Financing India’s green future
Our green future requires massive funding. Currently, we are moving ahead of our target of reducing 33-35 per cent emissions intensity of 2005 gross domestic product (GDP) before 2030. This target stems from our COP 21 Paris 2015 commitments and is leading to a lower carbon development pathway for India. However, there are many other even lower carbon pathways (including Net-zero emissions by mid-century) that India needs to consider. Each of these development pathways entail enormous financing requirements. This financing will include vast amounts of (a) commercial (purely financial returns-driven) capital, (b) impact (both financial and social returnsdriven) capital, and (c) public funds (social returns-driven).
Note that this green financing will likely constitute the bulk of our overall investments in the next few years. For instance, the International Energy Association (IEA) forecasts that India requires $1.4 trillion over the next two decades in financing green energy technologies alone. To put this in context, India’s GDP in FY2021 is $2.7 trillion. The recently announced PM Gati Shakti investment programme is sized at ~100 trillion or about $1.3 trillion.
Commercial capital drives the global economy and is many times larger than public funds or impact capital. Green investments must therefore compete with brown (non-green) investments to find large markets and generate attractive returns. Typically, when promising new technologies are introduced, commercial investors rush to fund them expecting that costs will fall dramatically over time. This spurs rapid market adoption and eventually high returns for investors. Due to the sterling work of our inventors and engineers, this is exactly what is happening with green technologies. As a result, a “Green Frontier” of decarbonising technologies is developing that will define the production possibilities for the most efficient economies.
Consider some examples of decarbonising technologies at the Green Frontier. Renewable power is now cheaper than coal-fired power. Converting to renewable sources, whether at a utility scale or at a retail level, is economically viable for end users while still delivering a reasonable return on capital for investors. Electric vehicles have substantially lower total cost of ownership than internal combustion engine vehicles. Their cost advantage is increasing every day as battery prices fall and an efficient charging infrastructure gets built out. Plant-based proteins (including milk, eggs, and meat) are cost-competitive with traditional protein sources, thereby reducing the need to keep large animal herds that generate massive methane emissions.
Renewable energy, electric mobility, and plant-based proteins are thus developing into large industries with many fast-growing competitors, each attracting substantial commercial investment. The role of government is to maintain a stable and supportive policy environment and help in unleashing market forces. Market and competitor dynamics will then drive us to the Green Frontier. In fact, it is quite possible that India might have the most costeffective deployments of these technologies in the world — replicating what we have already achieved in telecom services, fintech, and e-commerce.
There are other green technologies that are still early in terms of customer acceptance and market adoption. These include offshore wind, battery storage, green hydrogen, bio-fuels, carbon capture, new nuclear fission and fusion technologies, among others. These technologies are too expensive, or their risks still too high for commercial deployment. Still, when they become commercially viable, these technologies will likely make a vast difference in driving decarbonisation.
Leaving these immature and risky technologies only to market forces may not work relative to our decarbonisation targets: Governments and markets will have to work in tandem to lower costs and jumpstart new green industries. In cases where the idea has potential risks or its cost of deployment is high, executing demonstration or pilot projects can create learnings for private enterprises and bring valuable policy lessons for regulators and policy-makers.
Government has access to a wide range of policy levers and funding options to jumpstart green industries. For example, it can: (a) absorb the initial capital expenditure of demonstration or pilot projects, (b) offer subsidies for part of the capital or operating costs, (c) mandate or incentivise offtake of the final product, (d) help push for and create technology transfer initiatives between countries, and (e) offer connecting infrastructure or distribution for the new technology.
Three different sets of impact capital providers can assist in jumpstarting green industries to complement the role played by government and the market. First, advanced countries are deploying capital (grants, aid, loans, equity) to help commercialise new technologies. Second, philanthropic capital, which is concerned about long-term social impact and does not judge its performance solely by financial returns. And, finally, there are many firms that are committing to net-zero targets: Their cash flows are being channelised into green investments.
In the next few decades, India will require trillions of dollars of commercial capital, tens of billions of dollars of impact capital, and hundreds of billions of dollars of public funds to get to the Green Frontier. These immense funding requirements will necessitate that we fully mobilise domestic and global sources of capital. Our financing system will have to be geared up to support these capital flows.