Mission Net-Zero: A Strategic Plan for the Indian Chemical Sector

In recent years, the pursuit of net-zero emissions has garnered substantial global attention, with nations worldwide committing to specific timelines to achieve carbon neutrality. Prime Minister of India, Mr. Narendra Modi, promised to cut India’s emissions to net zero by 2070 at the COP26 Summit in Glasgow in 2021. A revolutionary shift in the country's energy composition is imperative to realize this ambitious goal and transform it into a net-zero nation. This is particularly challenging as fossil fuels still constitute a significant portion of India's energy consumption. The Indian Chemical Sector, a key player in the country's economic and energy landscape, is now at the forefront of discussions on sustainability and green practices. This blog delves into the strategic initiatives for the Indian chemical sector to contribute to environmental stewardship and support national and global sustainability objectives.

Understanding Net-Zero Emissions

Net-zero emissions refer to the balance between the amount of greenhouse gases produced and the amount removed from the atmosphere. Achieving this delicate equilibrium is essential for combating climate change and preserving the environment for future generations. The Indian Chemical Sector, known for its diverse range of products and processes, holds immense potential for positively impacting the country's carbon footprint.

Current Landscape of the Indian Chemical Sector

The Indian Chemical Sector is pivotal to the nation's economic growth, contributing ~7% to India’s GDP in FY 2023, and is the sixth largest chemical producer in the world. From basic chemicals to advanced materials, the sector influences key value chains, impacting agriculture, healthcare, manufacturing, and technology. Beyond domestic markets, it is a major player in global trade, with interconnected supply chains spanning continents.

The chemical industry is pivotal in India's industrial and economic landscape. Data from the Confederation of Indian Industry (CII) reveals that the market size of this sector in the country reached US$ 220 billion in FY2022 and is expected to reach US$ 383 billion by 2030. This suggests a robust Compound Annual Growth Rate (CAGR) of 7.2% from 2023 to 2030, underscoring the sector's significant contribution and potential for expansion in the coming years.

Source: Confederation of Indian Industry Report

The Chemical sector directly contributes only ~4% to India’s Greenhouse gas emissions. However, the sector's significance lies in its indispensable role in the supply chain for several sectors viz. fertilizers, pharmaceuticals, construction, and polymers, to name a few.

The sector has historically faced challenges related to environmental sustainability. Industrial processes in chemical manufacturing often involve energy-intensive operations and emit greenhouse gases, contributing to environmental degradation. Recognizing these challenges, the sector is now gearing up to adopt a strategic plan that aligns with the broader goal of achieving net-zero emissions.

Key Government Initiatives to kick-start Journey towards Net-zero

During the COP26 summit in Glasgow in 2021, The Indian Prime Minister, Mr. Narendra Modi, committed India to achieving net zero by 2070 along with four other key promises to be achieved by 2030:

• Elevating non-fossil energy capacity to 500 Gigawatts (GWs).
• Meeting 50% of energy needs from renewable sources.
• Decreasing the carbon intensity of the economy by 45%.
• Mitigating total estimated carbon emissions by 1 billion tonnes.

The commitment to achieve net-zero emissions by 2070 demands that Indian companies align their strategies with the transition to a low-carbon economy. This will require a substantial increase in investment towards research and development of new technologies and increased skilled manpower availability. The government has implemented a series of measures, delineating key actions for the chemical sector to address escalating environmental challenges domestically while fostering robust growth. The key steps taken by the Indian government are summarized below:

• Increasing FDI to bring in international expertise in India: 100% FDI is allowed under the automatic route in the chemicals sector, with few exceptions. The FDI in the chemical sector is gaining traction and grew by a robust 91% in FY 2023. Increased investment from global players brings advanced technologies and sustainable practices, fostering eco-friendly production. This not only enhances the sector's efficiency but also aligns with environmental goals, contributing to India's journey towards a greener future.
• Focus on skill development: The Indian government has actively endorsed skill training, technology, academia, and research to boost the chemicals sector. This is evident through the creation of Centers of Excellence (COE) under the National Policy on Petrochemicals and the Chemicals Promotion Development Scheme (CPDS).
• Boosting the production of non-hazardous chemicals and curbing imports of substandard products: To bolster indigenous producers, the Indian government enacted the deregulation of non-hazardous chemical production and enforced anti-dumping duties on substandard imports as a protective measure. These actions are anticipated to uplift domestic manufacturers, fostering increased scale and profitability within the industry.
• Initiatives in the pipeline: The suggested reform entails a substantial revision of the 2007 Petroleum, Chemicals & Petrochemical Investment Regions (PCPIRs) policy. Geared towards establishing integrated chemical complexes, PCPIRs aimed to connect diverse chemical industries through shared infrastructure. The policy awaits a comprehensive review. Additionally, the government encourages the formation of plastic park clusters and chemical manufacturing units in specified regions, including SEZ/NIMZ and areas like North-east, Jammu & Kashmir, Himachal Pradesh, and Uttarakhand, fostering the growth of the chemical sector. The Centre is also developing a Production Linked Incentive (PLI) scheme for the chemical sector, likely focusing on agrochemical intermediates, pharmaceutical intermediates, dyes, and multi-use chemicals, to enhance manufacturers' cost competitiveness.

Growing ESG adoption further drives focus towards Net zero

There is mounting pressure from stock exchanges and regulatory bodies in the financial sector for companies to produce high-quality disclosures that offer a comprehensive view of their ESG strategy, capabilities, risks, and challenges. Organizations are transitioning from voluntary to mandatory reporting due to evolving stakeholder expectations. The shift is complemented by emerging disclosure platforms such as Business Responsibility and Sustainability Reporting (BRSR), aiding Securities and exchange board of India (SEBI) in developing methodologies for climate change reporting. Established platforms like Task Force on Climate-Related Financial Disclosures (TCFD), Carbon disclosure project (CDP), and Sustainability Accounting Standards Board (SASB) are gaining prominence in India, enabling organizations to benchmark globally. With growing investor demand and a changing political landscape, a future with standardized ESG metrics, like the UN's Value Driver Model, is increasingly likely to facilitate the assessment and communication of sustainability impact.

The influx of sustainable and green financing further motivates companies to be ESG-compliant

Responsible investing is gaining momentum in India, with ESG-focused equity funds increasing from US$330 million in 2019 to US$1.3 billion in June 2023, according to Avendus Capital reports. The rise is attributed to heightened awareness of the climate crisis and consumer interest in supporting companies perceived as socially responsible. Firms with superior ESG scores experience easier access to funds at lower costs, leading to improved operating margins and shareholder returns. For chemical companies, this serves as an incentive to prioritize sustainability in decision-making processes.

Challenges and the road ahead

The transition to net zero in the Indian chemical sector faces multifaceted challenges. Timely policy actions are critical, whether incentivizing R&D or implementing a carbon tax. Significant capital investment is required for adopting emerging technologies like carbon capture, while a transformative shift in the business model demands collaboration across industries. Manufacturers may hesitate due to anticipated increases in key intermediate costs, posing an additional obstacle. Securing sustainable bio-based alternatives and establishing a consistent supply chain adds complexity, highlighting the need for unified efforts and supportive policies.

Suggestions from the CII-Kearney report: In 2022, the Confederation of Indian Industry (CII), in partnership with Kearney, a global management consulting firm, conducted a study outlining the transition plan for the Indian Chemical industry to achieve net-zero emissions. The study highlights that the Chemical sector is expected to reach the tipping points for low-emissions technology later than other key sectors due to challenges like high upstream emissions, uncertain demand for low-emission chemicals, and the need to validate key technologies. The study led to the development of a three-phased plan for effective implementation, summarized below:

Source: CII-Kearney report November 2022

Transitioning the chemicals sector to a low-carbon footprint involves a blend of energy efficiency, demand management, and investments in new technologies. The CII study aptly outlined the incremental steps needed to achieve net zero in the Indian chemical sector. Phase one of the suggested plan concentrates on swiftly implementable solutions that promise significant improvements in the near term. The second phase underscores levers evolving in maturity and technological feasibility, like the increased utilization of Green/Blue hydrogen. Phase III homes in on high-potential opportunities with technological immaturity, such as CCUS (Carbon Capture, Utilization, and Storage).

Conclusion

The omnipresence of the carbon atom in various roles within the chemical industry — as feedstock, fuel, product, and in end-of-life emissions — adds complexity, making it challenging to devise a straightforward set of pathways that comprehensively addresses the entire sector. Consequently, it is plausible to expect that the Indian chemical sector could be the final major sector to shift towards Net Zero emissions.

The Indian chemical sector is actively pursuing a strategic plan for net-zero emissions, spurred by government initiatives like increased FDI, a focus on skill development, and measures to control substandard imports. Proposed reforms, including overhauling PCPIRs and incentives for chemical manufacturing units, underscore a commitment to sectoral growth. The industry's pivot towards responsible investing and ESG-focused funds signals a positive trajectory for the sector's future toward net-zero emissions. However, challenges such as policy alignment, capital investment, and cost implications need addressing for a successful transition. The CII study outlines a phased plan, emphasizing quick solutions, evolving levers, and high-potential opportunities to guide the sector toward a sustainable and low-carbon future.

The successful transition of the Indian chemical sector to net zero relies on advancements in technological development, financial innovation, and robust political leadership. These crucial factors can position India to adeptly navigate the dual transformations of rapidly expanding the chemical sector while ensuring safe and sustainable growth.