Decarbonising Power Without Sacrificing Jobs
Carbon pricing need not cost jobs in India if clean electricity keeps power affordable for industry
Raavi Aggarwal: Indian Statistical Institute (ISI), Delhi | World Inequality Lab, Paris School of Economics
SDG 7: Affordable and Clean Energy
Ministry of Power | Ministry of New and Renewable Energy
India’s energy transition is often framed as a trade-off between climate responsibility and economic growth. Carbon pricing, in particular, is seen as an efficient way to cut emissions, but also as a risk to manufacturing competitiveness and employment because it raises electricity prices. When power becomes more expensive, firms cannot easily replace electricity with labour, even though the power system itself can replace coal with renewable sources. This creates a binding constraint on climate policy design: decarbonisation must proceed without making electricity unaffordable for producers.
Recent evidence from India’s manufacturing sector and electricity market clarifies why this tension arises – and how it can be resolved. At the level of firms, labour and electricity move together in production. At the level of the power system, however, coal-based and renewable electricity can substitute for each other relatively easily. Climate policy need not be employment-unfriendly, provided it accelerates this upstream substitution and delivers clean power at competitive prices.
Why Electricity Prices Matter for Employment
Inside a factory, labour and electricity are complements rather than substitutes. Workers operate machines, monitor processes, and maintain production lines that require reliable power. When electricity becomes more expensive or less available, firms do not respond by hiring more workers. Instead, they scale back activity–reducing both electricity use and employment.
Economists describe this relationship using the elasticity of substitution, which measures how easily one input can replace another when relative prices change. A low elasticity indicates complementarity: making one input more expensive reduces the use of both. In such settings, higher electricity prices translate directly into lower output and fewer jobs.
Data from the Annual Survey of Industries covering registered manufacturing units across all states between 2009–10 and 2019–20 suggest that the elasticity of substitution between labour and electricity is around 0.1 – far below one. This means when electricity prices rise, firms scale back production, leading to lower electricity use and lower employment – rather than substitution toward labour.
One might expect greater flexibility outside the formal sector, where firms are smaller and production processes less capital-intensive. Yet, data from enterprise surveys conducted by the National Sample Survey Office in 2010–11 and 2015–16 tells a similar story. Estimated elasticities of substitution in informal manufacturing range between 0.3 and 0.5 – higher than in registered units, but still well below one.
This does not indicate technological flexibility relative to the formal registered manufacturing; rather it reflects scale constraints, underemployment, and low capital intensity.
This production rigidity would matter little if electricity prices were stable. They are not. Over the past decade, industrial electricity tariffs have risen – from about ₹5 per kWh to nearly ₹8 per kWh. For firms operating on thin margins, these increases have raised persistent concerns about competitiveness and job creation. When power becomes more expensive, firms scale down rather than rewire production.
Why the Power System Can Switch from Coal to Renewables
Electricity generation tells a very different story. Coal-based generation and renewable energy – particularly solar – are highly substitutable. Here, estimated elasticities of substitution range between 2.0 and 3.3, well above one. This means that when coal-based power becomes more expensive relative to renewables power producers and state distribution companies can shift the generation mix.
This is evident in recent trends. Between 2015–16 and 2023–24, the average cost of coal-based power rose from roughly ₹3.4 per kWh to about ₹4.9 per kWh, while the cost of solar power fell sharply, from around ₹7.6 per kWh to nearly ₹4.1 per kWh. Over the same period, average solar generation across states increased more than fifteen-fold. Even as coal remains dominant in total output, the grid has shown a strong capacity to rewire when relative prices change.
This flexibility is not accidental – it reflects both technological change and policy design. Competitive auctions, falling solar module prices, and regulatory mandates such as Renewable Purchase Obligations have enabled distribution companies to scale up renewable capacity when costs permit. Crucially, this substitution happens upstream – before electricity reaches industrial users – creating the possibility of decarbonisation without higher tariffs if the transition is managed well.
Carbon Pricing Without the Employment Penalty
These two relationships – rigidity inside firms and flexibility in electricity generation – point to a clear policy implication. Carbon pricing that raises electricity prices without changing the generation mix risks weakening manufacturing employment. Carbon pricing that accelerates a shift toward cheaper renewable electricity does not. What matters for employment, then, is how the power system absorbs the carbon price.
India’s own experience illustrates this risk. Even without an explicit economy-wide carbon tax, India already prices carbon implicitly through coal taxation. The effective levy on coal rose from ₹50 per tonne in 2010 to over ₹400 per tonne in 2017. Recently, the coal cess has been replaced with an 18 percent GST on coal. The cess contributed to higher coal prices and, through pass-through by power companies, higher industrial electricity tariffs. In the absence of sufficient low-cost renewable supply, the burden of this transition has fallen disproportionately on industry. The problem has not been carbon pricing itself, but the lag in expanding affordable clean power alongside it.
Discoms, Tariffs, and the Political Economy of Power
Whether carbon-related increases in electricity tariffs reach firms is not automatic. State electricity distribution companies sit at the centre of this transition. They are active decision-makers that choose the generation mix and set tariffs within a national regulatory framework. Their objectives include minimising procurement costs, meeting supply targets, and financing cross-subsidies from industry to households.
Industrial tariffs in India often include surcharges of up to 20 percent above the cost of supply, reflecting redistribution rather than inefficiency alone. Any climate policy that ignores this political economy risks misreading its employment effects. If renewable integration lowers the underlying cost of power procurement, distribution companies have room to cushion industrial tariffs while maintaining social objectives. If it does not, higher carbon costs will continue to be passed on to firms.
This makes coordination across ministries – power, coal, finance, and new and renewable energy – essential. Carbon pricing, renewable support, and tariff regulation cannot be treated as separate silos if the aim is a growth-friendly transition.
What This Means for Manufacturing-Led Growth
For India’s manufacturing ambitions, the evidence is cautiously optimistic. Decarbonisation does not inevitably destroy jobs. The real risk lies in implementing climate policy without addressing electricity prices. Because labour and electricity move together in production, protecting employment means protecting access to affordable power.
At the same time, the electricity system offers genuine flexibility. The grid can substitute away from coal as renewable technologies mature and costs fall. States that expanded solar capacity more rapidly in the late 2010s were better placed to absorb rising coal costs without proportionate increases in industrial tariffs.
A Transition that Aligns Climate and Growth
India’s energy transition will succeed not by choosing between climate goals and employment, but by aligning them. Carbon pricing can send the right signals, but only if embedded in a broader green industrial policy that prioritises affordable electricity for producers. Renewables, in this sense, are not just a climate solution; they are an industrial competitiveness tool.
The real test of India’s transition is simple: can the grid absorb higher carbon costs without raising the price of electricity faced by firms? If it can, decarbonisation and manufacturing growth can reinforce rather than undermine each other.
Authors:
The discussion in this article is based on author’s research published in the Journal of Development Economics (Volume 179). Views are personal.