Challenges of raising climate finance

With a per capita GDP of around USD1,800, India is relatively poorer than its peer emerging economies. This places a disproportionate pressure to reduce the impact of climate change on its poor and vulnerable. Moreover, it is a country relatively dependent on natural resources for the livelihoods of most of its populace, and its terrain means it is equally impacted by melting snow-caps and rising sea-levels. It encompasses several agro-climatic zones, making a one-solution-fits-all difficult.

Tackling climate change is now about saving the country’s social ecosystems as well as businesses (for tax resources). Climate finance, or the financing of projects that tackle the issues arising out of climate change, is key. The requirements for climate finance are mammoth, with India estimating it needs USD2.5 trillion till 2030 for its climate targets. This amount is estimated to be equivalent to the entire GDP of India. This scale is unprecedented and would need concerted efforts from both public and private capital. The objectives are to reduce greenhouse gas emissions and degradation of natural ecosystems as well as ensuring communities adapt and remain resilient.

Where are the funds coming from? First, the developed countries, who caused disproportionate damage in terms of emissions due to industrialisation, but largely failed in raising the required funds. The Paris Agreement saw them agreeing to raise USD100 billion annually till 2020 to meet climate needs in developing countries, but mobilisations were much lower. The largest climate finance fund, the GCF, has a corpus of only USD100 billion with a USD10 million limit to India. Compare this with India’s needs.

Also, most monies raised in the developed countries are invested domestically. Nevertheless, India’s Environment ministry is encouraging its institutions to design solutions and get accreditation of the GCF for funding like SIDBI and IDFC did. Research shows that the required capital is available in the developed world, it just needs channelizing mechanisms. But the demand of India has been that all climate finance from the developed to developing countries be categorised as public finance (non-profit, even if it is private capital). This means even if developed countries leverage private capital, the government would still need to guarantee assured and predictable climate finance. This may be in line with the mandate of polluter-pays-more, but it delays developed nations from setting quantifiable targets. In this backdrop, India should leverage its bilateral relationships based on the depth of the economic ties, rather than depend anymore on multilateral forums, for raising funds from developed countries.

Second, in terms of the Indian government, the National Action Plan on Climate Change includes 12 missions across sustainable agriculture, Himalayas, water, wind and solar energy, energy efficiency, waste, health, coastal and so on. These include mitigation and adaptation programmes, with specific ministries entrusted with the responsibility. The National Clean Energy Fund, funded through levies, funds R&D in clean energy technologies. Tax-free infrastructure bonds to fund renewable projects are being considered. India’s target of producing 40% of its power from renewable energy by 2030 is to be funded partly from the GCF.

State-level Action Plans on Climate Change focus on adaptation/afforestation, and the Green India afforestation mission to plant trees as an additional carbon sink is funded from internal sources. India has institutionalised programmes for disasters, droughts, epidemics and floods under its ministries, to be funded through internal relief funds. The National Adaptation Fund bridges the gap between funds needed and available for state-level projects while the National Mission for Enhanced Energy Efficiency offers a partial risk guarantee on loans for energy efficiency. The Venture Capital Fund for Energy Efficiency offers equity to leverage private capital for energy efficiency projects. Internal funds are also instrumental for schemes like PMUY and UJALA, to migrate households towards LPG or LEDs. The Finance ministry set up the Climate Change Finance Unit to advise the Environment ministry. The Renewable Energy Certificate requires electricity regulators to buy at least 5% of renewable power, thus incentivizing private investments. Environmental cess or green tax are other mechanisms. But while all these efforts are noteworthy, more is needed to meet the targets.

Climate finance, or the financing of projects that tackle the issues arising out of climate change, is key. The requirements for climate finance are mammoth, with India estimating it needs USD2.5 trillion till 2030 for its climate targets. This amount is estimated to be equivalent to the entire GDP of India. This scale is unprecedented and would need concerted efforts from both public and private capital

Third, the Indian private sector has been active in the climate finance market, with green bond issues doubling to USD3 billion in 2017. While this amount is dwarfed by the actual requirements, nevertheless, the commitment of the private sector is positive. But this has been led mainly by the renewable energy and transport sectors, and there is a need to diversify to other sectors like waste, agriculture and livelihoods. This means developing innovative funding models to blend in public resources that incentivise private investments.

Finally, the flows from the developed countries to developing countries still hold key for India to achieve its climate finance targets, given the capital available in the Global North. The developed countries must avoid creative accounting to ensure they deliver proper and predictable climate funding to the developing countries, else the tipping-point is not far when bilateral relationships are made contingent to the delivery of climate finance. Similarly, developing countries need to avoid greenwashing and provide audited monitoring & evaluation reports to provide the confidence to global public investors that their monies are being utilized with measurable impact.