India needs urgent, actionable plan to meet climate goals as time runs out

Climate change is a “commons problem”. The unusually high number of major natural calamities in recent years is a stark reminder of the proverbial “tragedy of the commons”.

One of the serious failures of the United Nations Framework Convention on Climate Change negotiations has been the developed countries’ failure to fulfil their commitments to transfer finance and technology to developing countries, and not doing enough to sequester their past cumulative carbon emissions. Developing countries, relatively more vulnerable to the impacts of climate change, have largely been left to fend for themselves. With time running out, these economies must quickly firm up their strategies, as there is no time left for blame games. 

This column focuses on the need for India to have a quantifiable and monitorable plan, including a financing plan, to meet international commitments and facilitate smooth transition to a low-carbon economy. Let’s begin with India’s international commitments, the major ones being the reduction of emission intensity of gross domestic product (GDP) by 45 per cent by 2030 compared to 2005 levels, and achieving net zero greenhouse gas emissions by 2070. While 2070 is a bit far away, what about the 2030 GDP emission target? Despite some commentary suggesting that India is well on its way to achieving this target ahead of schedule, the real question is: What exactly is the government’s disaggregated, sectoral-level plan to meet this goal? Is there a PERT chart, a programme evaluation and review technique, delineating the timelines for achieving various milestones? What proportion of the target is envisaged to be achieved through administrative fiat like mandating renewable energy based power, increasing forest cover, and prescribing electric vehicles, and how much by market mechanism including carbon credit trading? The aspiration to achieve net-zero by 2070 has to be necessarily backed by a credible, meticulous and well-thought-out plan.

What about financing the vast climate change mitigation and adaptation efforts, and the preparedness of the country’s financial system for the transition? Various studies have projected differing estimates of India’s funding needs. In an October 2022 report, McKinsey estimated that India will need an average annual funding of $100 billion between 2021 and 2030 to finance its mitigation plan, while current investments are only about $44 billion — leaving a huge gap. A major proportion of this investment would need to come from the private sector, given the government’s fiscal constraints and limited support from development finance institutions and multilateral development banks for these activities.  According to an assessment, developing countries (excluding China) will need two-thirds of their capital for climate targets to come from foreign funding during 2023-30, and India’s story is likely to be similar.

Our equity market is well-developed and established to attract foreign funds. Sebi’s ESG regulatory framework, including the Business Responsibility and Sustainability Reporting guidelines for listed companies, is a timely step in tune with the global developments on this subject. The problem lies in the debt market. Successful raising of sizeable debt in rupee terms to meet the climate finance requirement through foreign fund inflows requires developing the domestic bond market, which currently lacks sufficient depth and liquidity, as well as deepening the domestic currency hedging market and reducing hedging costs.

The government’s top priority should be to establish an unambiguous taxonomy defining “green” investments. Notably, many developed countries mandate their institutional investors viz. insurance companies, pension funds, etc to invest a portion of their investments in green projects. This taxonomy should be aimed at attracting such investments. Many green projects, though crucial for combating climate change, may be unviable ab-initio for commercial investment. Such projects should be carefully identified, and with a view to incentivising private investment in them, the government may consider offering credit guarantees for debt raising, reducing withholding tax for foreign investors, and providing tax concessions.

The government would need to continue to invest in those non-commercial projects that can’t be made investment worthy even after concessions. Equally important is to ensure that the economy goes through the green transition in a systematic manner, thereby avoiding financial stability concerns. An unplanned and disruptive transition to a low-carbon economy could have destabilising effects on the financial system. For example, imagine a well-operating and solvent thermal power plant being suddenly abandoned in favour of a renewable energy-based plant, thereby becoming a non-performing asset, and its implications for lenders and other stakeholders. A series of such incidents could have a debilitating effect on the economy.

Climate-related financial vulnerabilities and potential financial stability impacts require a systematic assessment. The climate risks should be embedded into standard vulnerabilities assessment frameworks of the regulated financial sector entities and the regulator. Supervisory and regulatory approaches to climate-related risks should be integrated within the overall supervisory and regulatory approaches to address financial risks.

For instance, the banks’ capital adequacy framework should acknowledge and provide for climate-related risks. Lending to projects vulnerable to climate change impacts has to be assigned relatively high risk weightings while computing the banks’ overall capital adequacy requirement.

The Reserve Bank of India issued draft guidelines on the “Disclosure Framework on Climate-Related Financial Risks” in February 2024, following a discussion paper on “Climate Risk and Sustainable Finance” in July 2022. The framework mandates disclosure by regulated entities on four key areas of governance, strategy, risk management, metric and targets. This is a significant step towards bringing the climate risk assessment, measurement and reporting requirements under mainstream compliance framework for banks and top and upper layer  non-banking financial companies. These guidelines, along with the timelines for various compliances, should be finalised quickly. Similar guidelines should also be attempted by Sebi and Irdai.

In conclusion, climate change poses a major vulnerability that demands a comprehensive, quantifiable medium- and long-term plan, along with close monitoring to ensure timely corrective actions. Aspirations alone won’t help.

The writer, a retired civil servant, is a distinguished fellow at the Observer Research Foundation, and former chairman of Sebi