India is increasingly vulnerable to climate change. We lose approximately one percent of our annual GDP due to the increasing frequency of natural disasters that can be linked to climate change. An increasing number of Indians recognise this reality and are concerned.
We have done well to state a net-zero target and aggressively accelerate renewable energy deployment. However, drawing up a road map with agreed milestones must be accomplished, particularly for hitherto missed opportunities.
Financing for climate action is our biggest challenge. According to the Climate Policy Initiative, about $44 billion of climate finance was mobilised in 2021, approximating one-fourth of the requirement. Most went towards mitigation projects, particularly renewable energy. Domestic capital contributed about 85 percent, with a 60:40 split between private and public sectors.
Clearly, there is a need to ramp up financing. We also need supportive policies and business models, specifically for sectors with low investments. For example, cities need to be prioritised as they are particularly vulnerable to climate impacts and consume a large proportion of energy.
Priority should be to finance solutions that provide maximum bang for the buck. For example, energy conservation, decentralised energy generation, and public transport. On the adaptation side, it is reviving water bodies, urban forests, vertical gardens, recycling plastic waste, and sea walls in coastal areas, amongst others. Forestry, land use and agriculture deserve significant investments at the national level.
Beyond prioritisation, multiple strategies at policy, program, and institutional levels are required to increase climate funding on a sustained basis.
First, the Green Growth priority, outlined in the Budget 2023, needs a champion. Given the significant investment requirement, the Ministry of Finance (MoF) is best placed to lead.
An evolved role for the MoF has several advantages, including accelerated and coordinated policy action. The MOF must appreciate that a major source of financial instability and macroeconomic change is inherent in climate risks. Therefore, climate financing must be integrated into the broader economic strategy and budgetary allocations.
Further, public funding needs to step up to plug the gaps. MoF has the skill set and mandate to prioritise investments with maximum impact. This is critical because multiple solutions exist, but line ministries are constrained by narrow mandates or a lack of industry response.
For example, adopting nature-based strategies, such as shading, increased ventilation, building orientation, double brick or cavity walls, and cool roofs, are technically optimal and were part of our traditional architecture. However, modern construction generally ignores them due to a lack of incentives and commercial interest.
The MoF can drive innovative new policies such as sustainable procurement, which can embed sustainability into product design and value chains. Such an approach will enable greater adoption of nature-based options and optimise energy consumption and investment requirement.
Further, policy action on carbon tax, subsidies, and investment in fossil fuels should be considered from a broader economic perspective. This will ensure coordinated action across centre, states, cities, and sectors of the economy. We are not recommending a return to central planning but prioritising climate investments to optimise the requirement. Without a consensus on such a roadmap, battling climate change will be challenging and expensive.
While the MoF can drive fiscal policy and budgetary allocations, monies from multiple sources must be garnered, pooled, and invested. Structuring annual investments of over $100 billion will require significant institutional capacity. Therefore, the second strategic intervention should be to catalyse a Green Bank focused on mobilising and directing climate finance.
There are multiple global precedents, including several regional green banks in the US. Likewise, Australia, Malaysia and the UK have created specialised corporations and banks to direct investments in green infrastructure. A dedicated institution will bring the required focus.
A Green Bank is also best placed to scale up the recent success with Sovereign Green Bonds. It can also develop other specialised bonds, such as Sustainability Bonds, Impact Bonds, Catastrophe Bonds and Blue Bonds.
India’s NDC is predicated on low-cost international finance, but it has played a marginal role to date. The third set of strategies should therefore focus on attracting international capital to the tune of $10-20 billion annually.
Accelerating international funding will require policies and strategies to attract new investors, particularly larger pools of capital such as sovereign wealth funds, pensions, and insurance monies.
A pipeline of aggregated investable projects can materialise action on smaller ones, which are otherwise unattractive for large investors. Cities, distribution companies and other large corporations can act as aggregators of small, decentralised projects to mobilise funding. Scaling international climate finance for cities will also require urban reforms, including delegating functional and financial powers to ULBs. Urban reforms will enable cities to tap international funds, which can be accessed through accredited agencies. Entities such as SIDBI and NABARD are already accredited. However, much more needs to be done. Ideally, each state should have one.
States such as Karnataka, Andhra Pradesh, and Tamil Nadu have existing urban development and finance corporations, namely KUIDFC, APUIAML, and TNUIFL, respectively. These can be accredited, given existing expertise and institutional structure.
As stated, Indians are increasingly aware and concerned about climate change. Recent Yale School of Environment research revealed that over 80 percent of Indians were worried about global warming.
Climate action is the race of our lives, and mobilising finance for it is the test. We need to act now and act decisively, not just to invest in our future but to have a future.
About authors: Gaurav Bhatiani is the Director – Energy and Environment at RTI International India, and Gireesh B Pradhan is the Former Chairman of the Central Electricity Regulatory Commission (CERC) and Former Secretary of the Ministry of New and Renewable Energy (MNRE).
The thoughts and opinions shared here are of the author.
Check out our end of season subscription discounts with a Moneycontrol pro subscription absolutely free. Use code EOSO2021. Click here for details.