-carbon emission economy are discussed in the article.

 

Context: According to a study in the Global Environmental Change journal, India’s financial sector is highly exposed to the risks of the economy transitioning from being largely dependent on fossil fuels to clean energy.

 

Background:

  • Coal currently accounts for 44% of India’s primary energy sources and 70% of its power generation.
  • The country’s coal-fired power plants have an average age of 13 years and India has 91,000 MW of new proposed coal capacity in the works, second only to China.
  • According to the Draft National Electricity Plan 2022, coal’s share in the electricity generation mix will decrease to 50% by 2030.
  • In 2021, the PM of India announced India’s commitment to reach net-zero emissions by 2070 and to source half of its electricity needs from non-fossil fuel sources by 2030.

 

Highlights of the study:

  • The financial decisions of Indian banks and institutional investors are forcing the nation to rely on a more expensive, more polluting source of energy. For example,
    • Oil and gas extraction accounted for 60% of lending to the mining industry, while petroleum refining accounted for one-fifth of debt in the manufacturing industry.
    • Only 17.5% of bank lending to the power sector has been to renewables.
  • Consequently, India has much higher electricity from carbon sources than the world average, despite its vast potential for cheap solar, wind, and small hydropower.

 

Challenges:

  • High-carbon industries – power generation, chemicals, iron and steel, and aviation – account for 10% of outstanding debt to Indian financial institutions.
    • However, these industries are also heavily indebted and therefore have the less financial capacity to respond to shocks and stresses.
  • Mapping India’s policy commitments against these lending and investment patterns reveal that India’s financial sector is heavily exposed to potential transition risks.
  • A shortage of experts in India’s financial institutions who had the expertise to appropriately advise the institutions on such a transition.
  • Trillion dollars needed: To meet net-zero and power generation from non-fossil fuel sources commitments.

  

In general, the following are a few reasons a nation’s economy may be at risk from moving to clean energy:

  • High upfront costs: The initial investment required to transition to clean energy, such as building solar or wind power plants, can be significant.
  • Job losses in certain industries: This could have negative effects on the economy and could lead to higher unemployment.
  • Dependence on foreign technology: Many countries may have to import clean energy technology from other nations, which can be expensive.
  • Lack of infrastructure: The transition to clean energy requires a significant overhaul of the existing energy infrastructure, which may be costly and time-consuming.
  • Uncertainty of investments and regulations: The transition to clean energy may be slowed down by the lack of clear regulations and policy frameworks, which can make it difficult for companies to make long-term investments.

 

Way ahead:

  • Financiers, regulators and policymakers should be acting swiftly to ensure an orderly transition to net zero.
  • RBI is expected to launch India’s first-ever sovereign green bonds auction worth ₹40 billion.
  • India’s presidency of the G-20 also means a focus on the energy transition and mobilising sustainable finance.
  • Major financial institutions should collect information on environmental, social, and governance (ESG) risks and systematically incorporate data into financial planning.

 

Conclusion: There is a linkage between financial risk, renewable energy technology budgets, and environmental quality as the transition to clean energy can have an impact on all three areas.

 

Shifting financial resources towards these renewables would deliver huge benefits for India like cheaper electricity, cleaner air, and fewer emissions. Thus, on the other side of risk is a tremendous opportunity.

 

 

InstaCurious:

ESG stands for Environmental, Social, and Governance. It refers to a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental standards assess a company’s impact on the natural world. Social standards assess a company’s impact on its employees, customers, and community. Governance standards assess a company’s leadership, financial transparency, and ethical behaviour. ESG criteria can help investors evaluate the long-term sustainability of a company and its potential financial performance.

 

Related News:

What is Liquified Natural Gas (LNG), and how it impacts the climate

Source: Indian Express

Read related Link: Europe turns to LNG instead of Russian gas: What is it, how it impacts the climate

 

Insta Links:

India Ranks Third in Renewable Energy Installations in 2021

 

Mains Links:

Q. Describe the benefits of deriving electric energy from sunlight in contrast to conventional energy generation. What are the initiatives offered by our government for this purpose? (UPSC 2020)

 

Prelims Links:

With reference to the Indian Renewable Energy Development Agency Limited (IREDA), which of the following statements is/are correct? (UPSC CSE 2015)

  1. It is a Public Limited Government Company.
  2. It is a Non-Banking Financial Company.

Select the correct answer using the code given below.

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: C