Cite report
IEA (2023), Transitioning India’s Road Transport Sector, IEA, Paris https://www.iea.org/reports/transitioning-indias-road-transport-sector, Licence: CC BY 4.0
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Executive summary
Road transport will play a key role in India’s clean energy transition
India is among the fastest growing economies globally and will soon become the world’s most populous country. While road transport expansion and improvement typically serve as a catalyst for socio-economic development, as has happened in many countries, it has unleashed several negative environmental problems in India, namely, burgeoning emissions of CO2 as well as air pollutants such as nitrogen oxides (NOX) and fine particulate matter (PM2.5).
Road transport presently accounts for 12% of India’s energy-related CO2 emissions and is a key contributor to urban air pollution. As India seeks to meet the increasing demand for private mobility and the transport of goods, energy use and CO2 emissions from road transport could double by 2050. The IEA’s Stated Policy Scenario (STEPS), which reflects the trajectory implied by today’s policy framework, projects that both energy demand and CO2 emissions will peak in the 2040s and decline only marginally afterwards. The steadily increasing use of private cars and the expanding truck fleet, with continued reliance on gasoline and diesel, drive the rise. Two-wheelers continue to dominate India’s vehicle fleet, but due to fast electrification, their energy needs and emissions start to decline in the mid-2020s.
Ambitious policies could reduce energy demand by 30% and avoid 60% of the expected CO2 emissions in 2050
In 2021, India’s Prime Minister announced the ambition to reach net zero carbon emissions by 2070. According to the IEA’s Announced Pledges Scenario (APS), which brings the sector on track with the 2070 goal, ambitious policies could help reduce energy demand by 30% in 2050 relative to current policies, saving India 70 million tonnes of oil equivalent (80% of the sector’s current energy needs). CO2 emissions peak in the mid-2030s and fall to about 20% below today’s level by 2050. Cumulatively, this could avoid up to 4 Gt CO2 between 2021 and 2050, compared to the current policy framework. Up to 2030, additional reductions are realised equally through stronger energy efficiency improvements in vehicles with an internal combustion engine (ICE), accelerated electric vehicle (EV) uptake and higher biofuel use. After that, electrification, especially of cars and trucks, accounts for most of the additional abatement potential.
Additional CO2 mitigation potential in India in the Announced Pledges Scenario compared to the Stated Policies Scenario by abatement option, 2010-2050
OpenElectrification is a key pillar of India’s strategy to decarbonise transport
India is the world’s fourth largest car manufacturer, making EVs a potential source of economic growth and exports. There are two flagship national programmes to support road transport electrification in India: The Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, which provides purchase incentives and charging infrastructure support until 20, and the Production-Linked Incentive (PLI) schemes that provide incentives for manufacturing in different sectors. Numerous state-adopted policies complement national programmes.
As a result of these policies, EV sales are projected to reach nearly 35% of total vehicle sales in 2030. To bring the sector on track with the 2070 goal, this share needs to reach 50%. The amount of CO2 that EVs can avoid will depend on the speed at which India decarbonises its power sector, which currently heavily relies on coal. Today, the tailpipe CO2 emissions that India’s EV fleet avoids are roughly equal to the CO2 emissions that such vehicles indirectly cause at the power plant level. However, this is set to change in the future: By 2030, India’s EV fleet will avoid around 5 Mt CO2, while in 2050, the amount could range from 110 to 380 Mt CO2, depending on the EV fleet size and the pace of power sector decarbonisation. EV deployment can also considerably reduce citizens’ exposure to air pollution.
Two- and three-wheelers are the frontrunners for electrification
India’s EV market is small but growing. EVs accounted for 1.8% of new vehicle sales in 2021, and more than 4% in 2022. Shares vary from more than 50% among three-wheelers, to 4% for two-wheelers and less than 1% for cars, reflecting differences in purchase and operating costs. Analysis of the total cost of ownership (TCO) shows that electric three-wheelers are 70% cheaper than their gasoline-powered ICE equivalents over their lifetime. EVs are also cost competitive in other categories, but high upfront costs can deter consumers. India’s policies are addressing this: for example, the sales price of electric scooters was about three times that of a comparable gasoline scooter in 2022, but the FAME subsidy and favourable taxation reduce this difference to twice as expensive. Policy measures such as low-emission zones, stringent fuel economy standards or zero-emission vehicle (ZEV) requirements can further accelerate EV deployment.
Fuel efficiency improvements are equally important
Even in the APS, gasoline and diesel still account for more than half of the road transport sector’s energy demand in 2050, highlighting the critical importance of improving fuel efficiency in conventional vehicles. India implemented the Corporate Average Fuel Consumption (CAFE) standards for passenger cars in 2017 and in 2022, these standards were tightened by more than 10% to 113 g CO2/km. It is expected that manufacturers will meet this target largely by means of flexibility mechanisms that aim to promote technological innovation. Fuel economy standards for trucks were adopted in 2017.
In the STEPS, the fuel efficiency of cars improves by less than 20% up to 2035. In the APS, however, it improves by more than 50%. A speedy update and gradual tightening of its fuel economy standards would help India achieve this. If India were to achieve a 55% reduction in corporate average fuel economy by 2035 compared to current levels (i.e., imitating the EU Fit for 55 target with a five-year time lag), cars sold between 2035 and 2037 could save up to 145 Mtoe in fuel consumption and avoid 400 Mt CO2 emissions over their lifetime compared with the current policy framework. India could further consider adopting fuel economy standards for two-wheelers, given that they account for more than half of the country’s gasoline consumption.
Developing strategies for clean trucking is a priority
Improving the fuel efficiency of diesel trucks will be pivotal in limiting future diesel demand and emissions growth. The government is revising fuel economy standards for trucks and is expected to release a roadmap by the end of 2023. To be on track with the 2070 goals, the fuel efficiency of the diesel truck fleet needs to improve by more than 35% by 2050. The largest additional abatement potential in the APS however lies in the deployment of ZEV trucks, i.e., electric and fuel cell trucks. While ZEV trucks make inroads into the fleet only after 2030, policy efforts to reduce costs and build enabling infrastructure need to begin now for leveraging scale in the next decades. To achieve this, India could build on the successful April 2022 tender with FAME through which 5 450 electric buses will be introduced across the country. Implementing a similar procurement for medium-sized electric freight trucks could avoid 3 Mt CO2 and more than 30 kt NOX emissions over the replaced trucks’ lifetime.
Road transport fuel consumption of freight trucks in India in the Stated Policies Scenario and the Announced Pledges Scenario, 2021 and 2050
OpenThe co-benefits for air quality are considerable
Air pollution is one of India’s most pressing environmental challenges. Of the 50 most polluted cities in the world, 35 are in India. Reducing transport-related emissions would have direct public health benefits, given that a large share of emissions occurs in urban areas and close to the ground, directly affecting millions of people. Road transport currently accounts for 20-30% of urban air pollution.
India regulates vehicle tailpipe emissions by means of the Bharat Stage (BS) emission standards. In April 2020, India implemented BS-VI standards, which largely parallel Euro-6/VI norms, leapfrogging from BS-IV to BS-VI in only three years. In addition, several climate-driven policies, including vehicle electrification, have strong co-benefits for air quality and public health. In the STEPS, NOX emissions from road transport decline by 15-20% by 2030 and fall drastically afterwards, due to the BS standards and the gradual shift to EVs. However, non-exhaust PM2.5 emissions caused by the suspension of road dust, and brakes and tyre wear abrasion increase and require greater attention.
India’s scrappage policy of 2021 has great potential to reduce air pollution. This policy requires passenger cars older than 20 years and commercial vehicles older than 15 years to pass a “fitness test” to keep their registration. The replacement of freight trucks which fail the test could avoid up to 17% of NOX and 11% PM2.5 emissions from trucks, assuming that they would be replaced by trucks that are BS-VI compliant.
Strengthening enabling conditions for the transition
Holistic long-term planning can support the fast and ambitious transition of the road transport sector. As in other countries, transport planning and policy making in India has largely been conducted by mode, partly because responsibilities are split between various institutions. The last significant review of India’s transport planning dates to 2010. Launching another round of long-term planning could help provide a common vision for the sector, support policy alignment and provide certainty to industry, financial markets and consumers. Improving data on key indicators such as vehicle activity and performance, energy use and emissions would support such efforts.
Achieving an ambitious transition will require mobilisation of capital and finance. The average annual investments in EVs and private chargers will need to increase from about USD 210 million in 2016-2020 to USD 19-33 billion in 2026-2030, depending on the scenario. However, regulatory uncertainty, high risk-perception, and limited risk mitigation options and targeted financing mechanisms are increasing the costs of finance, while hampering access to funds. Options to address these barriers range from data and capacity improvements, to policies which reduce upfront and financing costs (e.g., through subsidised interest rates) as well as the use of guarantees or risk-sharing facilities, and the promotion of innovative business models.
The shift from petroleum products to electricity will have consequences for public finances, especially at the state level, where the taxes on petroleum products contribute 3% to 12% of net revenue receipts. By 2030, the shift from ICEs to EVs could lead to USD 5-8 billion in foregone tax revenue from avoided gasoline and diesel consumption at the state level. Additional tax revenue from EVs’ consumption of electricity compensates only half of the forgone revenue. Alternative revenue streams could be secured, for example, by shifting from taxing fuel consumption to taxing vehicle use by means of road pricing.
Following steps could help realise further climate and air quality benefits
- Strengthening policies for electrification. Continue existing demand incentives to help bridge the upfront price gap between EVs and ICEs beyond 2024 (when FAME will expire) and maintain favourable taxation. As electric three-wheelers are already highly cost competitive in TCO terms, fleet targets, ZEV sales requirements or registration restrictions for ICEs could be considered. For cars, demand incentives will need to be accompanied by stringent fuel economy standards. Preferential parking and low-emission zones can provide an additional push for EV adoption, without increasing the burden on public budgets.
- Strengthening fuel economy standards. Establish a roadmap for fuel economy standards in line with long-term climate goals and with a regular revision cycle. Consider EU fuel economy regulations with a five-year time lag, e.g., aiming for a 15% improvement by 2027, applying penalties for non-compliant car manufacturers, and updating flexibility mechanisms. Introduce standards for two-wheelers, sufficiently stringent to support electrification.
- Supporting the transition of heavy-duty vehicles. Continue to prioritise the deployment of electric buses by means of bulk procurement. In trucking, update and enforce fuel economy regulations. In addition to ongoing efforts to improve freight transport logistics, India could support pilot projects for electric and fuel cell trucks and expand demand incentives to ZEV trucks.
- Fully implement the scrappage policy to accelerate phase-out of the most polluting vehicles. Rapidly setting up more testing centres could help accelerate the identification of end-of-life trucks. Strengthening incentives to scrap and replace, and linking them with access to finance, and a public communications campaign, could further enhance the policy’s potential to reduce air pollutants. In addition, and building on the National Clean Air Programme, cities can reduce circulation of the most polluting vehicles in densely populated areas, e.g., by establishing low-emission zones.
- Strengthen policies and mechanisms to improve access to EV financing and reduce the cost of financing. Opportunities include enhancing technical capacities in the financial sector, improving data availability on long-term EV performance, promoting risk mitigation mechanisms and businesses models that reduce financing needs and/or costs, and including EVs in priority sector lending.
- Strengthening the basis for transport policy making. Develop a long-term plan to align road transport with the national 2070 net zero goal, including milestones and measures on how to achieve them. Invest in collecting and managing road transport-related data to support policy making. Strengthen institutional structures, for example, by creating a nodal agency for EV policies, to strengthen policy co‑ordination across sectors and levels of government.
- Strengthen international engagement and collaboration. India already participates in several international collaborative efforts such as the Clean Energy Ministerial's Electric Vehicle Initiative and the CALSTART initiative. India should take advantage of the opportunities that exist to further strengthen international collaboration and improve co-ordination in ways that will contribute to progress towards its long-term goals.