Climate Finance for Prosperity: What should India do?

India’s climate targets: India has a long-term goal of achieving net-zero emissions by year 2070. The Nationally Determined Contributions (NDCs) for India includes intermediate targets by year 2030. They are, reduction of emissions intensity of GDP by 45%, achieving 50% cumulative installed power from renewable energy, creating 3 billion tonnes of forest cover, and promoting healthy and sustainable way of living. The targets require increased investments in development programs for adaptation measures in agriculture, water resources, coastal regions, health, and disaster management.

Progress: The progress towards NDCs during the last 10 years is not unsatisfactory, thanks to the increase by year 2023 of renewable energy to about 44% of total installed capacities, reduction of emissions intensity by 33% between 2005 – 2019, and other measures initiated by the Government.

Climate risk impacts: While the efforts and achievements are continuing, the climate risk impacts are also continuing. During the past ten years, floods caused several deaths. The instances include 1,000 deaths in year 2018 in Kerala, 500 deaths in year 2015 in Chennai, and 6,000 deaths in year 2013 in Uttarakhand. There are deaths due to instances of extreme heat waves, droughts, landslides, and starvation. The other impacts include receding of glaciers, shrinking of freshwater availability, loss of green cover, and declining biodiversity. In year 2019, India ranked 7th among the most affected countries due to extreme weather conditions. The climate risk impacts caused deaths, loss of properties, and unbalanced growth.

Climate projects and others: The efforts, programs, and projects for mitigation and adaptation measures require huge funding. India is a capital scarce economy struggling to allocate capital for the required projects. India has a huge challenge in funding climate related projects. Insufficient funds for climate related projects may slow down GDP (gross domestic product). At the same time, focusing more on climate projects affects other sectors and other projects.

World Bank Report: The World Bank released a climate finance report on 2nd September 2024 on the emerging and developing economies (EMDEs). In EMDEs except China, less than 50% of climate finance is domestic. Also, about 50% of total climate finance in EMDEs (again except China) is from Government. About 28% of banks in EMDEs provide no climate finance at all. About 60% of banks in EMDEs have less than 5% of climate financing in their overall lending portfolios. Within the provided climate finance, only 16% is towards climate adaptation. It could be due to pay back periods from adaptation projects being longer than those of mitigation projects.

Mobilizing incremental finances is not easy. Diverting complete funds from the existing capital is risky. Finding an approach that could well address climate risks while minimizing other impacts is the challenge and the need of the hour. At the same time, not involving banking system to dispense the loans may have severe adverse impact on the economy.

For Advanced Economies, climate finance is available from domestic sources. More of the volume is from private sector. This implies that the climate projects in the Advanced Economies are sustainable and financially viable.

Fiscal constraints for India: India is also fiscally constrained like other EMDEs (except China). The climate related projects are yet to prove to be financially viable given the low paying capacity of the users. Diverting existing capital may affect growth, hugely depreciate rupee since climate friendly projects call for import of technology, and cause unemployment where technology replaces manpower. The income inequalities may increase, and growth may be imbalanced.

Ideal Fund Sources: Considering the above, India should mobilize funds from new sources besides rerouting some of the existing funds to climate finance. This should be without weakening the banking system. Private funds from the Advanced Economies should be the target. Efforts should also be on mobilizing domestic private funds, particularly from private sector developers who could be motivated to take up sustainable climate related projects. ??

Ideal approach: The private investments from Advanced Economies should be invited for climate finance. This needs a more conducive policy framework. The contractual robustness and policy stability should be demonstrated beyond doubt. Long term projects at a sustainable scale should be planned. Public Private Partnership (PPP) projects should be initiated. Public infrastructure support should be strengthened to enhance viability. Introduce suitable reforms. Ensure transparent accounting and reporting on the deployment of climate finance. Let institutional funding play a guiding role. Gear up the Banks to extend loans to the climate related projects. A Climate Finance Bank should be established. It may be an exclusive climate development bank with expertise to assess climate risks, provide long-term funds, low-cost funds, and on terms that promote more climate related projects. Like priority sector lending (PSL), a percentage should be earmarked for climate finance. Banks should be mandated to report their proportion of climate finance lending. The Institute of Chartered Accountants of India (ICAI), through its Sustainability Reporting Standards Board (SRSB) or otherwise should issue guidance note on accounting for climate finance investments and climate project assets. Securities and Exchange Board of India (SEBI) may launch an innovative framework for climate related projects for equity, bonds or unit investments such as Infrastructure Investment Trusts (InvITs). Finally, Government should publish annual reports on climate finance and progress in climate related projects.

Disclaimer: Dr. Kishore Nuthalapati is an Economist, and is the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.