Green Financing for Achieving Net Zero by 2070

India is curiously positioned in the global landscape of climate change. It is among the most vulnerable countries with high exposure to extreme weather events, causing human, infrastructural, ecological, and economic losses. According to the World Meteorological Organization, India suffered a loss of US$ 87 billion due to climate-related events in 2021. In a similar vein, India is steadfastly pursuing its goal of becoming carbon neutral by 2070. When it comes to climate change performance, it is reportedly among the top 5 countries in the world, and the best among the G20 nations.

A very recent demonstration of a strong intent to tackle the causative factors of climate change is the Union Budget of 2023, which is touted as India’s First Green Budget. The focus of the green budget was certainly on ramping up renewable energy production and decarbonisation of the transport sector. Experts argue that the “increase in government expenditure towards green initiatives is unprecedented and signals a significant step up in India’s efforts towards decarbonising its economy.” 

Among several other policy and fiscal measures and sector-specific actions India is taking to be at the forefront of climate action, one of them is green financing, which refers to allocation of financial resources towards projects and initiatives that promote environmental sustainability and address climate change. Some of the mechanisms are green bonds, carbon tax, emissions trading systems, green grants, etc. 

What is the status of green financing in India? 

Situation in India is ripe for promoting green financing. A recent report of the Reserve Bank of India, titled Towards a Greener and Cleaner India, suggests that India needs to focus on “accelerated reduction in the energy intensity of GDP by around 5% annually” to achieve the net zero target by 2070. It also calls for “significant improvement in its energy mix in favour of renewables to about 80% by 2070-71” and an annual green financing to the tune of 2.5% of India’s GDP. 

A report titled The Landscape of Green Finance in India tracked the finance flow from both public and private sources of capital towards clean energy, clean transport, and energy efficiency, and found that the green finance in 2019-2020 was approximately INR 3.9 lakh crore or USD 44 billion, which is roughly one-fourth of what India needs (roughly Rs 11 lakh crore or USD 170 billion) each year.

While public sector stood out as a major player in increasing green finance flows, private sector was slack in their involvement. Hence, it is imperative to get private players to invest in green projects and financing. 

New Framework on Green Deposits

To help enhance credit flows to green projects and initiatives, the Reserve Bank of India brought into effect a new framework for green deposits, starting June 1, 2023. This move is important for two reasons: 1) recognising the decisive role banks and other financial institutions have in mobilising green finance, 2) encouraging financial institutions to offer green deposits to customers and support customers in achieving their sustainability agenda.

Renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, and green buildings are some of the sectors / projects where banks and other financial institutions can allocate the proceeds raised through green deposits.

While banks offer almost similar interest rates on both green deposits and fixed deposit schemes, the end use of the funds is different. Unlike fixed deposits, the banks cannot use proceeds from green deposits for projects that are not environment-friendly.

Emissions Trading Scheme

Decarbonising an economy by pricing GHG emission through trading of carbon credits is a concept that gained steam in the last few years. While carbon was recognised as a tradable commodity when the Kyoto Protocol was signed in 1997, the Government of India recognised carbon credit as commodities in 2008. Since then, India has witnessed quite a few bright spots. Between 2010 and mid-2022, India issued 35.94 million carbon credits, which was about 17% of all voluntary carbon market credits issued globally. In fact, India’s Multi Commodity Exchange is the first exchange in Asia to trade carbon credits.

All this while, India made investments in producing carbon credits and exported them to international enterprises. However, India’s commitment under the Paris Agreement requires it to reduce all internal emissions, and hence, the government now intends to forbid exports of carbon credits so that India can expand its domestic market and increase internal trade.

Plans are now afoot to launch a ‘robust and credible’ carbon market in India, which will provide incentives to climate actors to mobilise technology and finance towards sustainable projects that generate carbon credits. On March 27, the Ministry of Power released a draft framework for the functioning of carbon credit market. This was just a month after India listed 12 GHG mitigation activities for generating and trading carbon credits: “renewable energy storage, solar thermal power, off-shore wind, green hydrogen, compressed biogas, emerging mobility solutions, high-end technology for energy efficiency, etc.” 

Clean Development Mechanism

Clean Development Mechanism (CDM) is yet another instrument established under the Kyoto Protocol to create a cleaner and more equitable future by financing emission reduction activities in developing countries. The CDM projects produce Certified Emission Reductions (CERs), which nations (mostly developed ones) purchase to achieve their emission-reduction targets.  

Be it rural electrification using solar power or installation of energy-efficient boilers, “an overwhelming percentage of the CDM project activities belong to the energy sector”. This is because India, just like any other country, has been making efforts to make energy industry “as sustainable and less-polluting as possible.”

Since the first CDM project in India, which happened in Gujarat in 2005, India has come a long way. In fact, about 70% of all the registered projects globally are in China and India. 

These CDM projects are not just about reducing the impact of climate change; they are also about uplifting vulnerable and marginalised communities. Replacing fossil fuel-intensive practices with green and sustainable practices have a myriad impact on marginalised sections in the form of improved income, improved health, and improved quality of life. 

One such project that deserves a mention is the Bagepalli Biogas Project, which involved construction of about 5,500 two-cubic-metre capacity biogas digesters in households in Bagepalli and nearby areas in Kolar District of Karnataka. Known for having taken a “bottom-up" approach wherein the concerned community was involved in the process of decision-making since the inception, the projects benefitted around 30,000 people in that area. 

The project generated employment for the local youth to the tune of 16,500-22,000 person-days of masonry work and 44,000 person-days of daily wage labour to excavate pits and assist the masons. Moreover, with the installation of biogas digester, collection and purchase of fuel wood and kerosene by local community reduced considerably, which led to direct cost savings for the households.

Finally, the use of biogas as cooking fuel improved quality of life of local households. The time they used to invest in procuring fuel wood was saved and women could spend more time for agricultural activities which led to earning of more wages; the ease in cooking was realised and households also became smoke-free, hence, reducing health-related issues. 

Financing green projects through various mechanisms will fortify India against the onslaught of climate change and help the country attain some of the Sustainable Development Goals by enabling impoverished communities to lift themselves out of layered vulnerabilities.