How green are our budgets?

Two of the world’s largest economies have recently released their 2023-24 annual budgets within six weeks of each other. The envisaged journey to India@100 in India’s Union Budget 2023-24 invokes the colourful word “green” applied to growth sectors in fuel, energy, farming, mobility, buildings and equipment, consumption, waste, and jobs. The budget of the US government fiscal year 2023 evokes “historic” investments in clean energy, transport, manufacturing, phase-outs, international climate finance, and domestic ecosystem restoration projects that avoid, reduce or sequester greenhouse gases (GHGs).

Colour-coding is useful, so let us use the colour green for the budget’s emissions decrease; and red for its emissions increase. Mixing red into green makes the colour brown. So how green or brown is the budget? We shall seek the answer in relating expenditures to greenhouse gas (GHG) mitigation or emissions.

A budget can be evaluated for its “greenness” by attaching a price to GHG emission. One candidate price for decarbonisation of the economy is the cost incurred with one metric ton of carbon dioxide removal from the atmosphere. Other candidates are the cost of avoiding, or the cost of reducing GHGs. In its 2017 Report, the High-Level Commission on Carbon Prices concluded that “the explicit carbon-price level consistent with achieving the Paris [Agreement] temperature target [to restrict rise to 1.5 to 2 degrees Celsius] is at least US$40–80/tCO2 by 2020 … provided a supportive policy environment is in place.” Further, the report estimates the price to rise by $2 a year. While we wait for an official global carbon price, a price of $66/tCO2e to bring about decarbonisation is a realistic minimum in today’s markets.

Also Read | Cabinet approves Rs 19,744 crore National Green Hydrogen Mission

In India’s budget speech, Finance Minister Nirmala Sitharaman made explicit mention of green expenditures to mitigate or avoid carbon emissions from the energy and transport sectors and increase removals from agriculture and forestry. The first two sectors are net GHG emission sources and (along with buildings, manufacturing of equipment, consumption and waste). The latter two sectors use photosynthesis that removes carbon dioxide – the major GHG.

In the energy sector, budget allocations have been made for the National Hydrogen Mission; energy transition for Net Zero; battery and pumped storage capacity; and renewable electricity (RE), which will bolster avoidance of emissions that would otherwise occur with fossil-fuel use. In the transport sector, budget allocations are for boosting coastal shipping that is less carbon-intensive than other freight movers, and fleet replacement. Incentives are provided for compressed biogas, batteries for electric vehicles, and ethanol for biofuel blends. These help GHG avoidance and its capture.

Also Read | EU members announce deal on major carbon market reform

In the agriculture sector, the budget allocations are for “regenerative agriculture.” The budget proposes a network for micro-level bio-centers. The more prominent programme works primarily through adaptation toward alternative fertilisers. The budget also mentions the “circular economy” for organic bio-agri-resources. These mitigation and adaptation policies help both GHG capture and CDR. In the forestry sector, the focus is on land and soil conservation, mangrove plantations along coastlines, and salt pans. With local community participation, the budget seeks to enhance wetland conservation and encourage carbon stock biodiversity, while adding income to livelihoods of the locals.

All told, the budget speech explicitly mentions about Rs 87,610 crore as expenditure on green energy policy initiatives. Implicit expenditures are from other green policies, such as the emphasis on millet crops that have lower emissions, financing for MSMEs, revamping electrical power distribution, and PPPs in coastal shipping. Let us assume that, together with implicit and adjusted outlays and viability gap funding, green budget expenditures may be Rs 100,000 crore.

A DIY (do it yourself) approach is now possible. Simple arithmetic will show that when the prevailing carbon price is $66/tCO2e, such green expenditures of ₹100,000 crore ($12.2 billion) in India’s budget would serve to mitigate an estimated 185 million tCO2e.

A similar exercise of tallying investments in USA’s budget reveals about $8 billion for direct investment in projects that avoid, reduce, or sequester GHG emissions, including clean energy projects. There is outlay of about $18 billion for adaptation and resilience, about $17 billion for climate science. This yields a total investment of $43 billion – the budget mentions $44.9 billion to “tackle the climate crisis”. USA’s budget provides an additional $11billion in international climate finance for projects in developing countries. The $8 billion of direct investment would serve to mitigate 121 million tCO2e within the USA, and the $11 billion of international climate finance would serve to mitigate another 167 million tCO2e globally, for a total mitigation of 288 million tCO2e.

Targeted growth

Do the policy interventions in the budget that increase emissions exceed those that reduce it? Does red pigment exceed the green? One indicator is the emphasis in India’s budget on the increased ease of business (EOB), which pertains to facilitation of individual business revenues, and, in the aggregate, the economy-wide GDP. The budget mentions reduction in more than 39,000 compliances, and decriminalisation of more than 3,400 legal provisions. With less regulation, emissions of GHG and other pollutants could dramatically increase.

India’s budget policy interventions for GDP growth have other, varied impacts on emissions. Development of infrastructure have expenditures of about 22 per cent in the budget. These policies are expected to crowd in further large private and state investments.

India’s budget envisages an approximate 6 per cent targeted GDP growth for the year. This will add about $208 billion to the current $3.47 trillion Indian economy. What is the increment in associated emission? India’s emission intensity of GHG averages 13.3 g/rupee of GDP. We can then project India’s incremental GHG emission in the coming financial year to be 228 million tCO2e.

Similarly, USA’s budget envisages 4.4 per cent GDP growth. This will add $ 1,127 billion to its current $ 25.6 trillion economy. USA’s emission intensity averages 219 g/$ of GDP, which computes to incremental emissions of 247 million tCO2e.

In sum, DIY calculation of India’s net increment (emissions less mitigation) yields about 43 million tCO2e. India’s budget colour-code is clearly brown rather than green, with emission increasing by 1.13 per cent. However, this is an improvement over India’s 3.8 per cent emission increases in recent years. The corresponding net increment for USA’s budget is a negative 41 million tCO2e. Its budget is pale green, with emission reduction of a mere 0.73 per cent.

Stakeholders–citizens and businesses–are entitled to know the implications of their country’s budget expenditures from more sophisticated models than the one provided by any DIY approach. Greater transparency is needed for the colour-coded claims of future budgets in the transition to net zero. At some stage of the journey to India@100, the browns need to turn into greens. To be historic, USA’s stated goal of reducing 50 to 52 per cent of its emissions by 2030 requires its budgets to be far more verdant greens.

(The writer was formerly on the faculty of leading B-schools in India, Singapore and USA. His latest book is ‘The Art & Science of Managing Externality’.)