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Analysis: What does Budget 2022 say about Energy, Environment and Climate Change?

Analysis: What does Budget 2022 say about Energy, Environment and Climate Change?

A man in a mask rides a bicycle on a cloudy morning in New Delhi, India. October 28, 2019, REUTERS/Adnan Abi

The Union Budget 2022-23 promises to address climate change and sustainability. Its approach to these issues is both forward-looking and promising. It promises a low carbon development strategy that will lead to job creation and views the climate change agenda in a positive light.

The speech explicitly uses energy transition and suggests that cities should be re-imagined as places of sustainable living. Furthermore, the speech highlights green energy and clean mobility as potential sunrise opportunities. This language is used throughout the speech and is not confined to a section on sustainability or about climate change. It shows that India’s approach to sustainability is serious.

However, a closer look at the budget’s inner workings shows a much more mixed picture.

Need for low-carbon and climate-resilient developments

Gati Shakti is a bold attempt to stimulate growth by significantly increasing capital expenditure in infrastructure in seven areas. This includes roads, railways and airports. There is no denying that there is a need for such stimulus spending in a context of pandemics.

It is clear that large capital investments in India will set the direction of its development. It would have been desirable to see more evidence that these funds can also help India move towards a low carbon future and greater climate resilience. Gati Shakti explicitly mentions clean energy. However, some investments may actually do so such as high-efficiency trains and investment in clean energy. If not carefully chosen, investment in roads, ports, and other infrastructure could fall short of this standard.

Gati Shakti must stimulate the economy and promote low-carbon, climate resilient development in order to actively mainstream sustainability. It must consider the high likelihood that economic disruptions will result from climate impacts when implementing it. Many of the infrastructure here will be able to withstand extreme events well beyond mid-century.

Energy transition could be one-dimensional

The Budget 2022-22-23 emphasizes energy transition by making this a part the Amrit Kaal Vision and an instrument for Atmanirbhar BharatWhile supporting the Prime Ministers Panchamrit narrative. However, this narrative is not fully consistent with the allocations thrust and incentives.

It is important to allocate an additional Rs 19.500 crore for Production Linked Incentive for high-efficiency modules. Priority will be given to fully integrated manufacturing units, from poly silicon to PV modules. The finance minister has rightly highlighted the importance of combining domestic manufacturing with renewable energy promotion, which has been given insufficient attention in the past.

PLIs have helped to increase production. But, domestic manufacturing can only be sustained if there is technology intellectual property and access the rare and critical minerals. Budgetary allocations for research-and-development would have been a valuable complement to the budget.

The energy storage sector is an important pillar in the energy transition. Its demand will increase in tandem with the addition of renewable energy capacity. The inclusion of energy storage systems (dense charger infrastructure and grid-scale batteries) in the harmonised infrastructure list is a welcome move that will allow for credit availability for deployment.

India’s energy transition is incomplete without paying attention to the long-term and medium-term roles of coal in India’s energy economy. India is dependent on coal for short-term purposes, but it must also be prepared for the future. It would have been a positive signal to start thinking about a long-term, just transition in coal-dependent countries that focused on alternative jobs. Moreover, despite past budgets being amended to include provisions for retirement and compliance with environmental regulations for polluting old coal power plants, no state action has been taken. The budget missed an opportunity for state-level action.

The Revamped Distribution Sector scheme allocation of Rs 7,566 crore may not be sufficient to fund the envisioned distribution network upgrade, which is crucial for 21st-century energy transition. The allocation is comparable to previous schemes, even though enabling energy transition will require more investment in the distribution network. The burden of upgrading distribution networks and smart metering is now being borne by the bankrupt discoms as well as cash-starved countries. While the budget provision to allow states a fiscal surplus of 0.5% of GSDP tied to power sector reforms may help to meet some of the investment requirements it may also exacerbate the discoms debt crisis.

Green hydrogen is not mentioned in the budget, although it was discussed extensively during the preparations. This may be a good thing, since it is important to have well-developed plans for a new technology push such as green hydrogen rather than making hasty pronouncements. It is also important to lay the foundations for transformative clean technology innovation. In the next year, it would be helpful if there were steps in this direction. This could lead to a substantial announcement in a future budget.

Air pollution: Missing piece, with the risk of backsliding

Budget shortfalls include a lack of attention to or even steps backwards on air pollution. The Commission on Air Quality Management’s financial allocation has been reduced slightly, while the National Clean Air Programme’s allocation remains flat. There is little progress in addressing this systemic problem beyond funds that were allocated to urban localities under the 15th Finance Commission grants. In order to achieve the longer-term goal for better ambient air quality, the government must invest more in regulatory, monitoring (especially in periurban and rural areas), as well as enforcement capacity. This is not what the budget can do.

Surprisingly the budget could undercut one of India’s recent successes in fighting pollution by rapid expansions of LPG for cooking via the Pradhan Mantri Ujjwala Yojana. Budget estimates for 2022-22-23 only allocate Rs 4000 crore for LPG subsidies, down from more than Rs 12,000 crore in 2021-22 and more than Rs 26,000 crore 2020-21. This is likely because LPG subsidies via direct benefit transfer were stopped in May 2020 due low global oil prices. However, domestic LPG prices have risen by more than Rs 300 per cylinder since then.

Due to sharp price increases and the COVID-induced economic downturn, domestic LPG will be unaffordable for most PMUY beneficiaries. These subsidies should be restored immediately to ensure that the gains made in the transition of households from traditional fuels to cleaner LPG are not wasted.

Importantly, the PMUY is being omitted from policy discourse. Household cookstoves are the largest source of air pollution in the country and cause over 680,000 deaths annually, primarily among young children.

Although there are two areas that indicate possible advancements, more information is needed: public transportation and biomass for power stations. It is encouraging to see a shift in public transport in urban areas, partly thanks to changes in the EV ecosystem. The details are sparse, and a large-scale move towards public transport in urban areas would require significant reforms to transport policy and investments in public transport infrastructure beyond metro systems.

Moreover, the report does not mention any changes in rural transport policy other than additional road-building. There are indications that biomass pellets will be used more in thermal power plants. This could be to aid stubble burning, but it is not clear what structures have been created to facilitate this increase or whether it will lead to a decrease.

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EVs get a shot in the arm

Budget support for electric vehicles adoption is one of the strongest signals. The introduction of a battery swapping policy and interoperability standards is a bold step. Given that batteries make up a large portion of the cost of an EV and there is limited space in Indian cities, as well as the availability of charging stations, allowing batteries to be offered as a service through a swapping program would help increase EV adoption.

The FAME India subsidy scheme allocation was increased to Rs 2,908 Crore for FY 22-23 from Rs 800 crore in FY 21-22. This is a significant increase for EVs. The PLI Scheme for National Programme on Advanced Chemistry Cell Battery Storage (ACC) has received an additional Rs 3 crore. This scheme aims to create large-scale cell manufacturing capacities in the country. This budget includes the promise of special mobility zones that will allow EVs to drive in zero-emission vehicles.

Importantly, the promotion and use of EVs is done in the context of a greater emphasis on transit-oriented development and the aspiration to promote public transportation in urban areas. The budget for MRTS projects has increased to INR 23,875 crore for FY 22-23 from a revised INR 23,480 crore in FY 21-22. This simultaneous emphasis upon EVs and public transportation is a useful signal. This is incorporated in a larger vision of urban transformation. The form of which is left to a high level committee. These announcements indicate the potential for significant future changes in urban transport.

Finance and approvals

The budget signals an intention of mobilising funds for climate- and energy investments through several measures. These include sovereign green bonds to mobilize finance for green infrastructure projects; promotion and participation in thematic funds for blended financing, in which the public will have 20%; a blended capital fund through NABARD for rural startups and innovative finance for suitable metro systems at scale. Although the exact amounts and modalities of these steps are still to be determined, they signal an increasing interest in financing sustainable development and a recognition that the private sector plays a significant role in this.

Protecting the environment

The government’s focus on minimum government and maximum governance continues. However, there is a risk that environmental safeguards could be compromised in the pursuit of efficiency gains.

The budget has, at least rhetorically, included energy and climate actions, but it does not include a similar emphasis for ecological protection and conservation. The Ken-Betwa Link Project, which promises five more, includes provisions for clean power generation solar and hydro, but these gains could be at the expense of fragile ecological balance.

Need a strategy framework to support green transition

A budget document can’t define the course of a green transformation. However, it should allocate funds for its implementation as well as send signals about its importance. India needs institutions that have the ability to provide long-term visioning, strategic thinking, and long-term analytical capabilities to chart low-carbon, job-creating and climate resilient transitions. The allocation of funds to support these institutions is an important part of future budgets.

This article was published for the first time on CPRsEnvironmentBlogThis article has been republished with permission.

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