Will India Fulfill Its Green Pledges? Don't Be So Sure

(Bloomberg View) -- As soon as Donald Trump withdrew the U.S. from the Paris Agreement on climate change, eyes turned eastward. Even as the U.S. reneges on its promises, the argument now goes, China and India will show leadership instead; they at least are committed to low-carbon growth.

I wouldn't be so sure, at least where India is concerned. It is true that the Indian government has reiterated its Paris pledges. But Trump's decision has nevertheless opened a door for India to revise its own very stringent commitments as and when they become problematic. While they haven't yet reached that point, they may well do so, and soon.

QuickTake Climate Change

The positive story about India and climate change rests on the idea that, although the country remains heavily dependent on coal-based power plants, it may add to its stock of such plants much more slowly than was earlier anticipated. In fact, given that coal plants that will produce more than 50,000 megawatts of electricity are already being constructed, the government's most recent energy plan estimates that no additional coal-burning capacity will be needed between now and 2027. Questions are rightly being raised about whether it's profitable any longer to invest in new coal plants in India.

But here's the problem. All such studies make a couple of very big assumptions about the future -- assumptions which, given Indian history, are dangerous.

Here's the first assumption: that India will meet its targets for generating renewable power. The government wants to build 100 gigawatts of solar capacity by 2022. At best, this year, it will install around 10 gigawatts -- and this has been a very good year.

In fact, so many companies have been bidding furiously for solar power plants recently that auctions have produced unsustainably low per-unit prices for renewable energy. What happens if the bubble bursts over the next few years, and some of these companies start going bankrupt? Won't investors be turned off then? And, if so, where will the remaining thousands of megawatts of solar power capacity come from?

The second worrying assumption is that new coal power plants won't produce electricity at a lower cost than new renewable energy projects. To ensure that happens, the government would have to enforce onerous environmental regulations and, of course, plant owners would have to believe they can't quietly ignore those regulations once their facilities are up and running. This is, effectively, circular reasoning. One can't assume that India will meet its Paris targets because of the price of coal, since ensuring that coal will be expensive assumes that India's government is committed to its Paris targets!

And, finally, there's a third, even more problematic assumption underlying the headlines about India turning away from coal: that India's economy is a monolith.

In fact, even if the central government wants to promote green energy, even if, overall, new coal projects might not make sense, individual new coal projects might. Perhaps only a few such projects can be profitable. But many companies and investors, especially those that have political connections, are sure to be convinced that their project will somehow wind up being the profitable one, if they can only get the right concessions from one or another government authority.

In other words, zero new coal capacity might be needed till 2027. But there's no reason to feel confident that zero new coal capacity will be added.

India isn't like China, or the U.S., or Australia or Germany when it comes to meeting its Paris pledges. In India, hundreds of millions of people still live without electricity -- a big part of what keeps them desperately poor. India also has a shrunken manufacturing sector, partly because electricity is so expensive (relatively) and its supply so variable. No democratically accountable Indian government can ever favor an international agreement over fixing these two problems.

Remember this: Coal looks bad in India at the moment because its economy is struggling and because it is so services-intensive. Over the past few years, coal plants have used less and less of their capacity as growth has slowed. In other words, nobody in India has had to make a real choice between growing manufacturing and sticking to the country's climate commitments.

But, if India's economy does take off, Prime Minister Narendra Modi might indeed be faced with such a choice. Modi -- who as a chief minister decried climate deals as infringing on Indian sovereignty -- has already gone out on a limb and reversed decades of Indian climate policy in signing the Paris agreement. If he's ever actually confronted with that choice -- one that's much more real than the one Donald Trump faced -- I wouldn't be as sure as all the headline-writers that he won't follow Trump's lead.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg View columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”

To contact the author of this story: Mihir Sharma at m.s.sharma@gmail.com.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net.

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