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[East Asia Forum] India’s green industrial policy

May 18th, 2013

Author: Ashwini K Swain, Delhi

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After the global financial crisis governments were asked to support industrial activities, and eventually many states decided to restructure their industrial policy.

After all, there is a new reason for industrial policy — the problem of climate change.

Governments now concentrate on green industrial policy, which involves essential policy changes to price resource consumption. It is different from conventional industrial policy in two ways: first, it requires different policy instruments; second, it involves stronger state engagement in markets. India, especially, seems to be pursuing green industrial policy, but will it actually lead to green growth and sustainable development?

India prioritised the production of clean energy as an alternative to fossil fuels to meet rising industrial energy demand, impose energy efficiency measures to tame demand, and set a target to raise its renewable energy capacity to 74 gigawatts by 2022, a figure that includes 22 gigawatts of solar capacity. With an installed capacity of 27.7 gigawatts of renewable energy (13 per cent of total installed capacity), the country is already a global leader. Over the 12th five-year plan(2012–17), it aims to install renewable energy facilities able to produce 30 gigawatts of power. The federal price tag is around US$4 billion, but the government is relying a great deal on the private sector. The state’s role has been to set up a favourable policy environment through regulation, incentives and R&D support.

For example, each subnational electricity regulatory commission has set a specific‘Renewable Purchase Obligation’ for their utilities companies so that corporations source electricity from renewable sources. In the first year of the scheme, fiscal year 2009–10, the national target was set at 5 per cent. The target is now 8 per cent and will increase 1 per cent a year for the next seven years. The aim is for utilities companies to procure 15 per cent of their electricity from renewable energy sources by 2020. If the companies fail to meet their target they have to purchase a ‘Renewable Energy Certificate’, which is issued to producers of renewable energy who sell their product on the open market.

So renewable energy generators have a choice: they can trade electricity at a preferential tariff or trade their certificates separately after selling electricity at the market rate. India is also helping generators and manufacturers with R&D and giving tax credits to companies that import renewable energy technology like solar panels.

India’s target for energy efficiency is equally ambitious. It aims to save 10 gigawatts by 2014–15 and thus avoid installing 19 gigawatts of additional generation capacity. Again, India is using the market to achieve its objectives. Energy-intensive industries, which account for 60 per cent of India’s total primary energy consumption, will have to meet certain efficiency targets. Those who achieve gains beyond their target will be rewarded with an energy saving certificate; those who fail to meet their target can buy certificates to make up the difference or face a financial penalty.

Simultaneously, the state is trying to transform the market to promote the production and use of energy-efficient appliances in designated sectors. While manufacturers are being encouraged to make super-efficient appliances, products are being labelled to raise consumer demand for efficiently produced goods.

While in the past, the Indian state retained control over the economy, with its current industrial policies the government is letting the market do the job. India realises that on its own it cannot transform the energy market so it is seeking to build up market players, pick winners and offer incentives to hasten development.

If India achieves its solar energy target, 95 million fewer metric tons of CO2 will be released into the atmosphere in 2022, which would be about 2.6 per cent of India’s total emissions in that year. By 2050, if solar development is continued at the same pace, Greenpeace estimates that 434 million fewer metric tons of CO2 will be released every year. At the same time, the efficiency target could prevent the release of 98 million metric tons of CO2 annually.

Though India has ambitious targets and policies in place, it is too early to say whether it will be successful in reducing greenhouse gas emissions. India will have to overcome its finance gap and lack of market transparency. Access to private finance is crucial for the development of a clean energy industry, but current interest rates are too high and financing institutions remain reluctant to invest. The government does not yet have a comprehensive strategy so that new companies can access money to invest. The lack of market transparency that prevails in the sector may result in rent-seeking and market distortion. A study by the Centre for Science and Environment reveals how a major conglomerate has subverted the rules to acquire a stake in the solar incentive scheme that is much larger than legally allowed. The state needs to provide real-time information that the public trusts and can use to hold it and private companies accountable.

These challenges are not insurmountable. India will need to improve state–business relations and the capacity of its private sector, and untangle interests from the policies that control them. But if it is successful India could lay out a path for green growth in developing countries.

Ashwini K Swain is a Delhi-based independent researcher and energy & climate policy analyst. He tweets @AshwiniKSwain.

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