The economics of clean energy with Namrata Kala

Kara Miller: I’m Kara Miller.

Rob Stoner: And I’m Rob Stoner.

KM: And from the MIT Energy Initiative, this is What if it works? A podcast looking at the solutions for climate change.

Today we’re going to examine how the world’s most populous country, India, is thinking about clean energy and how policy shifts in the U.S. might affect their trajectory. But first, a story about environmental degradation versus, well, cold hard cash and the kinds of experiments you have to do to understand how to alter human behavior.

Namrata Kala: One thing that development economists think about a lot, but maybe not everyone else does, is just how the nature of market frictions might change what the optimal policy is.

KM: That’s economist Namrata Kala. She’s an associate professor in applied economics at the MIT Sloan School of Management and a few years ago she and some colleagues decided to figure out how you can best incentivize farmers to stop setting fire to their fields at the end of the season.

NK: Every year, farmers in North India, and also other parts of Asia, burn their fields to clear it for the next crop, because that is the quickest and cheapest way to prepare your field before the next season. Except the air quality implications of doing this are very large and very negative. And so there’s work in epidemiology that shows that it’s responsible for about 20% of New Delhi’s air pollution during the burning season. I don’t need to tell you but New Delhi air pollution level is extremely high, most polluted capital city in the world and so on.

KM: Experts have estimated that burning this crop residue causes more than 60,000 deaths a year. So the incentive was high for Kala and her colleagues to figure out, how do you convince farmers not to do this? A reasonable answer might be, well, check their fields at the end of the season and if they haven’t burnt them, give them some money.

NK: And what we found is that because of market frictions like liquidity and trust, data actually performs extremely poorly. In fact, that leads to no additional emissions reductions relative to not paying farmers at all.

KM: So just to underscore that, researchers say, I’ll give you money at the end of the season for not burning your fields, and it doesn’t move the needle. People go ahead, they burn them anyway, regardless of the fact that they have a contract to get paid.

NK: What instead works is paying farmers the same amount of money but giving them a small amount, 25%, upfront before the season as a sign of trust and to decrease their liquidity issues and that doubles compliance relative to the control group and in fact it performs much better than doubling the total payment that you give them. This is just one example where understanding market conditions allows you to design an effective policy that then achieves these emissions reductions at a lower cost relative to this higher, more expensive, less effective contract.

KM: So, in essence, the bottom line was not the bottom line. Increasing the payment didn’t work. But understanding that these were not wealthy people and having some money upfront mattered, well, that turned out to be crucial to convincing them you were serious.

NK: We tested a payment that said 800 rupees per acre, everything paid at the end; 800 rupees per acre, 200 now, 600 later, if you comply. And then we tested a version that said 1,600, like double the amount, but all at the end of the season. And the 25% upfront is where we see all the compliance. So, the 50% upfront contracts are where we see all of the compliance happening.

KM: Kala says that India is moving towards clean energy quickly, but in a place where many people are trying to make sure they’ve got enough to eat every day, there has to be a balance between economics and the environment.

NK: So like a lot of the developing world in the 90s and 2000s, thanks in part to trade reforms and other types of reforms, extreme poverty fell. Worldwide, I think the number is about 2 billion people escape poverty, and in India as well, as I mentioned. That said, this has been reversing in the developing word in about the last 10 years. So these trade-offs of poverty reduction combined with emissions reductions I think will continue to be salient for developing countries moving forward. And just to kind of put some numbers on this, the per capita income in sub-Saharan Africa is about $1,600. In India, it’s something like $2,500. In the U.S., it is like $82,000.

KM: Kala says that people who haven’t visited India for five or ten years tend to be shocked by the rapid rate of change. Indeed, her own childhood is reflective of that change.

NK: When I was younger, my family did not have an air conditioner and that was a source of kind of great joy and comfort when that arrived. And I was about, I think, maybe seven years old and there was one and so everyone sort of crowded in to sleep at night in the same room. And then there was a lot of kind of managing, because it was a big energy consumer and you wanted to manage the bills, there was a lot of like, it’s been on for an hour, now shut it off, right. And there was also a lot of, which is, I think, emblematic of a lot of experiences, dealing with outages and trying to protect your appliances from these outages that might hurt it and the inability to use all your appliances that you wanted all the time, especially because when it’s hotter, it is correlated with demand and also outages. So I think personally, a lot of what I see in the data and what I do in the fieldwork resonates with just like my experience growing up.

KM: But India has been ramping up the reliability of its grid, which has made a huge difference.

NK: And so I think there’s been a massive electrification program over the last couple of decades, and I think hundreds of millions of people have benefited from that. I think that’s been a large increase in appliance use. And I think it’s kind of just sort of correlated with my experience. Then in a country of 1.3 billion people, when you go from 65% electrified to almost 100%, that’s just order of a magnitude increase in comfort and welfare.

KM: Meanwhile, India has also embraced clean energy, Kala says. And that doesn’t seem likely to change, even as American policy on energy shifts dramatically.

NK: A lot of Indian policy regarding clean energy, I think, and Chinese as well, has been, in my opinion, quite pragmatic and innovative. If you look at cost reductions around solar energy, India is such a large market. It really is. It’s the fourth largest wind market in the world. And renewable capacity just last year grew by about 35% in India. And I think in China, solar capacity grew by over 40% last year. So these markets are large and they are growing fast. And India has electrified, I think, almost all of its railway network, which is a system that carries 20 million people every day. So it’s a large system. And I, think a lot of it has been based in terms of whether it makes sense of the economics, along with you know, does it make sense in terms of the emissions. So the railways running on say diesel are costly and variable in terms of cost. Electrification can be more reliable if it’s done well. So I think that’s sort of this combination of what I consider pragmatic and innovative has been one kind of the first principle component, as I would call it, of a lot of these energy policy decisions that I’ve been aware of.

RS: So you made it a really interesting point there about the railroads and the electrification displacing the use of diesel. You know, I think of India as being sort of emblematic of many developing countries in that fuels are very expensive there.

NK: That’s right.

RS: You may not experience that because sometimes they’re subsidized by the government to sort of provide a buffer in the middle. But India doesn’t have large primary energy supplies apart from coal. They don’t use coal on the railways anymore. And what that means is that renewables have an advantage there, because you’ve got to import natural gas. And unlike us, who pay $3 per million BTUs, Indians pay $12 to $14 per million BTUs three or four times the cost. And so suddenly, solar starts looking pretty good in India. And with pretty good sun, that’s really a help. And I think that’s helping to propel this rapid adoption of low-carbon energy, not because it’s low-carbon energy, because it’s the best deal.

NK: Yes, I think that that’s going to be, as I said, just given the really salient trade-offs about growth and poverty reduction, most clean energy policies will likely be driven by economics.

KM: Let me go back for one second, Namrata, to this, in some sense, if you have a lot of poor people, the question of can people eat next week, maybe, I don’t wanna put words in your mouth, maybe tends to subsume the question of like, are the glaciers melting, right? And so people go to the polls in India. So the issue of energy, even the issue of climate change, is it something people care about or are they kind of like focused on other things?

NK: I think, you know, like everywhere in the world, I think the economy matters a lot and jobs matter a lot. I have in the most recent elections, there has been mention of air quality, and I think that’s important. I think energy is really important, and electricity and quality of life are very important for sure, and people value that and I think people would reward that electorally and so on.

RS: Is there an explicit trade-off that you think of? I mean, you know, how much of an increase in emissions can India accommodate in order to deal with poverty? How do you think about that?

NK: So I, you know, I’m very much like, smart policy matters. And by that I mean, one of my favorite papersthat I read in the last year was this paper in Science. The lead author was at the Potsdam Institute. And essentially what that paper does is it takes 1,500 policies, climate policies, that have been implemented across the world and uses really data-driven methods to find out which ones were effective, right. And so in some sense, this is not a binary version of should any country, India included, have climate policy or energy policy or not. It’s so much more a question of what is the right policy that has productivity, co-benefits, and emissions reductions. And they find successful examples and they show you. So in the developing world, the pricing policies matter a lot more. They have like examples of these, et cetera. You can do the same thing with cost benefit, right? And so I think that the way that I think about the, like, is there an emissions gap or is there like that we need to achieve our growth targets? I think thinking about these kinds of policies is much more high return because it’s more like not that I want to invest in a tech firm, yes or no. It’s like which tech firm am I going to invest in is really important for my returns. And I don’t think policy is any different. So I think that’s kind of thing one, which is why, as I said, I’ve been very heartened by these large growths of an already large renewable market that don’t show signs of slowing down. And partly, again, it’s the economics, partly it’s the demand, but partly it is also the learning by doing. So there’s work that shows that both in solar and in wind, the more you produce, the more your average costs go down. And you can have policies that induce lower costs over time by having like R&D subsidies or output subsidies. So there’s like a really nice paper by Robin Burgess and co-authors on China’s solar experience. There’s work by Rich Sweeney at Boston College on learning by doing in the wind industry. So I think these are all things that make me think that there’s momentum in terms of the economics. I think there’s a portfolio of policies, many of which are not a trade-off, some of which might be a trade-off, and we should think about and so on.

KM: It’s a little bit from a U.S. perspective, but I wonder, there’s long been an argument here that there’s really no point doing a big energy transition in a place like the U.S. if much larger countries in terms of numbers of people, i.e., China and India, are gunna keep their appetite for energy is going to keep increasing. And you could even make it, it’s even more salient for small countries like France or Denmark or whatever you can get pretty small like what’s the point in making these little shaving things off here and there if like China’s building coal-fired power plants.

NK: I think there’s kind of like a particular amount of carbon that you can put in the air and that’s going to increase the temperature by X degrees and kind of increase the likelihood of extreme events by a certain amount. So when you scale that back, how do you allocate the scale back I think is a good question, right? And I think that there’s certainly merits to saying something like, of course, it won’t matter if, I think the top 10 countries have 76% of carbon emissions. So if like nine of them keep going, maybe it will matter less for sure. At the same time, I don’t think it’s superfluous to consider the fact that the U.S. has like 29% of cumulative historical emissions, you know, India has 3%. So when you’re thinking about scale back, I think that’s potentially useful information and does not at all, in my opinion, preclude a reasonable solution, right?

And I think, that if you just kind of look at policy actions, the policy actions are indicative of many developing countries knowing that there’s benefits to investments in clean energy, right. Like that’s why now, from what I understand, China’s emissions are set to peak in 2030. If they have this large renewable market that’s again growing like 45% relative to last year for solar, I think they’re making gains in emissions reductions and so on. So for me, I think that’s right. There’s a certain amount of carbon you can put in the air that’s going to increase the degrees by a certain amount. How should the scale back be apportioned when there’s like the poverty reduction goals that I mentioned, and the per capita emissions are 14 tons per capita for the U.S. and two for India, and I think for sub-Saharan Africa, it’s probably less than half. That’s not superfluous information. I think that really doesn’t preclude a solution. And I think the last couple of decades of renewable energy investment, in fact, indicate to me that there is a feasible solution at hand.

RS: At least at an initial level. I mean, I think something that’s lost in the climate discussion is often just how much we have to do. I mean we really have to massively reduce our emissions. Somebody uses the phrase, you know, if we each do a little, we all do a little. We have to do a lot, and unfortunately India will have to be part of that story.

NK: Absolutely, but that’s why I think I’m heartened when I see these kinds of year-on-year growth numbers from a large market, and I think part of that, again, like I think it has to be the economics at play to some degree, right? I think the wind turbine paper that I was mentioning earlier said something like you manufacture twice the turbines, and then I think your costs fall by about 15%. It’s pretty big.

KM: It sounds like you think people are adopting these technologies because they’re cost effective. Like not—is that right?—not because they are clean.

NK: I think it’s both, but I think there has been good concerted policy actions from a lot of countries like the EU, like China, like India, to mention some, and of course the U.S. as well, to sort of understand that if you’re at a higher cost point, what does policy need to do to make that competitive and then do that. And so a lot of the gains that we are seeing are partly like the private sector responding to policy certainty, price signals, a large incoming market, and doing its part and getting us these cost reductions that make the economics look better.

RS: I think it’s pretty clear from what’s happened and the numbers that solar plus batteries in India, which are becoming cheaper all the time, actually economically displace coal as coal plants age. You’re not going to rebuild those coal plants. You’re going to build solar and batteries instead. That doesn’t mean that the whole power system can be replaced by solar and batteries, but I think Indians are being very realistic and pragmatic about recognizing the opportunity to do this. It’s economically driven, but I think they’re also aware of the benefit that that has for them as well.

NK: Absolutely.

KM: And Rob, no concerns about intermittency and wanting something that you can do 24/7 and the sun doesn’t shine all the, I mean, does the battery fully solve that problem?

RS: No, they don’t. No, no, they solve it when we’re in the regime at which we’ve got some of the generating capacity from old coal plants rolling off as those plants age out, and you can replace those with batteries and wind to some extent. But you’re taking advantage of other flexibility that still is available within the generation system, a lot of which comes from more modern coal plants, but also from hydro.

KM: Okay.

RS: That, you know, you can take advantage of to deal with that intermittency, but you get to a certain point where that’s no longer really feasible without adding a lot of batteries, and that starts to affect the economics negatively. Now, of course, we’re hoping that we get cheaper and cheaper storage technologies over time, and that threshold just keeps on moving up, and India can continue down this path. And, you know, they get an economic benefit from it. Another way of looking at that economic benefit is that it’s freedom from having to import fuels in many situations that would otherwise have to be used. So it’s win-win. India is really leading the way and showing how far you can push a lot of these things, I think.

KM: Namrata, I wonder what the impact, if there is any, of the shift in U.S. policy has been on India. So, you know, obviously very early in the Trump administration, we saw the president dismiss the Paris Climate Accord, and obviously the approach is super different from what the Biden administration had been. Does India sort of like, we have a different policy, we just keep on going?

NK: It’s a little early to say, you’re right. So I think the one thing that I will point out is that these renewable policies and these kinds of growth rates had been happening even prior to the Biden administration, right? So there is some broad trend of countries deciding that for economic reasons, for other reasons, like this is the thing to do. Does it slow down the rate? Perhaps because there’s market conditions that have shifted, there might be less technological conditions that are favorable, et cetera. But I don’t know how much of that is gonna affect this kind of broader trend of increased investment and growth.

KM: This is veering into your personal experience, but I wonder if you also see the possibility… Clearly, there’s a lot of people in the U.S. who are Indian, who’ve either come here for school or come here after school, very technically capable people. I wonder, if at all, in the trajectory of your own life, you’ve seen more of those people return to India versus stay in the U.S indefinitely. I don’t know if you see any like balance shifting there. Cause I know that can be a sign that like there are very good opportunities at home. Maybe, I don’t wanna stay in this other country.

NK: Yeah, I think it’s a bit difficult to say also because like I, you know, sadly, I know more economists than I know other types of scientists. That really is sad. I’m a nerd, I don’t get out much. And so a lot of my kind of personal experience is like seeing my friends and co-authors and things kind of make these career decisions, but only in one field that I know a little bit, but much less than about other fields. India has had this influx of private universities that have tried to value cutting-edge research. And I think that’s kind of been a heartening development in the last 10ish years or so. And so you do see more people kind of get PhDs in the U.S. and then go back and do cutting-edge research there. So there’s been, I think a little bit of that pull factor relative to kind of these other macro factors. I can’t really say if it’s a big deal.

RS: You know, the Tata Center had a lot of Indian Ph.D. students at MIT who were working on a variety of technologies that found their way back to India. And we got to, I think, 10 of them became Indian faculty members over a period of four or five years. We stopped counting at some point, but, you know, a lot Indian, really, really highly trained Indian scientists and engineers certainly were returning through that program to India, and I think having a big impact.

NK: Absolutely. And similarly, as I said, in economics, I think it’s a field with a lot of depths of talent. And so there’s been more dispersion across space as well.

KM: Now Namrata, when you think about clean energy going forward in India, I wonder what sort of gives you the most hope and what also gives you the most cause for concern or what you feel like the biggest hurdles are gonna be?

NK: As I mentioned, the trend gives me a lot of hope. It’s a large market. I think a lot of the recent policies have helped the growth of clean energy. At the same time, I think there’s more that you could do to really make sure that you’re getting the maximal returns to these policies. So that’s thing one. So Nick Ryan at Yale has a very nice paper on counterparty risk in the solar market in India. And so, trying to understand what market frictions, what contracting frictions you should mitigate to make sure that when you put in a policy in place, you’re getting the most private entry, the lowest cost entry, and you’re targeting the consumers that you want to be targeting, I think be great to see.

The other thing which is kind of a broad point about industrial policy and green industrial policies no different is some of this ends up being countries competing for the same slice of the pie rather than making the pie bigger, right? So it’s like the same thing can be produced in country X or country Y. So country Y tries to get subsidies in earlier and become lower cost faster with the learning by doing. But then if both countries start that, then in terms of like aggregate welfare, you don’t get as much as you would if they specialized. So I think for countries broadly thinking more about comparative advantage, And then how to target the resources best that you want to target towards these clean energy goals would be great to see just broadly across the board.

KM: Versus, it sounds like a race to the bottom with who has the cheapest solar cell.

NK: That’s right. If we all have exactly the same advantage in producing a commodity and it’s just a question of who gets there first, then starting together and trying to race might not be optimal for the world. But figuring out what your comparative advantage is, so to Rob’s examples about India’s recent advances in the solar industry is a great example. So really thinking about targeting within the industry to those resources I think is likely to yield the maximal cost benefit.

RS: Well, I think this discussion has had an interesting academic character. You know, we’re talking to an economist rather than an engineer. So it’s, you know, thinking, and it begs the question, what’s the role of universities in helping countries like India to advance faster? Is that something we want to talk about?

NK: I mean, how much time do you have?

RS: I mean, how do we do it? I mean maybe if we could talk from your personal experience of how you engage with the Indian government or Indian companies to help them find their unique path.

NK: So I think collaborations are pretty key, have been pretty key ,at least for me. And that’s like collaborations with economists in India, collaborations with firms, state governments, and so on. And that’s a lot easier when you have these ongoing research relationships. And here, I really want to give a shout out to J-PAL, which is a center housed at MIT, but has offices all over the world where you have these educated research-oriented professionals that are forming these relationships, conducting research, and facilitating a lot of this research and disseminating it as well. And I think that’s been really helpful as well.

So, what is the role of universities? I think, you know, the way that I think about it is we need to produce knowledge, we need kind of collaborate in the production of that knowledge because at least in my field, I think it’s better when it’s done in collaboration in knowledge of what the context is, how you improve things when you understand what the frictions are. That’s thing one. And then I think thing two is, again, helping figure out what policies, what firm strategies are the best out of a portfolio of strategies. And that’s difficult experimentation for a single firm to do by itself. It’s costly or by, you know, for a single government with maybe a year of lead time trying to make a difference to do, but having a store of knowledge and having multiple collaborations for people to learn is, I think, a role for a university. And I think at least in my experience, MIT has done a lot of that.

KM: You make a really important point too. It makes me think of like, everything we have talked about in this conversation has been, nobody lands in India and like immediately knows who these farmers are, who you’re going to talk to, right? So you’ve got to like start to get to know people and you have no ongoing relationship that, yeah, it’s hard to then get to the truth of what even would work.

NK: Exactly and then just figuring out what the right thing to try is like that’s going to be like the steeper learning curve and all of the work.

RS: We’re also in a world in which people are trying to move quickly, and there are lots of actors out there promoting their ideas. They strongly believe in them, or maybe they have companies that sell products that align with those ideas. People are saying, well, solar is the answer, or green hydrogen is the answer, or LPG is the answer. And of course, none of them is the answer. There’s a combination of those things. It’s very contextual. And it might not even be the same in different parts of the same country, and it might change over time. And so I think universities also have a role to play in helping governments to understand what’s optimal and what are the trade-offs that they have to make in setting policy. And we’ve seen that play out in a number of places. I spent a couple of days this week with a bunch of oil and gas executives in Houston who wanted to get involved in ending energy poverty. And I have not the slightest doubt that they’re earnest in wanting to do that. And their perspective is, well, I think people are overlooking fossil fuels as part of the answer to ending poverty in these countries, and we’re overemphasizing climate as a guiding light. And I have some sympathy with that. Being poor is something that people experience right now, and ending it is important. But that doesn’t mean the answer is natural gas or oil. It just means that we need to be mindful of the impacts outside the energy sector on personal economy of people who live in these places.

NK: Absolutely, and I think that is the university, like the universities can play that neutral research, data-driven role, and we should.

KM: Namrata Kala is an associate professor in applied economics at the MIT Sloan School of Management. Namrata, thanks so much for being here.

NK: Thanks again for having me. This was really fun.

RS: Thanks, Namrata.

KM: What if it works? is a production of the MIT Energy Initiative. If you like the show, please leave us a review or invite a friend to listen. And remember to subscribe on Apple Podcasts, Spotify, or wherever you get your podcasts. You can find an archive of every episode, all of our show notes and a lot more at energy.mit.edu/podcasts and you can learn more about the work of the Energy initiative and the energy transition at energy.mit.edu. Our original podcast artwork is by Zeitler Design. Special thanks to all the people at MITEI and MIT who make this show possible. I’m Kara Miller.

RS: And I’m Rob Soner.

KM: Thanks for listening.