The key to India's clean energy transition: decarbonizing industrial supply chains

The Key to India's Clean Energy Transition: Decarbonizing the Industrial Supply Chain

India's clean energy transition has entered a decisive new phase. Over the past decade, the focus of discussion has centered on expanding renewable energy (RE) capacity. But now, a more fundamental question is emerging: Is the way we manufacture the infrastructure needed for this transition sustainable enough?

Industrial emissions are increasingly becoming the biggest challenge on the path to net zero, accounting for about a quarter of global greenhouse gas emissions. As India rapidly advances urbanization, infrastructure expansion, and manufacturing growth, demand for industrial goods will surge, and the share of industrial emissions will climb even higher. This leads to a critical contradiction: renewable energy deployment may continue to accelerate, but if the materials needed to build this infrastructure are produced through carbon-intensive processes, industrial emissions could rise in tandem with clean energy growth. Without substantial industrial decarbonization, India risks undermining the climate benefits of its energy transition.

Industry Background: Challenges of Industrial Emissions and Global Pressure

According to the International Energy Agency (IEA), India's industrial sector emissions in 2023 accounted for about 30% of the country's total emissions, with steel, cement, aluminum, and chemicals being the main sources. As India aims to become a developed nation by 2047, the output of these sectors is expected to grow by 3–5 times. Without changes in production processes, absolute industrial emissions will increase significantly, running counter to India's 2070 net-zero target.

At the same time, global market trends are reinforcing the importance of clean industrial supply chains. Sustainability is no longer confined to ESG disclosures or voluntary reporting frameworks; it is increasingly becoming a determining factor for market access and trade competitiveness. The European Union's Carbon Border Adjustment Mechanism (CBAM) is a typical example of this shift. By attaching a carbon cost to imported products, CBAM is changing how global manufacturers evaluate their supply chains. Other developed markets are likely to introduce similar measures.

For Indian exporters, especially in sectors like steel and aluminum, decarbonization is no longer just a matter of corporate reputation; it is a necessary condition for maintaining market access and competitiveness in global value chains. Manufacturers that can demonstrate lower embedded carbon emissions will hold a clear advantage in a world where carbon becomes an economic variable.

Current Development Dynamics: Policy, Economics, and Technological Progress

#### Accelerating Policy Framework

The Indian government is pushing industrial decarbonization from voluntary action to mandatory transformation. The Carbon Credit Trading Scheme (CCTS) is a significant step: over 740 industrial facilities (covering major sectors) now face emission intensity reduction targets, marking a clear shift toward performance-based climate regulation.

In addition, the government has launched initiatives supporting green hydrogen, carbon markets, and carbon capture, utilization, and storage (CCUS), building a policy framework for large-scale industrial decarbonization. These measures provide industries with the incentives and regulatory certainty needed to invest in low-carbon technologies. For example, the National Green Hydrogen Mission aims to produce 5 million tons of green hydrogen by 2030, most of which will be used in hard-to-abate sectors such as steel and chemicals.

#### Improving Economics Drive Change

The economics of industrial decarbonization are becoming increasingly attractive.#### Economic Improvements Driving Change

The economics of industrial decarbonization are becoming increasingly attractive. Rising coking coal prices, growing carbon-related costs, and investor expectations are narrowing the gap between traditional production routes and green alternatives.

Green steel, renewable-energy-driven manufacturing, and circular production models are gradually approaching commercial viability. Although challenges remain (especially in technology and scale), the business case for clean production is strengthening. Decarbonization is increasingly seen not just as a compliance requirement, but as a strategy for long-term competitiveness and resilience.

#### Technological Innovation as a Key Driver

Renewable energy adoption alone cannot achieve the deep emissions reductions needed in hard-to-abate sectors. The next frontier lies in digitalization, artificial intelligence, process optimization, electrification, and circular economy practices.

AI-powered energy management systems can improve operational efficiency, reduce waste, and optimize resource consumption. Circular production models can reduce dependence on virgin materials while enhancing productivity. Together, these innovations provide industries with a path that both reduces emissions and strengthens competitiveness. The steel industry is experimenting with hydrogen-based direct reduced iron (DRI) technology, while the cement industry is exploring alternative fuels and carbon capture.

Impact on the Energy System

Decarbonizing industrial supply chains has multifaceted impacts on India's energy system:

• Energy Supply Structure: Industrial demand for green hydrogen, electricity, and low-carbon fuels will reshape the electricity demand curve. By 2030, electricity demand from the steel and chemical sectors alone could increase by over 100 TWh, requiring further expansion of renewable energy capacity and enhanced grid flexibility.
• Energy Security: Reducing dependence on imported coking coal (a key raw material for the steel industry) can lower the energy trade deficit. India's coking coal imports exceeded $25 billion in 2023; replacing some coking coal with green hydrogen or renewable-energy-powered electric arc furnaces will improve energy security.
• Grid Stability: Industrial loads can provide demand response resources. Green manufacturing plants equipped with energy storage systems can help balance the output of variable renewable energy.
• Electricity Costs: Renewable energy costs continue to decline, but industrial users will need to pay additional fees for grid upgrades and energy storage. However, the overall cost may be lower than the additional costs imposed by carbon taxes or CBAM.
• Supply Chain Development: Clean supply chains will give rise to new industries such as green equipment manufacturing, electrolyzer production, and carbon capture equipment, creating jobs and export opportunities.
• Carbon Reduction Targets: Deep industrial decarbonization is a prerequisite for India to achieve its 2070 net-zero target. Decarbonizing the power sector alone will not suffice.

Challenges Ahead

• Despite the promising outlook, India's industrial decarbonization faces significant challenges:- Insufficient technological maturity: Technologies such as hydrogen-based direct reduced iron and cement carbon capture are still in the demonstration phase, with commercialization requiring 5–10 years. The cost and energy efficiency of CCUS remain major bottlenecks.
• Enormous financing pressure: According to IEA estimates, cumulative investment of approximately $1.5 trillion is needed for industrial decarbonization in India by 2050. There is currently a large gap in green financing, and domestic capital markets impose a high risk premium on low-carbon technologies.
• Transmission grid constraints: Clean industrial facilities typically require a stable supply of renewable energy, but India's grid transmission losses and renewable energy integration bottlenecks (especially in the eastern and southern industrial belts) may affect project siting.
• Policy uncertainty: The specific carbon pricing mechanism of the carbon credit trading scheme has not yet been fully implemented; the transitional rules of CBAM are still under negotiation, which may affect the pace of corporate investment.
• Raw material supply issues: Green hydrogen production depends on electrolyzers, and the platinum group metals and rare earths used in electrolyzers are concentrated in a few countries; lithium batteries for energy storage also face supply chain risks.
• Skilled labor shortage: Operating AI energy efficiency systems and maintaining electrolyzers require new skills, and India's education and training system needs to keep pace with demand.No other major economy is simultaneously attempting to expand manufacturing, infrastructure, and clean energy deployment at such a pace. By building cleaner industrial supply chains and clean energy infrastructure, India can create a sustainable model of industrial growth that can be replicated globally and position itself as a trusted hub for low-carbon manufacturing in a world increasingly focused on carbon.

The future of India's energy transition will depend not only on its installed renewable energy capacity but also on the carbon footprint of the materials and industrial processes that make this transition possible. Cleaner industrial supply chains are no longer just a supporting element of the energy transition—they are rapidly becoming its cornerstone.