India’s Climate Finance Requirements – Steel and Cement Overwhelm Power

India faces a pressing challenge of aligning its developmental aspirations with a sustainable and low-carbon path, necessitating immediate and targeted climate action. Various studies have estimated the climate finance requirements of India in the range of $160-$288 billion annually up to 2030. All these estimates are model-based and have followed top-down approaches that fail to address granular and sector-specific climate finance requirements.

The overall estimated climate finance or additional capex for India’s four key CO2 emitting sectors is estimated at $467 billion from 2022 to 2030, with an annual average capex of $54 billion or 1.3 percent of India’s GDP

Our new study, “India’s Climate Finance Requirements: An Assessment,” adopts a bottom-up approach, focusing on four key carbon-emitting sectors – steel, cement, power and road transport – that together accounted for over half of India’s carbon emissions in 2023. The study assesses the additional capital expenditure (capex) India would require to decarbonize these sectors, beyond the capex projected under a business-as-usual (BAU) scenario up to 2030.

Our study employs two distinct methodologies for the four sectors. For the power and road transport sectors, climate finance is estimated as the additional capital expenditure required for a progressive transition from fossil fuel-based sources to renewables (power) and from internal combustion engine vehicles to electric vehicles (road transport). For the steel and cement sectors, climate finance is estimated as the total capital expenditure required to mitigate existing as well as incremental carbon emissions that will arise in these two sectors up to 2030. In addition, the study also examines the macroeconomic consistency of estimated climate finance requirements and evaluates the fiscal space for financing climate action by the public sector.

Estimating Climate Finance Needs in Key CO₂ Emitting Sectors

The overall estimated climate finance or additional capex for India’s four key CO₂ emitting sectors is estimated at $467 billion from 2022 to 2030, with an annual average capex of $54 billion or 1.3 percent of India’s GDP (Figure 1). In other words, India would require $467 billion in additional climate finance to decarbonize just these sectors by 2030.

Note: The period covered is 2022-2030 for the steel and cement sectors, 2024-30 for the power sector and 2023-30 for road transport.
Source: Authors’ calculations.

Thus, contrary to the common narrative, the power sector does not entail large additional capex for abating carbon emissions in India when compared to steel and cement. Ironically, power is the sector that has received the most attention in mitigating the impacts of climate change.

Of the total estimated additional capex requirements, $392 billion alone is estimated for two high-emitting sectors, viz., steel ($251 billion) and cement ($141 billion). India’s steel sector faces large capital requirements because of rising production levels and carbon-intensive production methods. The sector is projected to grow by over 80 percent by 2030, i.e., from 125 million tons in 2022 to 225 million tons by 2030. India’s carbon emission intensity (tons of CO₂ produced per ton of steel) of 2.4 significantly exceeds the global average of 1.85.

India’s cement sector requires $141 billion additional capex, driven mainly by its dependence on coal for power generation and kiln operations, despite using efficient dry process technology. While the sector has a lower carbon intensity of 0.44 compared with the global average of 0.6, a sharp increase of 82 percent in projected cement production, from 370 million tons in 2022 to 674 million tons by 2030, significantly drives up the capex required for decarbonizing the sector. Both steel and cement are hard-to-abate sectors where reducing emissions is particularly challenging. Decarbonizing these sectors requires mainly the use of carbon capture and storage (CCS) –  the only feasible technology at this stage, but it is expensive to deploy.

India is estimated to require capex of about $57 billion for the power sector up to 2030. This also includes energy storage costs (battery storage costs and pumped storage costs) for renewable energy, which are estimated to entail capex of $10 billion. Thus, contrary to the common narrative, the power sector does not entail large additional capex for abating carbon emissions in India when compared to steel and cement. Ironically, power is the sector that has received the most attention in mitigating the impacts of climate change.

It is the steel sector which emerges as the most critical in terms of additional capex, followed closely by the cement sector. These findings underscore the substantial investment challenges in these hard-to-abate sectors, primarily driven by their carbon-intensive production methods and/or large production levels

India is also estimated to require $10 billion for switching over from internal combustion engine vehicles (ICEVs) to electric vehicles (EVs), and additional capex of $8 billion to develop the charging infrastructure for EVs. Thus, additional capex for road transport is estimated at $18 billion up to 2030.

Based on the above estimates, decarbonization of the four sectors would result in a large reduction in the use of fossil fuels – 291 million tons of coal and 72 billion liters of petrol and diesel – and mitigation of 6.9 billion tons of CO₂ in the power, steel and cement sectors. The road transport sector could not be included in CO₂ mitigation estimate as the relevant data was not readily available.

Conclusion

Our study presents a distinct perspective compared with existing research on India’s climate finance needs by estimating additional capex requirements in addition to capex already planned for the economy in the BAU scenario. The study disapproves the common narrative that the power sector needs large climate finance. It is the steel sector which emerges as the most critical in terms of additional capex, followed closely by the cement sector. These findings underscore the substantial investment challenges in these hard-to-abate sectors, primarily driven by their carbon-intensive production methods and/or large production levels.

The need for climate finance has arisen at a time when India is stepping up efforts to accelerate its growth rate by emphasizing physical infrastructure development and promoting manufacturing. As our findings demonstrate, India will need to manage its resources skilfully, balancing the competing demands of growth priorities and decarbonisation of the economy.

India will need to manage its resources skilfully, balancing the competing demands of growth priorities and decarbonisation of the economy.

Furthermore, India’ saving rate has declined in the recent period. Therefore, the key focus of policymaking needs to be on improving the saving rate of the general government (by reducing dissaving) and of the household sector. This would help India navigate the challenges of pursuing development goals and achieving the country’s environmental and sustainability targets without complicating macroeconomic management.