India could spend 11% of GDP in reaching net zero emissions by 2050: Report

India would need to invest a relatively large portion of GDP towards decarbonization: India’s annual capital spending on the transition would be about 11 per cent of GDP in the Net Zero 2050 scenario, compared to the global average of about 7.5 per cent of GDP. 

This is according to global consultancy McKinsey's report ‘The net-zero transition: What it would cost, what it could bring,’ that assesses the road to net-zero emissions by 2050 and the implications for the same.

Net Zero 2050 is an ambitious scenario that limits global warming to 1.5 °C through stringent climate policies and innovation, reaching net zero CO₂ emissions around 2050. 

Annual capital spending on physical assets in India would rise from around $300 billion in 2020 to an average of $600 billion between 2021 and 2050, McKinsey believes. 

"Much of that capital would be used to reduce the use of existing coal power and expand renewable-electricity capacity. In India, almost 40 per cent of spending would be in power. In addition to capital spending on low-emissions technologies, India may also have to invest more heavily than other countries in climate adaptation measures given their relatively high physical risk exposure to climate change," the report observed.

The impact of the transition would be felt unevenly across sectors, countries, and communities. Countries reliant on fossil fuels are most exposed to the shifts in a net-zero transition, although they have growth prospects as well. About 40 per cent of India’s GDP is in sectors most exposed to the transition, compared to about 20 per cent in many developed countries, according to McKinsey. 

Power generation would scale substantially and roughly double compared with today. Globally, the greatest increases in demand would be in sub-Saharan Africa (a sevenfold increase compared with today), India (fourfold), and emerging markets in Asia (threefold). About 95 per cent of electricity generation globally in this scenario in 2050 would come from sources other than fossil fuel combustion. 

"Asset stranding would be an acute risk in India as emissions-intensive assets are retired. The average age of coal power plants in India is less than 15 years, compared with more than 30 years in the United States," said the report. 

Despite India’s physical and transition risk exposure, India has an abundance of low-emission or critical transition resources and is geographically positioned to become a leader in the transition.

For instance, India has a high solar potential (5.1 kWh/m2/day) and potential for CO2 abatement through reforestation and afforestation (16 tonnes/km2).

“The economic transition to achieve net-zero will be complex and challenging, but India’s abundance of low-emission or critical transition resources and geographical position could allow it to become a leader in the transition. Our findings serve as a clear call for a well-considered, urgent, national plan, as an imperative for India to secure an orderly transition to net zero,” said Rajat Gupta, Senior Partner at McKinsey and Asia leader of McKinsey Sustainability. 

Globally, spending on physical assets for energy and land use systems would total around $275 trillion through 2050 — rising by $3.5 trillion per year for the next 30 years to about $9.2 trillion annually, as high-emissions activities are ramped down and low-emissions activities ramped up. 

Accounting for expected increases in spending, as incomes and populations grow, as well as for currently legislated transition policies, the required increase in spending would be lower, but still about $1 trillion. Spending would be front-loaded as global capital spending could rise to as high as 8.8 per cent of global GDP by 2030 before falling back to 7.5 per cent of GDP by 2050, McKinsey noted.