India’s Greatest Asset In Its Fight Against Climate Change

Posted by Deepak John in Business and Economy, Environment, Society
August 31, 2017

Since 2011, the coal cess has been at the heart of India’s climate finance mobilization strategy. The recent reports suggest that National Clean Energy Fund (NCEF), formed through coal cess accrual, had collected more than ₹54,000 crore until early this year. NCEF was created with a mandate to fund research and innovative projects in clean energy technology. It was symbolic of a financial promise to lead the nation to a low carbon development pathway. But the news of this fund being diverted for Goods & Services Tax (GST) compensation and other budgetary shortages has cast serious shadows on the government’s commitment. It is highly doubtful that the NCEF would survive or even be revived in the following years. The Government has not been successful in devising a consistent climate finance policy.

The current circumstances call for exploring newer avenues for resource mobilization and addressing the challenges in accessing these resources, especially private finance. Developed nations have committed to mobilizing $100 billion in climate finance per year by 2020. This is a humongous task. It is impractical to reason that the governments of the developed world alone will be able to conjure up this much. The United Nations Framework Convention on Climate Change (UNFCCC) had taken cognizance of the enormity of this effort by highlighting the support of the private finance in its charter. The Green Climate Fund (GCF) has designed a private sector facility to enhance private sector engagement. The Centre for Policy Research acknowledges private finance as the critical link to bridge the climate funding gap.

In India, the private finance route has considerable potential considering its mature financial sector and enterprising corporate and industrial sector. Until 2015, around $34 billion has been invested in India to mobilise private climate finance, predominantly in renewable energy, energy efficiency and transport sector. However, there are limiting barriers to scaling up that have deterred them from entering this space. The private sector in India faces significant policy, financial, technical and behavioural barriers.

One of the significant barriers is the lack of policy clarity and loose engagement with the private sector on climate change policy framework.  There has been increasing focus on renewable energy (RE) generation due to various incentives like fiscal incentives and generation based incentives. It has been further supported by faster and transparent approvals. This reflects a policy bias toward the renewable energy (RE) and energy efficiency (EE) sectors. The government has not incentivized other climate-related fields with comparable enthusiasm. Also, another major factor is limited engagement with the private sector for designing climate change plans and strategies. The private sector has restricted decision-making power in the climate change policy process. The private stakeholdership in climate dialogues is limited to weighing in views and opinions. But more often than not, their engagement is impaired by the lack of technical understanding on the subject matter itself. As Michael Bloomberg said, “It’s critical that industries and investors understand the risks posed by climate change, but currently there is too little transparency about those risks.”  No one really understands the risks it poses or the impact it has.

The climate finance delivery cannot be complete without the engagement of Indian banks and financial institutions (FIs), as they form the primary conduit for climate investments. However, the financial landscape for climate-friendly investment is still in its nascent stages. The Indian banks have enough funds but they are apprehensive of foraying into these new sectors. Currently, the loans granted have lower tenure with high interest rates, which raises the cost of capital considerably. Also, there is a need to integrate climate priorities in the various steps of credit appraisal, risk assessments, project implementation and monitoring. The lack of a comprehensive project evaluation framework deters private finances. However, private banks like YES Bank have taken a proactive lead in including climate change and sustainability component in the project evaluation process. In 2015, it aimed to mobilize $5 billion from 2015 to 2020 for climate action through lending, investing and raising capital towards mitigation, adaptation and resilience.

Interestingly, a bright spot in India’s private finance setting is CDM financing, which is a creative market mechanism to fund projects. India is the second largest recipient of CDM projects after China, with a total of 563 projects till 2014, representing almost 33% of CDM projects in Asia and 22% of CDM projects worldwide as per Ministry of Finance (MoF). CDM or clean development mechanism allows a country with emission reduction targets under the Kyoto Protocol to implement emission reduction projects in developing countries. Implementing these projects helps developed nations to either offset emissions which were discharged above their stipulated quota or gain CERs (Certified Emission Reduction) that are tradeable in carbon markets. For the developing nations, this route provides funding for domestic projects. A win-win for both developing and developed countries under the Kyoto framework. In India’s case, it was found that CDM projects are concentrated in states that are more industrialised, such as Gujarat and Maharashtra. In contrast, poorer and less industrialised states generally implement fewer CDM projects.  India needs to diversify its CDM investments with an overarching policy structure in place for all the implementing states.

The private finance route can amply supplement public finance if there is a coherent and coordinated mechanism to set common priorities for climate action.  This calls for a more proactive engagement with the private sector. This will also lower behavioural attitude that assumes that climate-borne compliance is just another burden.

A version of this article was originally published here.