India Has A History Of Flawed Climate Change Policies. Here’s Why

Posted by Srinivas Raman in Environment
August 31, 2017

Under the Paris Agreement, India has been spearheading the clean energy revolution in Asia and has set itself ambitious targets to reduce carbon emissions and follow sustainable development by generating 175 gigawatts of renewable energy (RE) by 2022.

In order to achieve its Intended Nationally Determined Contribution (INDC) goals, India requires a whopping $200 billion as climate finance. The USA’s exit from its erstwhile commitments under the Green Climate Fund coupled with the shift in priorities under the Trump administration adds pressure on India and other developing countries to generate climate finance independently and place less reliance on international aids and subsidies. For this, India has started developing its climate finance instruments by economic liberalisation and following international practices.

In recent years, India has introduced ‘green bonds’- an innovative financial instrument to fund the RE sector. Green bonds have been successfully issued by several large corporate and financial institutions such as Yes Bank, Axis Bank and Hero Future Energies which have raised millions of dollars.

In May 2017, the Securities and Exchange Board of India (SEBI) recognised and legitimised the use of these debt instruments and had laid down detailed disclosure guidelines which need to be followed for the issuance of green bonds. Among other norms, the SEBI laws mandate that the funds raised through green bonds must be utilised specifically for specified purposes such as RE projects, clean transportation, climate adaptation, sustainable waste management, land use and water management projects. The disclosure norms also mandate continuous end use monitoring and performance evaluation through an external audit to ensure that the issuer is utilising the funds efficiently and not misappropriating them towards other purposes.

The Reserve Bank of India (RBI) has also legitimised the issuance of ‘masala bonds’ which are debt instruments denominated in Indian currency. One emerging variant of the ‘masala bond’ is the ‘green masala bond’ which is a green bond denominated in Indian currency. “Addressing climate change is a priority for IFC in India, and the ‘green masala bond’ demonstrates the powerful role of capital markets in mobilizing international savings to help close the climate finance gap,remarked Jingdong Hua, Vice President, International Finance Corporation.

The green bond market in India is developing at a robust pace clocking an impressive 30% growth from 2015 to 2016. The primary factor driving the success of the green bond mechanism can be attributed to the robust regulatory monitoring mechanisms in place. This framework not only increases investor confidence in these instruments but also minimises the scope for corruption and misuse of funds by ensuring that the resources are allocated exclusively towards the earmarked purposes.

Unfortunately, the same cannot be said about all of India’s climate finance structures. One glaring example of systemic and pervasive corruption in this regard is the National Clean Energy Fund (NCEF) which is funded by the carbon tax. The carbon tax system in India is inherently flawed due for several reasons. Firstly, it is an indirect tax which transfers the ultimate burden on the consumer instead of the producer. This defeats the purpose of the levy because it does not affect the profits of the producer and consequentially fails to act as an effective deterrent against coal and does not adequately encourage a shift to renewable energy. In addition, it increases the cost of access to electricity for the poor Indian consumers who do not have access to alternative sources of electricity.

Secondly, the carbon tax system is not in consonance with internationally recognised practices such as adherence to the ‘polluter pays principle’, implementation of emissions trading schemes, the principle of ‘revenue neutrality’ as well as other effective practices. Further, the rate of this unsound tax has rapidly escalated since its inception in 2010 and currently stands at ₹400 per metric tonne of coal which is disproportionately high for the Indian economy.

This regressive tax policy begs the question: where is all the public money going and what is it being utilised for? As things stand, the nation-wide cess collected from the carbon tax is channelled into the National Clean Energy Fund (NCEF). The NCEF is a non-lapsable earmarked fund which is to be exclusively allocated to support renewable energy projects and aid in climate mitigation efforts. Since its inception, the NCEF has been riddled with corruption and characterised by maladministration.

Till date, only a fractional 30% of the fund has been used to finance RE projects across the country while billions of dollars lie unspent. This is because the NCEF by-laws are extremely restrictive and are available to very few RE projects which have to meet a set of arbitrary qualifications to be eligible for funding. Ironically, the NCEF in its nascent history has been used to fund several unrelated pet projects of the government which have nothing to do with the RE sector.

While innovative RE projects succumb due to lack of funding, the government indiscriminately dips into the NCEF as a general reserve on an ad hoc basis. However, the NCEF’s death knoll came recently with the introduction of a new indirect tax regime in India, i.e. the Goods and Services Tax (GST) whereby the unused funds accumulated in the NCEF amounting to approximately $25 billion have been diverted to a completely unrelated purpose; i.e., compensating states for losses incurred under the GST regime.

It is important to note that the NCEF is the largest Government administered RE dedicated fund and represents a huge quantum of India’s climate finance. In the absence of the NCEF, several innovative RE projects will be halted or even terminated on account of non-availability of finance. “The Fund cannot be treated as an adjunct to the general Budget, wherefrom shortfalls in meeting budgetary requirements of already approved Plan schemes can be met,” said Sunil Mitra, former Finance Secretary of India in an inter-ministerial meeting.

The blatant embezzlement of the NCEF also has spillover effects. It may lead to loss of investor confidence and as a result, may adversely affect the success of green bonds and other financial instruments. This is because the Government’s skewed climate change policies send mixed signals to the international community and consequentially causes regulatory uncertainties. Since regulatory predictability is the cornerstone of investor confidence, the diversion of NCEF may erode India’s reputation for climate finance management amongst the international community as a whole.

The expropriation of the NCEF highlights the failure of the Government to efficiently procure and administer climate finance and casts a looming shadow over India’s 2022 objectives. While the regulatory framework ensures proper governance of private RE funds such as green bonds; the Government’s unchecked discretion indicates a disconnect resulting the climate change policy to remain in a constant state of paralysis.

Prioritizing purely economic policies such as GST over the far more critical issue of climate change is symptomatic of Trump’s administrative regime. At a time when Trump has turned the USA into a traitor in the battle against climate change, the rest of the world cannot afford another country to be trapped in a state of policy paralysis.

Developing nations in Asia depend on emerging leaders such as India and China to lead the clean energy revolution and hence it is vital for India to come out of the current policy paralysis and develop comprehensive and robust mechanisms to enable procurement and proper administration of climate finance.

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