Green shift: Costs and opportunities

Source: The post is based on an article “Green shift: Costs and opportunities” published in the Business Standard on 26th July 2022. 

Syllabus: GS 3 Ecology and Environment; Infrastructure – Energy 

Relevance: Green Energy Transition 

Context: The single biggest long-term challenge being faced by the world today is decarbonising world energy.  

At present, atmospheric CO2 level is 420 ppm (parts per million). Further, about 2 ppm is being added every year.  

The atmospheric CO2 level needs to be contained, at least at 450 ppm. It will help in containing global warming within 2 degrees centigrade. Further, Carbon emissions will have to fall by 50% by 2030.  

What are the challenges in the decarbonisation pathway?  

(1) The energy transition models showing the path to net-zero carbon by 2050 make three key assumptions. 

First, it has been assumed that energy demand will peak around 2030, then it will flatten, and then there would be no further growth. This assumption is difficult to be believed looking at current scenarios of growth in population, and the growth in the global gross domestic product (GDP).  

Second, assumption in all the models related to change in the energy mix are unrealistic. For example, the share of fossil fuels will decline from the current levels of over 80% to less than 25% by 2050, Like Coal consumption has to drop from 25% of the energy mix to less than 3%. 

Third, all model’s assumption that more than 50 per cent of these residual GHG emissions will be absorbed by carbon capture and storage (CCS) is unrealistic. The technology has not been commercially proven at scale. 

(2) There are issues in the cost that will be incurred on the energy transition. This can be seen from two perspective: 

(a) Although the costs of solar, wind and lithium-ion batteries have declined dramatically over the last decade, the cost of raw materials now account for almost 70% of the costs, given the surge in commodity prices in 2022. Therefore, it is difficult to estimate the actual cost of the energy transition. 

(b) There would be a need of about $100-125 trillion cumulative investment till 2050 to get to carbon net-zero. It implies an annual investment of $3.5-4 trillion would be required in clean energy. But at present, total annual spending remains at the level of $1.5 trillion for the energy ecosystem. 

(3) The prospective of huge and visible growth will attract investors, but it does not always lead to shareholder value creation. 

What should be done? 

Energy transition is going to be the largest thematic investment opportunity of our lifetime.  There are huge investment opportunities for everyone involved. It can range from the banks funding the green transition to the companies putting up the plants to the technology providers. 

The Indian companies pivot to address the energy transition, must decide their niche areas where returns are higher and engineering capabilities matter.  

The Make in India cab provides opportunity for India to become one of the major investment destinations for green energy.