How will India find the climate finance it needs to go green?

Labourers work next to electricity pylons in Mumbai, India, October 13, 2021. REUTERS/Francis Mascarenhas

Labourers work next to electricity pylons in Mumbai, India, October 13, 2021. REUTERS/Francis Mascarenhas

What’s the context?

Funding the energy transition will be discussed at G20 summit, with host India needing trillions of dollars just for its own plans

  • India may need over $10 trillion for its net-zero goal
  • Green money flows in India are only a quarter of needs
  • Defining 'green' activities for investors would help

NEW DELHI - When G20 leaders gather in New Delhi in September, the issue of how to fund the action needed to turn their economies green and tackle climate change will be high on the agenda.

India, which has positioned itself as a voice for the Global South on the international stage, is demanding accountability on an overdue promise by rich nations to deliver $100 billion in annual climate finance to vulnerable countries.

India also faces a significant challenge at home: mobilising trillions of dollars for its own climate plans, such as boosting renewable energy, to cut emissions to net zero by 2070.

While there is no official estimate, researchers say trillions of dollars will be required by 2030 - and flows of green finance are only about a quarter of what is needed now.

To unlock larger amounts of money faster, experts told Context that India should provide a clear definition of the economic activities it considers to be green.

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Here we take a closer look at current funding, needs and ways to increase green investment in India:

How much green finance is India seeking?

On the path to meeting a national goal to cut emissions to net zero by 2070, India has set short-term targets for 2030, including increasing clean power capacity to 500 gigawatts (GW) up from about 170 GW now, and meeting half of its energy needs with renewables.

The Indian government has not published an assessment of how much funding it will need to achieve those aims.

But the Council on Energy, Environment and Water, an Indian think-tank, pegs the investment required to reach net zero at $10.1 trillion.

The lion’s share of the money is to shift India from a fossil fuel-heavy economy, now reliant on coal, to one driven by renewables led by solar power.

To make the energy transition, India will need to green its electricity supply and transport, and decarbonise its industries.

This will require financing for infrastructure including renewable power capacity, new electricity grids and large-scale battery plants to store clean energy, as well as technologies like cooling and capturing carbon emissions.

In May, the Reserve Bank of India said the country should seek to deploy green financing equalling at least 2.5% of gross domestic product each year until 2030.

It will need new investments in the range of $7.2 trillion to $12.1 trillion by 2050, the central bank noted in a report.

And if the energy transition is accelerated, experts say the financial requirements will grow exponentially.

For instance, several coal power plants in India's energy fleet are just 10-15 years old. To recover the initial investment, a plant typically needs to run for 30 years.

But if India decides to shut down those plants early, it would create huge non-performing assets - a major financial risk given that 4-5% of the balance sheets of Indian banks and other financing institutions are exposed to coal power plants, said Labanya Prakash Jena, head of the Center for Sustainable Finance at the Climate Policy Initiative (CPI), a global think-tank.

Lenders and equity investors would have to be compensated using vast sums of concessional finance, Jena added.

And making up for the lost power-generation capacity would require installing renewables capacity and battery storage on a much larger scale than now planned, hiking the bill.

In addition, between 5 million and 10 million people whose livelihoods now depend on the fossil fuel economy, directly and indirectly, will need help to shift to new jobs.

The topic of a "just transition" for workers is fairly new in India - and it remains unclear how much helping impacted communities will cost, said Sandeep Pai, research director at the Swaniti Initiative, an Indian policy think-tank.

How much green finance is currently flowing in India?

Green investment is so far at much lower levels than India requires, analysts say.

In the financial year 2020, green finance flows tracked by CPI were at $44 billion per year, only about a quarter of what India estimated it would need through to 2030 when it produced its first - and now outdated - climate action plan under the Paris Agreement in 2015. It has yet to update the figures.

Domestic funding accounted for 83% in 2020, with international finance making up the balance.

Within India, sources of climate finance remain limited - but globally there are huge amounts that could be tapped.

For example, the Glasgow Financial Alliance for Net Zero (GFANZ), the world’s largest coalition of financial institutions committed to transitioning the economy to net zero, has a pool of $130 trillion that could be used for climate action globally.

But for India to access that money, experts say it needs a framework to help define how much is required and to attract investors.

What can help India tap green finance faster?

As a first step, India should define for the capital markets what it regards as "green" economic activities and finance, which would also help it measure and monitor flows, said Dhruba Purkayastha, CPI's India director.

India has yet to put in place a so-called "green taxonomy" - as in the European Union, China and Malaysia - which provides definitions and signals where green investments are possible.

India's finance ministry started working on recommendations for a green taxonomy in late 2020, which were submitted in 2022. But the government has yet to make anything public.

Once India has a taxonomy, it can use methods such as "priority sector lending" to channel bank loans into green projects in areas of the economy that may not otherwise receive adequate or timely finance, Purkayastha said.

Further, India needs to allocate more direct government spending to green activities, which can be blended with private sources to leverage commercial investment, he added.

India would also benefit from the creation of a green financial institution or green bank, enabling it to mobilise funding from both domestic and international sources, he said.

(Reporting by Bhasker Tripathi; Editing by Megan Rowling.)

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