A cap-and-trade system will help slash emissions more efficiently

It will equalize the marginal cost of reducing emissions across sectors and also generate some revenue for the government

- MONTEK SINGH AHLUWALIA & UTKARSH PATEL

The announcement that India would reach net zero emissions by 2070 has triggered much discussion on what needs to be done in different sectors. This is a good start; the transition will require government support and policy intervention in many sectors and ministries should work to evolve a credible and internally consistent medium-term strategy consistent with that long-term objective.

A missing element in the discussion thus far is the potential role of relative prices in incentivizing a shift from fossil fuels to renewable energy (RE). If low/zero-carbon alternatives were fully price-competitive with conventional fuels today, the shift would be reflected in all new investments automatically. But this is not the case. Both solar and wind power plants have shown sharp declines in cost, but both are intermittent, which means investment in grid-scale batteries or pumped hydro storage is needed to ensure a stable supply of electricity. When these costs are added, RE is more expensive than coal-based power at present.

Left to themselves, discoms would not want to shift to the more expensive option. The government has therefore stepped in with administrative directions forcing discoms to purchase a portion of their electricity from RE sources and also announced that this will rise over time. Something similar is being considered for fertilizer and oil refineries to meet part of their hydrogen needs from green hydrogen.

A price-based solution would be to impose a carbon tax on emissions. Such a tax, applied at an appropriate rate, would ensure that all units would shift to RE. It would also generate additional revenues that could be used to finance climate- related public expenditures and also to offset any adverse distributional effects of the additional tax incidence.