Funding India’s big green transition

The two-week-long intense negotiations at COP29 summit in Azerbaijan, in November last year, ended with a climate finance deal that India dismissed as “too little, too far.” Developing countries and activists have termed inadequate the annual commitment of $300 billion – starting in 2035 – which falls way short of the initial $1.3 trillion proposed by developing nations. There is also ambiguity related to the form of the disbursements (grant or concessional loans) as well as the source of these funds. Considering these challenges and India’s climate commitments, a National Green Transition Fund to finance its net-zero targets is the way forward.

The Global South has always opposed the way the developed world looks at climate finance. The UNFCCC’s principle of “common but differentiated responsibilities and respective capabilities” states that climate action should be based on different national circumstances rather than an imposition of equal obligations. This is because developed countries, like the US and countries in the EU, have been responsible for 27% and 22% of historical emissions, respectively. In contrast, India, despite being the third-largest emitter of CO₂ today, accounts for a mere 3% of the cumulative emissions, while China’s share stands at 13%. The Global North has evaded accountability over historical emissions, leaving the Global South with limited financial support. The unequal impact of climate change further exacerbates this imbalance. The scepticism over the developed world’s pledges is also justified because of their poor track record on climate finance as well as recent political changes in the US.

The RBI, in a 2023 report, estimated India’s green financing requirement to be at least 2.5% of the GDP, annually until 2030. Less conservative estimates by other credible agencies such as IEA, Climate Policy Initiative, and CEEW are in the range of ~ 5 to 6% of the GDP annually ($150-200 billion annually). On a long-term basis, India would require cumulative investments of around $10-15 trillion to meet its 2070 net zero target.

The key question, therefore, relates to the funding and deployment of these green funds. Here, the EU’s Innovation Fund could provide a good model, financed as it is through the EU Emissions Trading System where the polluters pay for their carbon emissions. The collected revenue supports innovative, low-carbon projects, and helps industries transition to clean technologies. The idea is to fund technically viable projects that are not commercially feasible; supporting such projects to completion spurs public and private investment through multiplier effects on the economy.

Identifying new funding sources

For India, kick-starting the Green Transition Fund could be with an initial allocation in the Union Budget for FY 2025-26 – a signal from the government towards its net-zero commitment and the will of the states to contribute to it. A regular inflow of funds may accrue from various sources. If India ultimately implements its carbon trading mechanism, on the lines of EU’s ETS, the proceeds can be diverted to the fund. Another potential source is the Clean Energy Cess on coal which was imposed in 2010 at Rs 400 per tonne. It was specifically meant for funding environmental schemes but was subsumed under the Compensation Cess for GST. The government can also commit to transferring the future revenues of coal cess into the Green Transition Fund when the GST Compensation Cess lapses in March 2026. Coal cess mobilised Rs 86,440 crore between FY10 and FY18. The estimated surplus of Rs 40,000 crore left in the compensation fund post-loan repayments may also be utilised.

Fuel taxes could also be restructured to feed this fund. India could take a cue from the ingenuity of Thailand which recently implemented a carbon tax by rebranding a portion of existing fuel taxes without increasing prices. This policy incentivises businesses to reduce emissions because lower carbon output would lead to a reduced tax burden. In the same way, a portion of the high mining taxes in India, which stand between 45-50%, could be readdressed as a sustainable mining tax that finances green and sustainable mining initiatives.

Ultimately though, India will have to put together a comprehensive climate finance strategy to mobilise funds through innovative financial instruments, mobilisation from private sources, multilateral agencies, and climate-focused innovation funds, and encouraging VC funding for climate tech startups.

Naturally, effective deployment of this fund will be extremely crucial. The government may disburse the funds through “Green PLI schemes” identifying green projects with verifiable outcomes, like other PLI programmes. Regular oversight and accountability would ensure efficient use of the funds. Otherwise, there have been several cases of diversion of state/national climate funds to other activities. Court orders for the deployment of Delhi’s Environment Compensation Charge (ECC) and Supreme Court’s questioning of the state governments on the diversion of Compensatory Afforestation Fund Management and Planning Authority (CAMPA) funds which are intended solely for green cover restoration are cases in point.

It is high time India started the deployment of dedicated funds for green transition and put together an effective climate finance strategy to spur innovation in clean technologies. Given the Global North’s apathy to climate finance, India’s thrust must be on self-reliance and securing a greener future.

(Saraswat is a member, NITI Aayog, Prachi and Aniruddha are economists based in Mumbai and the US, respectively)