The regulation of AI should take its climate impact into account

AI is so costly for the planet to deploy that a cost-benefit analysis ought to guide its rules of usage

India is undoubtedly a leading country in the deployment of artificial intelligence (AI) systems. A recent survey on cloud complexity by NetApp, a data infrastructure company, revealed that 70% of firms in India have AI projects up and running, as against 53% in the US, and that 91% of the companies in India plan to use their data to train AI models, as against a global average of 62%.

Globally, the AI industry is expected to grow by 37% annually till 2030, with great excitement over the opportunities it creates as also trepidation on its misuse. Regions/countries like the EU, US and China are expected to implement sweeping regulatory measures to bring about greater transparency, establish new standards and address activities that pose a systemic risk to citizens, with the EU already working on a bill to institute an “AI liability directive” that would provide financial compensation to adversely effected people. India too is cognizant of the need to develop a regulatory regime for AI, although it is likely to be light-handed, at least initially, with potential job losses its special focus.

It is important, however, to recognize the two-way relationship between AI and the energy sector. The electricity grids of today are only going to grow in complexity, with multi-dimensional flows of electricity now integrating all kinds of distributed and decentralized systems, including rooftop solar panels, electric vehicle power-packs, and so on. Combine this with the complexity that accompanies the deployment of hybrid systems such as wind-solar or offshore wind-solar-tidal power, or other combinations thereof. Planning and operating such systems, in particular the vexed challenge of demand and supply forecasting, will greatly benefit from the use of AI systems. In fact, AI will likely be indispensable for sustaining the green energy grid of the future. While AI is already helping with the predictive maintenance of current energy systems, it is easy to imagine it playing a vital role in the maintenance of emerging systems that will be vastly more complex.

On the flip side, the energy guzzling nature of the AI industry is assuming alarming proportions. A search driven by AI could consume four to five times the energy needed for a conventional web search. It is estimated that the computational power required to sustain the rise of AI is doubling roughly every 100 days. To achieve a 10-fold improvement in AI model efficiency, demand for computational power could surge by up to 10,000 times. In Davos, Switzerland, OpenAI’s CEO Sam Altman sounded a warning on the vastly higher power demand of the next wave of generative AI systems that energy systems will have to cope with. The water demands of the AI industry to cool data processors could be enormous too.

Research on other environmental consequences of AI is still in a nascent stage. However, staying with energy for the moment, there is no doubt that the world is off-track in meeting its sustainability goals. India’s renewable energy programme, while impressive, has thus far only helped make a dent in incremental electricity demand and therefore incremental emissions; it has not yet started taking emissions out of the country’s base of energy demand. Unchecked deployment of AI could increase incremental electricity demand enormously, making the task of reducing the growth of greenhouse gas emissions and eventually reversing them that much more challenging.

In other words, India and the world could be locking themselves further into fossil energy use for much longer. And, while we have little evidence on other environmental consequences of AI, the adverse effects of fossil energy use on the planet is well established and may be proportionally attributable to AI in the future.

To remind ourselves, scientists have identified nine planetary boundaries, staying within which would provide a safe operating space for humanity. We have crossed six of these boundaries, capturing climate change, fresh water use, air pollution, biosphere integrity and plastics pollution—mostly attributable to our use of fossil fuels.

The relationship between AI and energy becomes even more consequential in the context of climate concerns driving net-zero ambitions around the world, the emerging jurisprudence around recognizing our right to escape the adverse impacts of climate change as a human right, and the rise of liability directives in the context of AI regulation. The Supreme Court of India said in a recent judgement that climate change impacts the constitutional guarantee of the Right to Life, and that citizens have a right to freedom from the adverse effects of our climate emergency.

Not only does the AI industry need to take responsibility for its climate impact, every user industry too, by virtue of its Scope 3 emission responsibilities, must weigh the costs and benefits of AI deployment carefully. We cannot afford to allow its use for frivolous ends. Similarly, the regulatory regime needs to recognize the high cost of AI application—in terms of investments, climate effects and other environmental factors—and provide clear AI-usage guidance and incentives to contain costs. India and Indian industry should work towards strong, precautionary and enabling regulatory regime for AI. The sooner, the better.

International news in India at the beginning of 2024 was dominated by a publicized phase of diplomatic tension between India and the Maldives following Prime Minister Narendra Modi’s visit to the Union territory of Lakshadweep. This was followed by an order by the government of Maldives asking Indian troops to leave the archipelago nation.

However, this wasn’t the first time the relationship between the Maldives and India has been disturbed. If we go back a decade, in 2013, Malé had asked Indian infrastructure giant GMR to leave. After protracted arbitration, GMR was awarded $270 million in 2016 against claimed losses of $800 million.

Jindal Steel faced a similar fate in Bolivia when it had to walk out of a multi-billion-dollar project following a scandal over encashment of bank guarantees by the Bolivian government. The Indian company was awarded $22.5 million against claimed losses of over $100 million.

Given such instances, Indian industries wanting to spread their wings beyond Indian shores have been seeking political risk insurance (PRI).

Despite market demand for PRI, the question is whether this should be a significant policy matter, given the robust growth of India’s economy and growing set of domestic and international investors. There is general euphoria about the India story and the arrival of Amrit Kaal—a propitious phase for turning India into a developed country. The continued buoyancy of Indian markets in the wake of the covid pandemic, slowdown in China and conflicts in Ukraine as well as Palestine has demonstrated the confidence of investors in the India story. Strong domestic markets, of course, are indispensable to a robust economy.

However, to transform India into a global economic power, Indian businesses must expand their footprint beyond domestic markets. Outbound foreign direct investment (FDI) will be instrumental in accomplishing this business expansion. India’s outward FDI imperative may be understood from two perspectives:

One, India and Indian businesses must have a strategy to identify and capture markets abroad through forward integration in largely untapped and underserved regions such as Africa and South America. Many of India’s small technology-enabled companies could move quickly into global markets. For these ‘born global’ startups and micro, small and medium enterprises (MSMEs), outward FDI may be a critical means of business expansion.

Two, in a globalized world, sourcing of raw material can play a significant role in businesses gaining a competitive advantage. Therefore, unsurprisingly, some Indian companies have invested in facilities across the globe in pursuit of such an advantage while expanding operations. The future expansion strategies of Indian businesses must stay cognizant of the emergence of some developing nations as major suppliers in the coming years. The drive for decarbonization across industries has been driving demand for critical minerals that go into clean-tech solutions from such countries. This presents an opportunity for backward integration by Indian businesses through outward FDI.

The outward FDI path, however, is not free of hurdles. Some relatively untapped markets are particularly prone to high political risk, unfortunately. Given this backdrop, PRI is a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments in developing countries. It also eases the access of companies to finance on good terms.

In India, some private insurers and ECGC Ltd, a state-owned insurer, provide PRI. However, there is a major challenge that contributes to an observed under-utilization of PRI by Indian businesses as an effective tool for expansion: the low availability of US dollar-denominated PRI policies.

Rupee-denominated PRI policies are not adequately useful for businesses as the Indian rupee has been depreciating in value against the US dollar for years. Thus, the assured sum may not be sufficient to cover losses over extended periods.

Both backward and forward integration are long-term endeavours and necessitate insurance policy coverage for longer periods of time. Also, the frequent renewal of short-term rupee-denominated policies issued by Indian insurers is cumbersome and perhaps motivates businesses to opt for risk cover from international insurers that operate overseas.

Globally, most national PRI providers offer risk coverage in foreign denominated currencies. This includes the UK, where insurers offer 60-plus local currency options for PRI. For Turkey, its Exim Bank offers coverage principally in dollars and euros, although it also offers many other options, like the Japanese yen and British pound. In Japan, specific policy conditions are laid out for insurers to provide foreign currency denominated payouts; these include dates for applicable foreign-exchange conversion rates for such payments.

To facilitate the growth of Indian businesses outside India, India must overcome this problem associated with political risk insurance.