India needs a comprehensive climate finance strategy to achieve its long-term development goals and stay on track to limit climate change to two-degree celsius. A piecemeal approach will not work, as it will miss the window for achieving net zero emissions by 2070. India is at an early stage of development and its climate finance-related infrastructure needs are huge. India can jump straight into second-generation infrastructure projects now.
How much additional amount of climate finance India needs? This can be easily captured by applying two principles—first equity, and second spending needed to stay on track to limit climate change to two-degree celsius.
The equity principle should reflect that each country’s share of carbon dioxide emissions should equal its share of the global population. Although India is the third largest emitter, its per capita emission, at less than 2 tons, is at the bottom of global rankings, well below 7.38 in China and 15.58 tons in the USA.
The climate finance-related infrastructure needs of India- access to water, sanitation, electricity, food security, flood protection and decarbonisation—remain huge. India’s carbon financing need is much higher than the rest of the world, due to its population size, extreme poverty, and higher vulnerability to climate risk, and estimated to be close to five per cent of gross domestic product (GDP).
How can climate finance be scaled up? India needs to switch from traditional to second-generation infrastructure projects that promote less carbon-intensive industries. The rate of return on second-generation infrastructure projects in India is estimated to be much higher compared to Europe and USA. India’s early stage of development, young demographics, rising middle class and the basic traits of second-generation infrastructure projects make them attractive to global investors.
A long-term steady revenue stream and investment returns that exceed inflation make these projects attractive for mobilizing climate finance in an increasingly volatile financial world. There is a global glut in savings, and global investors have started to view India as one of their top destinations for green infrastructure projects- wind and solar energy, new construction material, new modes of transport, digital technologies, and much more. India now needs a comprehensive climate finance strategy to tap into different sources of financing.
India will need to change the financing mix, as the climate financing needs of India cannot be met just through increased budgetary allocation. In the past, India has relied primarily on the government budget, with 70 per cent of infrastructure funding coming from the government budget. While public finance will continue to play an important role, private sources including foreign direct investment and international development finance, will need to play a much bigger role.
India can take the lead in promoting green bonds, debt for nature swaps, green public and private partnerships (PPPs) and multi-sovereign loan guarantees, to meet the climate finance needs. Green infrastructure projects will remain a high priority for India, and global development banks and international financial institutions have a key role to play in this.
India will also need to introduce smart fiscal management to ensure that climate finance projects are sustainable and compatible with development priorities. An increased effort needs to be made towards achieving competitive risk allocation between the public and private sectors.
To attract private investors, a more credible regulatory and institutional regime is needed which will reduce the time taken for market assessment, socioeconomic impact, affordability, and bankability of projects. The credibility of PPP projects is being threatened by the rise in renegotiations. This can be tackled by improving PPP contract management, reforms to minimize the negative impact of renegotiations and improving standards for climate risk disclosure.
Smart fiscal management should also include tax and subsidy reforms and coordination of fiscal strategy with financial sector regulations that promote less carbon-intensive growth. India's tax-to-GDP ratio and environment-related tax revenue (excluding taxes on fuel) remain low compared to economies at a similar level of development. There is no explicit carbon tax in India. An implicit carbon tax is put through an array of schemes and mechanisms (e.g., coal, petrol, and diesel taxes) that put an implicit price on carbon.
India needs to promote the creation of a national carbon market to improve energy efficiency and the use of low-cost renewable energy. The global process of price discovery for carbon offsets, green hydrogen, carbon capture, and battery storage, is still evolving. Raising the price of carbon, which is currently low, will help change behaviours and investment patterns.
A green structural transformation should not be a piecemeal solution. More than 80% of Indians are already worried about global warming. Despite the low level of per capita emissions, the weight of the rising pollution is already being felt. Delhi has become the fourth most polluted city, and it is the poor people who are suffering the most. Air pollution is adversely impacting the health of people.
Climate change cannot be viewed as an obstacle to development but as a catalyst to accelerate green growth and reduce poverty. As president of G-20, India can take the lead in scaling up access to climate financing and technology transfer that will promote green growth. India and other developing countries need a ‘global, green multilateral platform’ to help them achieve both development and climate goals. This could be easily financed from the pledge that developed countries have already pledged to help developing countries tackle the climate change agenda.