India should make data centres expand clean power supply: Nicholas Stern

Nicholas Stern says India must accelerate its shift to renewable energy to reduce its vulnerability to geopolitical shocks and volatile oil prices

Nicholas Stern, an environmental economist and professor at the London School of Economics, tells Asit Ranjan Mishra in an in-person interview on the sidelines of the 5th Kautilya Economic Conclave that India must accelerate its shift to renewable energy to reduce its vulnerability to geopolitical shocks and volatile oil prices. Edited excerpts:

 

How should countries, including India, deal with energy price volatility and geopolitical uncertainty?

 

There are two parts to the story: the short run and the medium term. In the short run, it is a combination of holding stocks, building reserves, and diversifying sources of supply. India has been building relationships with other suppliers, and it will have to maintain reserves, which comes at a cost.

 

In the medium term, the focus should be on reducing dependence on oil and gas. India's imports of oil and gas amount to about 5 per cent of its gross domestic product, making the country highly vulnerable. Developing alternatives is important for its security. It will also lower costs, because renewables are now the cheapest source of electricity in India, and help reduce air pollution in cities, which is a huge issue.

 

What alternatives should India look at? Could nuclear power be one of them? 

To build capacity quickly, India will have to turn to renewables. Nuclear power has a role to play, but it takes time to develop and is costly at the moment. The challenges of energy security and climate change are so severe that a portfolio approach, including nuclear power, makes sense. But nuclear power cannot be scaled up enough, quickly enough, to deliver the energy security and emissions reductions India needs.

 

Is climate finance fundamentally broken after the Paris Agreement? 

It has become much more difficult because many rich countries have cut back on aid and low-cost finance. I think this is morally reprehensible, but it is a fact of life.

 

Low-cost climate finance will therefore have to expand through the multilateral development bank system. These banks have unused firepower, and even small increases in capital could enable them to lend more. They can lend at 4-5 per cent, at rates much better than those markets are willing to offer, and do so without subsidies because they can borrow so cheaply.

 

Several of these banks have no US shareholding, including the Asian Infrastructure Investment Bank and the New Development Bank, in which India plays a big role. The European Investment Bank, which has also invested heavily in Indian metro systems, is another example. The World Bank is an important part of the system, but people sometimes treat it as the entirety of development banking. The system as a whole has far more capacity to expand lending.

 

The Group of Twenty (G20) report on reforming multilateral development banks, chaired by N K Singh and Larry Summers, does not seem to have gone far. Has it had any effect? 

I was part of that group, which was set up for India’s 2023 G20 presidency. I think the report has had an influence. It has pushed the banks to consider their lending capacity and how much more they could do with a modest increase in capital. For example, we have seen greater use of guarantees in the World Bank group. The report has changed the debate, and my instinct is to keep pressing because its conclusions were very sound.

 

Will the artificial intelligence (AI) and data centre boom help or aggravate climate change? 

AI itself can play a very positive role, and it is the job of policymakers to steer it in that direction. Managing energy and transport systems, as well as congested, polluted cities, is a data-intensive task. AI can help discover new materials for batteries and chips. It can also help with adaptation and resilience by showing where climate impacts are likely to be most severe and where vulnerability is greatest.

 

Data centres are an issue, particularly at the local level. By the middle of this century, AI data centres might account for around 5 per cent of total electricity consumption. That is a relatively small share, given that transport, heating, and cooling are also being electrified. AI demand is therefore part of a much broader expansion in electricity demand and supply.

 

In the short run, however, data centres can account for a very large share of the expansion in electricity demand in some regions. People understandably get upset about noise, water use for cooling, possible power cuts and price increases, as we are seeing in the US. Those who build data centres should be required to provide their own renewable electricity supply and avoid harming local communities.

 

India is pushing to become a data centre hub, with tax incentives until 2047. Should it be incentivising data centres? 

India has a great deal to contribute to the development of AI, particularly its application, so having data centres in India makes sense. But given the pressure on India’s electricity supply, those who want to build data centres must contribute directly and substantially to expanding that supply in a way that is kind to both the local and global environment.

 

India has abundant sunshine. If data centres run on solar power and battery storage, they could make a real contribution to India’s role in AI. The onus should be on developers to help expand clean electricity supply.

 

Is over-reliance on China for critical minerals a deterrent to the green transition? 

The concentration of supply is a problem, but a few countries could help solve it. The issue is less where the minerals are located — lithium is found in many places — than where they are processed. Another three, four or five major processing centres would break the monopoly. India should be one of them, and the US could be another. This requires collaboration and a global strategy, but it should be a short-term problem because processing facilities do not take long to set up.

 

The European Union’s (EU’s) Carbon Border Adjustment Mechanism entered its definitive phase in 2026, and India calls it a unilateral trade barrier. Is it legitimate carbon pricing or protectionism? 

I think it is justified. Europe has a high carbon price, which raises the cost of producing steel and other goods. Ensuring that imports face the same carbon price levels the playing field, and that is not protectionism. It is justified under World Trade Organization rules and precedents. It also accelerates the shift to cleaner production.

 

But I have argued directly to EU leaders that the mechanism must be designed so that it does not become protectionist. It should be confined to a few industries, such as steel, cement, and aluminium, where carbon content can be measured directly and where it is possible to check whether the exporting country has carbon pricing or equivalent policies. If the mechanism is extended widely and lacks transparency, protectionism can be smuggled in. So the problem is not the essence of the policy but the way it might be applied.