21 June 2023
Author: Sumant Sinha, Chairman & CEO, ReNew
Indian Prime MinisterNarendra Modi is on a landmark visit to the U.S. The visit holds tremendous significance for both countries as they work to promote deeper economic and defense ties, strengthen technology partnerships, and overcome shared challenges. At this juncture, however, there is no bigger challenge for investors, businesses, and governments than climate change. New partnerships between the two countries to accelerate the clean-energy transition should rank at the top of their priorities.
As large economies and major greenhouse-gas emitters, the U.S. and India play a critical role in driving the energy transition. Collaboration will be critical to ensure that the investment and market conditions align with global clean-energy ambitions. The two governments should pay keen attention to four broad areas.
A crucial first step is to coordinate monetary-policy management.The U.S. Federal Reserve has raised interest rates ten times since March 2022 in an effort to counter inflation. This has had an adverse impact on clean-energy companies in India, and around the world. Financing costs have increased globally, which is impacting the capital-intensive cleantech industry. It is also leading to downward pressure on the rupee, making it more expensive to import the necessary components to deliver clean-energy projects. More coordinated monetary-policy management by central bankers could go a long way.
Second, it’s important to facilitate trade and investment in each other’s clean-energy markets. The U.S. has committed to a goal of 50-52% reduction in greenhouse gas emissions by 2030 compared to 2005 levels and 100% clean electricity by the year 2035. India, under Prime Minister Narendra Modi’s leadership, has an equally ambitious goal of 500 gigawatts of non-fossil-fuel electricity generation capacity by 2030. Massive investments, amounting to trillions of dollars are needed for this. Meeting the goal also requires large quantities of solar modules, wind turbines, batteries, and other components. Most important, it needs companies that can profitably operate in each other’s markets, since almost all of the implementation will be done by the private sector, not by the government.
The landmark U.S. Inflation Reduction Act presents an immediate and massive opportunity to scale up trade and investment in clean energy. The two countries should look to replicate what the U.S. has done with the U.K., Canada, and Australia. Products produced in those countries may be treated as domestically produced in the U.S. for the purpose of incentives under the IRA. Without similar treatment, Indian companies operating in the U.S. market in areas such as green hydrogen or critical minerals will be at a potential disadvantage. A similar political agreement between the U.S. and India could help avoid this situation.
Collaboration to ensure that the clean-energy transition is not dependent on one country for supply chains should be another key aspect during the visit. India presents a credible alternative to China for the U.S. clean energy market, from the perspective of quantities of supply to meet demand and from a geopolitical standpoint. For example, India is likely to have an oversupply of solar modules in two years, while the U.S. will be a net importer. The U.S. and India do not have a Bilateral Investment Treaty, but structured facilitation by the governments and support for coupling between the companies in the two countries could go a long way.
Third, strong support for corporate decarbonization is needed. Globally, the corporate sector accounts for almost 70% of greenhouse gas emissions. A material impact on emission reductions will only be possible with a push for corporate decarbonization. A large number of companies have started disclosing their emissions, but few are providing information about the biggest source of emissions. These are so-called Scope 3 emissions, which are produced indirectly in a company’s value chain. The European Union already has an emissions trading scheme for domestic producers and the upcoming Carbon Border Adjustment Mechanism, which will attempt to put a carbon price on imports. The U.S. and India must also think of ways to push for greater corporate disclosures and action.
The final piece of the puzzle is to explore the integration of carbon markets.Both India and the U.S. are already thinking of expanding or launching new carbon-pricing instruments. Fragmentation has been the bane of carbon markets in delivering necessary emission reductions. To counter this, many countries are signing bilateral cooperation agreements to implement Article 6.2 of the Paris Agreement, which creates a structure for countries to agree to trade emissions reductions. India and Japan recently announced such a plan. The U.S. and India are natural partners for such an agreement. Integrating their respective carbon markets would help achieve emission reductions efficiently, at scale, and at an overall lower cost.
To save our planet from the existential threat of climate change will take concentrated efforts and close partnerships between nations. The Indian premier’s visit to the U.S. is an opportunity to leverage the power of two large, committed nations to work together on the nuances of delivering the clean energy transition now—when it’s needed the most.