Investigating the role of capital formation to achieve carbon neutrality in India.

Abstract

India's sustainable development goals consist of higher economic growth through large investments on the one hand and ambitious carbon emission reduction plans through increased renewables on the other. It needs to be seen if the two policies related to capital formation and energy transitioning to renewables complement each other or if they have been divergent in the case of India. This paper studies the dynamic association between carbon dioxide emissions, economic growth, renewable energy (RE) consumption, and gross capital formation and tests for the existence of Environmental Kuznets Curve (EKC) hypothesis for India over the time period 1970-2018. It also tries to see if there is any possible conflict between the economic and energy goals of the country by augmenting the interaction term between renewable energy consumption and gross capital formation in the EKC framework. The empirical results not only confirm long-run relationship among the underlying variables but also indicate an "N"-shaped EKC in the long run for India which is a departure from the traditional inverted U-shaped EKC hypothesis. Renewable energy consumption is found to reduce emissions, whereas gross capital formation and the interaction term between renewable energy consumption and gross capital formation are found to raise emissions in the long run. The study concludes that India needs to align its economic policy of "Make in India" with its energy policy so that investments under the former facilitate extensive penetration, adaptation, and usage of renewable energy. A policy dichotomy between the two goals may defeat India's Intended Nationally Determined Contribution (INDC) objective of drastic reduction in carbon dioxide emissions through increased renewables by 2030.