India’s Leadership and Global Challenges of Climate and Finance

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Rob Johnson:

This is Rob Johnson, President of the Institute for New Economic Thinking. I’m here today with Adair Turner, who from, how I say, many different dimensions, has been an enormous supporter and illuminator of INET and INET’s agenda. Adair has been our board chair. He was the keynote speaker at our first conference in Cambridge, England in 2010 April. He’s been the head of the Commission on Global Economic Transformations Energy Subcommittee, and he’s a leading member of that entire endeavor that’s co-chaired by Michael Spence and Joe Stiglitz.

The Energy Transition Commission based in England, of which Adair is the chair, is really at the vanguard of working both with public and private institutions and trying to accelerate the progress we make in both the global north and global south with regard to energy transition. Adair, thanks for joining me today. This is a very, very interesting and critical time. India has been at the head of the G 20 and has a meeting coming up, and I wanted to reach out to you for your guidance as to where is the world going and where would you like to see it go, particularly as it pertains to energy?

Adair Turner:

Well, Rob, it’s great to be talking again within the auspices of INET and the Global Commission on Economic Transformation. These crucial issues across the world, multifaceted, of which one is the energy transition which we need to achieve. I think if you step back at the global level, our perspective is that we really do have an extraordinary mix of really terrifying challenges, a lack of progress in some areas, but startlingly good progress in the others. And I think that sets a context to think about what the world needs to do, what developing countries like India need to do, and what India needs to do in its role at the G20. So the challenge is that we’re running out of time. We are continuing to put up there a CO2 and other greenhouse gas emissions at a pace which is not yet actually coming down. We’ve committed to bring it down, but it’s not yet coming down. We are eating through the remaining budget of what the scientists tell us we can put up there in the atmosphere and still limit global warming to say 1.5 degrees or two degrees centigrade.

And we are running out of time. I think we are seeing already around the world today the impact of global warming at 1.2 degrees centigrade. We’re seeing that in huge wildfires in Europe this year. Enormous floods in China, in Northern China. Last year we had amazing floods and heat waves in India as well. At 1.2 degrees, we are seeing the imprint of climate change. Frankly, it’s going to be extraordinarily difficult to limit it to 1.5 degrees, given the trajectory that we’re now on. And it just takes time to shift around the super tanker of the global energy system. And if it goes significantly below 1.5 degrees to 1.7, 1.9, or even over 2.0, I think you have to realize that the effects on the global welfare will be catastrophic and they will be most catastrophic in the global south. Simply because one, a lot of the climate effects will be greatest and most difficult to deal with there.

And secondly, because poorer countries have less capacity to spend money on adaptation. So we face a hugely serious challenge and we are not shifting away from fossil fuels to new technologies fast enough. But here’s the good news; that technological progress is absolutely remarkable. I’ve been extensively involved in issues relating to climate change for 15 years now, that’s since I first became in 2008, the first chair of the UK Climate Change Committee committed to driving the UK to net-zero emissions by 2050. And in that time I have seen the development of technologies far faster than I dreamed was likely to occur. So the cost of producing electricity from solar PV by photovoltaics has come down about 90%. The cost of wind power has come down very significantly. The cost of batteries, either to be used in electric vehicles or to be used as a storage device, is down 85, 90%.

In the last year, with all the interruptions we’ve had to supply chains in COVID, to the Russia-Ukraine War, to the increase in interest rates for the first time in the major developed countries, there’s been a flattening out of that trend of declining costs. But we are absolutely confident in my energy transition commission that the trend is still there, and that cost or that trend of declining cost of batteries, of electricity produced from solar, from wind, and also key other technologies such as electrolyzers to make green hydrogen, that those are going to go on. So you have to live, I have to live in my own personal life as I engage in these debates with this sort of a split personality, I can get up really depressed about the fact that we haven’t yet turned the corner on emissions and just how bad it could be, but very aware of these technological possibilities.

So we now see that certain technologies, solar PV, heat pumps, and air conditioners are very crucial technology. Electrolyzers are progressing as fast as we need to build a zero carbon global economy by 2050. And we need to make sure that that pace is maintained, drive it as fast as possible, but we then also need to fill in some of the things that aren’t going fast enough. Let me give you a real specific example of that. In many parts of the world, the deployment of wind and solar is held up by the fact that we aren’t investing enough in grids, in transmission grids, electricity networks. And the crucial point here is that sometimes requires government roles to make it happen, government roles because grids are typically run by nationalized publicly owned companies. So you can end up with a situation where private enterprise is out there building lots of solar PV factories, lots of battery factories, but we don’t have the grids to connect the solar PV.

So that’s part of the background and I think the challenge is we have just got to accelerate the pace at which we grasp the possibility of some technologies which are transformational. And India is playing a major role in that domestically, India is very clear. It knows that it is one of the cheapest places in the world to produce solar PV electricity. It has new programs in place to drive the electrification of road transport, which will not only reduce CO2 emissions, but also will contribute hugely to local air quality with huge benefits for the health of individuals when you clean up city air. So India is playing quite a major role and many major Indian companies as well as the government are playing a major role.

And India is an interesting country because it is an intermediate. It is a lower middle income country, but within it are huge numbers of incredibly highly skilled people and companies. It has world-class companies within a lower middle income country. It has large amounts of domestic savings and investment. It’s in a very different position from, say, sub-Saharan Africa where we just don’t have those companies or that mobilization of capital. So the big picture, we’re not going fast enough, but the technologies, many of the technologies are there to enable us to, how do we as a world country by country and in cooperation, drive the pace of change faster than we are achieving at the moment.

Rob Johnson:

Yeah, I know, Adair, I want to share with our audience that in working with you really for almost 15 years, you were very prescient in seeing that the renewables costs were going down with work we did together in China and other things earlier on. And so I think it’s very credible what you’re saying. I don’t think this is, I’d say, an optimistic dream, but it sounds as if what we have is a very fast racehorse that we’ve discovered, but we don’t have a saddle and we haven’t learned to ride yet. And so we don’t know if we can win the race, but the potential of that horse to win the race is there. What I think is very interesting now is the amount of energy that I’m seeing from the scholarly communities and the policy communities, whether it be Al Gore or Larry Summers or our friend Armínio Fraga and others, that the need to understand that much of what is happening is what economists would call a public good.

That what you might call the magnets and the incentives of private finance alone may not be sufficient. And the need now, as people like John Kerry and Larry Summers and others have emphasized, for multilateral institutions to be turbocharged, to be stepping up, to be catalytic, particularly in those regions of the global south like Sub-Saharan Africa. But in many places, when you’re making the world safer for everyone, you’re providing public goods and the market’s incentives alone aren’t going to do that. But the awareness of the jeopardy upon which, how we say, we’re all subject to may create an impetus. How do we go from seeing that it’s a public good to realizing the capital flows that we need?

Adair Turner:

Well, I think it’s really important to talk about the finance which is required to drive this transformation. And the International Energy Agency based in Paris does a fantastic job at setting out the big figures. So broadly speaking, we’re heading in the right direction, but we’re heading too slowly. At the moment, a couple of years ago we were investing as a world about 2 trillion a year in the energy system of the world. About a trillion we’re still going into the old economy of the fossil fuel system, coal mines, coal-fired power stations, oil fields, gas fields, gas-fired power stations, et cetera. But a trillion was going into the economy of the future, renewables, nuclear, grids, electric vehicle factories, et cetera. The good news is that that new bit over the last three or four years has already gone up from about a trillion to about 1.7 trillion.

So the ratio of the new to the old has gone up from one to one to 1.7, but when you run it forward over the next 30 years, what are we going to do? That ratio of new investment to old investment has got to go from 1.7 to 4 to 10 to pretty much infinite as we expand the new investment and then reduce the investment in the fossil fuel system. And order of magnitude, and most people end up with this order of magnitude figures. You end up saying that by the 2030 or thereabouts, the world will need to be investing, say $3.5 trillion a year in the new energy system in order to be in all the countries of the world going fast enough that we can get to around net-zero emissions across the world by mid-century. Countries like the UK, Germany, US have set targets of 2050 to get to net-zero. Or in some cases earlier, China has said 2060, but I think we’ll get 95% of the way there by 2050. India has said 2070, but I certainly hope we’ll get most of the way there due by the 2050s.

To do that, we need to be at about $3.5 trillion a year of investment by 2030. Now the step-up which has occurred so far from 1 trillion to 1.7 trillion has been primarily in China where we are seeing extraordinary rollout of, for instance, solar PV just on an astronomical scale, stepping up in the US, stepping up in Europe, but so far not big enough in other countries of the world. And when we’ve run the figures, and other people have run the figures, by 2030 or so, if it has to go from 1.7 to 3.5, which is a rough doubling, within that, we need slightly less than doubling, maybe an increase of 50% in China, the US and Europe. But we need increases of four times in middle income countries, lower middle income countries, and in low income countries. We need a very big mobilization of capital. And the crucial thing then is where is this going to capital going to come from and at what cost will it be mobilized?

The cost of capital is hugely important when you are building a new renewable energy system because the new system which we’re building, and this is true whether it’s renewables or whether it’s nuclear or whether it’s a big hydro plant, they’re all low emission forms of producing electricity. They all have this feature. There is almost no operating cost. All that matters is building the asset upfront. You have a set of assets which are basically large capital investment upfront, close to zero marginal cost of operating them. Different from a fossil fuel plant like a coal generating plant, which has a capital asset, but there’s also a lot of ongoing operational cost to buy the coal to burn in it. And what that means when you think about it is that if you have an energy system whose structural characteristic is lots of upfront cost, very low marginal cost, the cost of capital becomes crucial.

The economics of the annualized average total cost of operation depend crucially on whether that initial capital was available at 4% real or 10% real or 20% real. We’ve been doing a lot of work in sub-Saharan Africa recently looking at the economics there. And here’s the challenge, if in sub-Saharan Africa you could do solar PV or wind developments at the same cost of capital that applies in Europe, you’d hardly build any fossil fuel plants at all. You would build wind and solar right from the beginning. You’d just skip a generation and build an electricity system. But if the cost of capital isn’t say 4% real, but 10% real, it’ll make sense to build some gas turbines, cheaper to install upfront, but more expensive to run. And if like in war torn and troubled areas of Africa, the cost of capital at the best is 25% or more, you’ll buy what’s called a diesel gen set, which is a nice cheap capital asset even though you’re going to spend a hell of a lot of money on running it over time.

The cost of capital is really crucial. We have a structural change that we have to do where the relative cost of capital is crucial. And of course what we have across the world is the cost of capital varies hugely country by country, it varies according to risk. It varies according to the scale of the development of the domestics savings pool. India, as I mentioned earlier, it does have a large domestic savings pool. It actually has quite a high savings rate. It has a increasing middle class who have significant savings, so it has a significant ability to mobilize domestic savings. You go to sub-Saharan Africa, there’s very little ability to mobilize domestic savings, but even in India, the cost of capital is still significantly higher than it is in Europe. So we’ve got to achieve these very big flows of capital and we’ve got to make sure that they are there at an affordable cost of capital, and that isn’t automatically happening through an entirely private sector operation, and it won’t.

And that is the role of multilateral development banks. I mean, if you ask why did we ever create development banks in the first place, even before we were worried about climate change and in any true transition, we invented them to help mobilize flows of capital on a scale and at a cost in order to achieve public goods, either national public goods or global public goods, which would not be achieved by the private market alone. And that is why this issue of multilateral development bank and other official financial institutional reforms has become hugely important. And this very important report which was produced for the G20 jointly chaired by NK Singh from India and Larry Summers, and as you said, Rob, our friend Armínio Fraga from Brazil also on that report, and I think they have built on previous reports, for instance, the one by Nick Stern and Vera Songwe, which was launched at COP-27 in Sharm el-Sheikh.

And all of them basically say the same thing. We have got to increase the resources of the multilateral development banks, of which of course the biggest by far is the World Bank. We have got to have capital increases. We have got to enable them to sweat their balance sheets more and run at a higher level of leverage. We have got to enable them to do more leverage at the project level by taking more risk, by being willing to provide guarantees, rather than just loans. And we’ve got to pivot and increasing percentage of all their investment has got to go into helping the countries that need it to supplement their domestic savings capability to achieve the scale of investment we need to go at the pace we need to grasp this opportunity of the new technologies which are now available.

Rob Johnson:

This is very, very illuminating, but I want to, how do I say, weave it into our current experience. I see people in North America getting very scared now about the ramifications of climate change. When we’re talking about funding multilateral institutions, a lot of people, say, friends of mine from growing up in Detroit, think that’s kind of a do-gooder fantasy because their kids’ school system doesn’t have enough money. The community colleges have withered. In other words, the opportunity cost of capital allocation. But are we not, if you will, it’s this awkward way of saying it, but are we not receiving a gift from the warning signs in the climate now to help us redirect the capital through multilateral institutions to those places like the global south?

I know you and I’ve worked with the members of CGET, the Commission on Global Economic Transformation, and have studied the huge demographic buildup of population in Africa. And with all of the angst around the world about outward migration, there’s another positive externality by building the proper infrastructure, maybe even education and technological infrastructure in addition to environmental, to help Africa develop in a way so that the adverse side effects of desperate outward migration are limited. But the punchline I’m really coming at is, aren’t the warning signs now getting so vivid that we might be able to motivate capital allocation to the public good?

Adair Turner:

Well, let me make a number of points on that, Rob. I mean, first, I think clearly we do have a challenge across the world now, and it’s a challenge that’s been made worse by some of the trends in the internal economics and social structure of the developed countries on which INET has focused a lot. So we are asking the taxpayers of rich developed countries to contribute, as I absolutely think they should contribute, to a global public good. And if you were to go to, if I was in India or Africa, I know part of the argument they would say is, “Look, you guys were responsible for the lion’s share of the accumulated emissions so far, so as a basis of justice, you ought to at least help us do it.” Of course, we’ve got to do most of it ourselves. I mean, foreign aid is never anything more than an assistance to efforts which are primarily domestic, and should be, but there is a justice argument.

Now what of course we have in the risk developed world is a lot of people who feel that their own societies have become very unjust and unequal and their employment has become fragile and they’re worried about their healthcare systems. And so they basically say, “Well, I’m not part of this elite that caused the problem. I don’t feel part of this supposedly privileged group because I feel underprivileged in my own society, and so I’m not willing to support it.” Now, we have to try to win that argument. It does say that in order to have the ability to win the arguments in developed countries that we should play our role in the global public goods, it would help if we were more equal and more equitable societies at home, it would be more easy to make that argument. So that’s point 1. Point 2, however, is that the global public good argument I think is hugely important.

I think it is probably easier to make in Europe than the US the argument you make about uncontrolled migration because Europe just sits immediately to the north of this huge expanding demography in Africa. It is, in any case, exposed to uncontrolled illegal migration on a scale which tends to produce a public backlash. That is a problem there in any case, but it will be multiplied a lot by the impact of climate change because if climate change comes along and desertifies regions which were previously supporting food production, if it undermines economic development as it will, that that process of uncontrolled migration will become even faster. Less of an argument in the US. I mean, the US, the demography of South America is actually turning North American. I mean, the South America’s population will soon stop growing. It has fertility rates already below two in most countries, and people can’t get in boats off the north coast of Africa and land in East Coast America.

That’s not doable. But they can across the Atlantic. So certainly in Europe it’s an argument which I deploy, which is to say, guys, look, if we don’t do something about climate change, we will own this problem one way or another. It’s going to make a set of challenges worse. The final thing to say, though, is I think on the multilateral development bank point, is this has huge leverage. One of the things that we always have to remember, and it goes back to some of the economic theory that we’ve explored at INET, Rob, is that banks create spending power. They create spending power that didn’t exist. The process of credit expansion creates spending power that already exists. And when you put capital into a bank like the World Bank, what it enables to do in terms of money lent to support grid developments in India or solar farms in Africa or new shipping lanes, burning ammonia rather than heavy fuel, whatever it is, you get this huge multiplier of the actual capital put in.

And there are many layers of this multiplier. What you actually do with the World Bank is you commit that you would be willing to put in capital, but you don’t necessarily have to pay it in as cash. You have a committed callable capital and then that is leveraged. And when you look at it, actually, when you’re talking about not grant aid, grant aid is needed for the lowest income countries. There will have to be pure grants, and that is a bit expensive. But when you’re talking about contributions to capital to increase the ability of the World Bank and the other multilateral development banks to mobilize capital, the sums of money are really very trivial in terms of the fiscal budgets of the rich developed world.

So I think the crucial thing to say is this particular issue of mobilizing capital through the development banks is just a very highly leveraged, highly effective use of public money, and we must be able to win that argument. These are not big sums of money in terms of what it implies for taxation levels in rich developed countries. And in so far as it helps support a sustainable growth rate across the world because there is an externality benefit of when one country is growing sustainably, it’s enabling sustainable growth elsewhere. It really is something that pays for itself. So this ought to be an argument that we can win.

Rob Johnson:

And I also sense, I have a son who works in technology, venture capital and so forth, that when you have that burst of energy associated with capital, say for climate transformation, the venture capitalists start to surround it and look for with an e-complimentary ways to allocate capital. Because if the baseline is moving, the profitability expectations of all kinds of other associated technologies and implementations warrants pure private capital.

Adair Turner:

That is another layer of the leverage. You purchase capital, you leverage up, you provide guarantees, and then you mobilize private capital which flows in because the multilateral capital is there. And this is the great trick. It’s what development banks do when they do it well, and we just need to do it bigger, better, and bigger. But this isn’t new. This is in our concept of what development banks do going back for decades, but we realize that we have a challenge that requires it to happen on a much bigger scale and better and more focused than it has been in the past.

Rob Johnson:

Yeah. Well, let’s turn the corner a little bit here. The G20 is centered in India, and I think many people, including my former neighbor and wise financier, Ray Dalio, are talking about the importance of India. People are quite anxious about US-China developments in recent years and in recent months. But the question now, India’s coming to the end of its G20 leadership, it’s been emphasizing global south, it’s been emphasizing climate transformation. But as they come to the conclusion of their leadership and pass the baton to Brazil, what do you recommend India say about the world that’s, how would I say, unique to India, and what do we see within this very large and important country that you would want to underscore at this point in time?

Adair Turner:

Well, I think you have to start with a number of points about India. First of all, as it happens, I think India is one of the most vulnerable places in the world to climate change. I think with an increasing warming of the world, bits of the North Indian plane will become pretty much unlivable for anybody who is rich enough to afford air conditioning. Now we look that more of them will become rich enough to afford air conditioning. But right at the moment that there is a huge challenge to the nature of the monsoon can get changed by climate change, et cetera. Secondly, India is already a major player in some of the crucial technologies. It is rolling out solar photovoltaics fast, not as fast as China yet, and it needs to up the speed, but it is doing that. It is building domestic supply chains, which makes sense for it to do.

And of course, India has very significant numbers of major domestic corporations. Corporations which are absolute cutting edge in terms of their technologies. Companies like Mahindra, Adani, Reliance, ReNew Power, Tata. If you look, I can name many, many more who, whether it be in batteries or renewable electricity or hydrogen electrolysis, are mobilizing capital and really pushing it into major opportunities. And India has a major opportunity in hydrogen. It has identified hydrogen as a crucial area to drive forward. So India is of course a very big economy. It will be the biggest by population country in the world, but it is already, and it’ll be significantly bigger than China by 2050. And it is an economy growing at about 5% per annum. And the great thing about 5% per annum is you can argue, oh, wouldn’t it be nice to be at 7%, but at 5%, somebody once said, compound interest is a remarkable thing.

It seems to start slow. But if you keep it going for 30 years, my God, it makes you think. So as long as India can keep going, and I think it can, with its technological capabilities and its corporate capabilities, it will become one of the biggest economies in the world. So it is crucially important. It is crucially important, therefore, that it both drives a decarbonization at home. And the most important issue there is decarbonizing the power system and moving beyond coal. But it is also, I think, important that it provides an example in India to the rest of the developing world which says, yes, we can do this. Yes, we can work out, by mobilizing capital enough, we can work out how to decarbonize our economy and how to combine rising prosperity, rising use of energy and electricity with decarbonization. So our scenarios for the growth of Indian electricity system assume that by 2050, it will be consuming five to six times as much electricity as it does at the moment in order that all Indians can have electricity supply and increasing electricity supply.

So the story has to be one of growth. And I think what India can do, I think if India combined domestically a very strong commitment to green growth and a confident commitment to saying, we now recognize that there are technologies which are available, which as long as we require them to be deployed and support them to be deployed and gradually get rid of the old technologies, can drive a green sustainable growth path. If India does that domestically, but then is a big engager in the world of saying, and that should be our vision globally, right? Our vision globally should be how to move beyond coal in power systems as soon as possible, how to mobilize capital to the places that have the opportunity to skip a generation. I think India could be a really major player in these debates. Now, I happen to think, and I hope this won’t be too provocative for Indian colleagues, that it would be good if they had a 2060 target, not a 2070 target.

I think 2060 for net-zero is easily technologically achievable for a country with India’s capabilities. And I think there are many people not just in developed countries, but even more in other developing countries who look at India and say, oh, why did they set to 2070 as their net-zero date? Vietnam set 2050, Indonesia set 2060, Kenya set 2050. So there is a sort of why is India a bit of an outlier? My actual belief is that with the great capabilities of their companies and their technologists and their skills, they will get there most of the way earlier, but actually making a commitment that they will and saying, that’s the target, and we are going to do 2060. At the Energy Transition Commission, we believe that the whole of the rich developed countries should get to net-zero by 2050 at the latest and ideally earlier, and all developing countries should get there by 2060.

That’s what we think has to occur. So I know that’s a bit provocative, but within the context of India, confidently stepping forward and saying, yes, we can do this, here is this vision of India, a deeply electrified society using its amazing sources of electricity, solar electricity. And then one final thought, I think India and India has been a leader in this, India should be a leader in getting on our agenda the idea of some of the international linkages in electricity systems. When I was first chair of the Energy Transition Commission, my co-chair from The Energy and Resources Institute of India, TERI, it was Ajay Mathur, the then director general of that, he left to become the Secretary General of the International Solar Alliance.

They are working on links, international links, for instance, links from the Middle East to a India, which would enable India to be producing electricity for its needs during the day, but then drawing on Middle Eastern desert electricity in order to keep the air conditioners running into the evening when the Indian sun has gone down. There are people who I know who are trying to develop a huge wind and solar farms in Morocco, which will be able to produce electricity shipped to the UK by 4,000 kilometer HVDC lines, which will be available for the UK when the wind goes down in the North Sea as it sometimes does in the middle of winter, just when we use a lot of electricity. Now, actually, Premier Modi is one of the people who in the past has talked about one world, one grid, one sun. OSOWOG; one sun, one world, one grid, bringing together the world into an electricity grid.

That I think is something that India could talk about as well, and is I think something that we do need on agenda. And I think my final thought is, and it goes back to what I said right at the beginning, Rob, we need to be aware that we are in a very scary place and we are running out of time, and we could do catastrophic harm to human welfare, probably most of all in the lower and lower middle income countries of the world, which India is still part of one, but we’ve got to balance that with a sense of vision and an optimism. But we now have a set of technologies and possibilities which enable us to have net-zero economies by mid-century, which are not only the solution to climate change or the limit to climate change, but also will create just much more attractive cities in which to live, much cleaner air, which will create jobs, et cetera.

So I think I would encourage India to make sure that they are developing that optimistic story and encouraging all the countries of G20 to commit to that optimistic story, commit to stretching targets, commit to rolling out renewables faster than it is at the moment, confident that India knows it can become a clean, electrified, zero carbon economy by becoming more prosperous, and that that’s the message that it wants to give to the rest of the world.

Rob Johnson:

Well, I think all of this, Adair, thank you, this is very, very illuminating and inspiring. I know Mike Spence, our fellow on the commission on Global Economic Transformation, has been doing a lot of work on digital, what you might call structure of society, and his optimism in part through work he’s done with the Luohan Academy and Chen Long, when I’ve talked to him, he said, “Well, the natural place for that to accelerate is in India because the digital transition infrastructure, banking systems and everything, are ahead of the curve, even relative to many places in the global north.”

So I think there is optimism for India as an example, and I think as you say, the global leadership that India can inspire. It may not be fair to them, because as you say, in the north, we burned all the carbon, but given where we are, they can play not just as the G20 leader in the next few months, but on an ongoing basis, they can be a leading and inspiring example to help bootstrap that optimism that can become what you might call amplifying for the actions and the results throughout the world.