Silver Linings not Silver Bullets

The human capacity to innovate is what separates us from apes, but there are clichés about being one’s own worst enemy for a reason.  Advances dating back to the first industrial revolution have simultaneously improved human quality of life at an aggregate level and increased population through extended lifespan, while slowly and silently putting us out of equilibrium with Mother Earth. And we all know nobody wants an upset mother.

As the economy grew, humanity ignored Newton’s laws – every action has an equal and opposite reaction.  Scientists started reporting climate changes in the early days of the industrial revolution.  Economists warned us about forgetting to account for the tragedy of the commons. Now, as we see more and more climate change-related extreme weather events, our bill for unfettered growth, living beyond the carrying capacity of the planet, has become due.  

This year, one of the main objectives of COP is reviewing the Global Stock Take – an exercise to understand exactly what has happened since the Paris Agreement was ratified and set new goals aligned to today’s reality.  One challenge is that the government data sets that feed analysis are typically dated. However, debating the nuance can seem superfluous considering ground realities. 

In 2023, multiple global temperature records were broken, and a great number of fires, floods, droughts, extreme heat waves, and other extreme climate-related events reached unprecedented 

levels resulting in tens of billions of dollars in damage. The planet will close the year with an average 1.4 ° C warming above pre-industrial levels, recording the hottest year on record according to data from the World Meteorological Organization (WMO). 

Against such a background and consensus that climate action has not made nearly enough progress, it is natural to try to look for quick fixes.  

Systemic problems require systemic solutions

Despite advances in micro-nuclear, nuclear fusion and the promise of green hydrogen, these ‘breakthrough solutions’, with an ability to create endless amounts of free or low-cost clean energy, are not silver bullets.  One problem alone did not cause climate change, and as much as technologists may wish differently, one solution alone cannot address the scale and scope of the challenge.

 This is not to say that we should not invest in these technologies or commercialisation of a myriad other up and coming and/or proven climate technologies. Each of these technologies and many others may play a valuable role in the energy transition, but none is ready for full deployment, none can solve all of our energy needs efficiently, and none is without unintended consequences. (details in call out box)

Also, each of these only addresses energy, which is only part of the problem. Climate change is caused by and effects so much more.

The transition to a green economy will be the next industrial revolution.  Every part of the global economy must be included.

Like its predecessors, this industrial revolution will necessitate changes in the means and mode of production and it will affect nearly every sector – energy, industry, agriculture, transport, buildings, mining and deforestation to name the big ones. Early participation in the energy transition will set the foundation for the green transition, but this is only the beginning. 

Further, like its predecessors, this industrial revolution will lead to the largest transfer of wealth in history. This could be good, creating a more inclusive economy or it can further exacerbate economic disparities.  How closely India marries its economic development to the green transition will have as much, if not more impact on socio-economic development as initiatives targeting a just transition. 

The Making of the Green Industrial Revolution

Industrial revolutions are borne of rapid adoption of new innovations that fundamentally transform economic development, often paired with new financial instruments to enable rapid dispersion. In this case, the drive for new technologies is in response to the scope and scale of changes required to keep climate change within liveable temperature bands. 

This will require nothing short of replacing the vast majority of chemicals, materials and processes used in the production of goods, food and services associated with a developed middle-class lifestyle. How homes and roads are built must change, as must how factories operate. 

For India, the fastest growing major economy, this is especially true.  By 2030, manufacturing and energy requirements are projected to double, while consumer spending is expected to reach $6 trillion a year – a full 1.5x the current national GDP. 

To achieve the promise of India’s economic development will require that new and existing manufacturing decarbonise early, accelerated adoption of innovations with a viable value proposition and dramatically improved capital efficiency. 

If India follows China’s emissions trajectory as it develops, it will use 70 per cent of the global carbon budget. This means that even if the US, Europe, Russia, China, the Middle East, and other developed nations ALL meet net-zero objectives by 2040, the planet would not be able to stay below 2° C.  None of these economies are on target to reach net-zero within this time frame. 

Silver Linings

Leaders in Indian industry (like Mahindra, Tata, Dalmia, Jindal to name only a few) have been early adopters of decarbonising technologies like heat pumps and new materials, with Indian cement having the lowest average carbon footprint amongst major economies. Similarly, corporates working with start-ups benefit from better access to technology, faster development time and can offer higher return on investment. 

Early transition is already reaping economic benefits for these companies through immediate cost benefits, shareholder pricing and competitiveness in international markets. 

Drawing lessons from these industrial leaders to green SMEs and industrial production is one step in India keeping its per capita carbon usage in check.  Another is to develop pathways for rapid adoption of innovations with cost effective emission reductions. 

To accelerate the adoption of such innovations – technologies or processes – often requires mechanisms to achieve techno-commercial validation, aligning business models and capital structures to the reality of the market, and access to appropriate capital. 

To be viable, climate innovations must be price and quality competitive.  To build climate viable businesses we cannot fight human nature. Price, aspiration, and convenience are the drivers of consumer decision-making. As climate change has become mainstream and climate-friendly products have become aspirational, market forces have shown consumers will make luxury, identity and low-cost impulse purchases despite price. In the vast majority of instances, however, climate-friendly goods must be better, cheaper and/or significantly more convenient than the status quo to achieve adoption. 

This is one of the areas in which India’s innovators truly shine

It is only when climate innovations are price and quality viable that funds will flow freely, but more capital or higher capital efficiency will be necessary to achieve climate and economic development goals.

Niti Aayog estimates that India needs $160 billion dedicated climate investment per year through 2070 to achieve its net-zero goals. This does not include economic development, investment or social inclusion requirements. This quantum of capital is not available at present.

Industrial revolutions often require adaptations in the financial markets to achieve rapid adoption and scaling of technology availability. A few financial adaptations that would support the transition include:

• Incorporation of climate risk in loan underwriting to equalise or benefit green financing terms – interest rates should not be dramatically cheaper for new dirty technologies when proven green technologies exist.

• Availability and reliance on equity to adequately reduce technology and business risk to create appropriate pipelines for lenders. Equity is intended to be higher risk capital than loans. In properly functioning markets, equity is intended to de-risk companies. When loans are de-risked, interest rates and NPAs should both reduce.

• Results-based financing can be leveraged to help agrarian communities transition and participate in the economic benefit of the green economy.  Registration and certification costs are prohibitive for low-income participants most in need of the economic benefits carbon markets offer. India’s farmers are responsible for food security.  More than any other group, agrarians will bear the brunt of climate change and need support in the transition.

• Regulations that carbon and similar credits only be used to offset emissions that cannot yet otherwise be mitigated.

Climate change impacts will not be limited to extreme weather, health, and price increases.  It impacts larger economic markets through supply chain disruptions and shifting commodities prices. We have only seen the early impacts of climate change. Baked-in emissions and transition timelines assure that impacts will become more intense and extreme. 

Innovation across industry, policy, and finance will all be required to meet the risks and opportunities of the climate challenge. 

Embracing systemic and coordinated changes based on market viability will be necessary. Silver bullets may be part of the solution but building on its many silver linings will be India’s true strength.