The world is experiencing a growing frequency of extreme weather, average temperature, shifts in seasons, and other climate change characteristics. Climate change adaptation occurs in social, ecological, and economic systems to reduce its impact. Communities and countries across the globe are developing adaptation solutions and implementing actions to address adverse climatic effects. However, the annual cost of adaptation to combat the effects of climate change is $70 billion (Rs. 5.1 lakh crore) for developing countries, and it may rise to $140-300 billion in 2030 and $280-500 billion in 2050 (United Nations Adaptation Gap Report, 2020). An early investment in climate-resilient infrastructure can deliver benefits up to 10 times of the initial cost. An estimate suggested that nearly an initial investment of $1.8 trillion in climate adaptation measures could generate $7.1 trillion across the different systems [reference]. Developing countries are most vulnerable to climate change. They are not having enough capital strength and efficient policies to address climate change impacts in different segments. The estimated adaptation cost would be around $300 billion/ year for developing nations. According to the Paris Agreement, wealthier countries will provide $100 billion yearly as climate finance to support developing nations.
Climate finance
Climate finance refers to local, national, or transnational financing—drawn from public, private and alternative sources (UNFCCC Annual Report, 2020). Climate finance is essential for adaptation strategies to mitigate climate change impacts. The UNFCCC, the Kyoto Protocol, and the Paris Agreement calls for financial support from countries with more financial resources to help more vulnerable countries. It follows the principle of “common but differentiated responsibility and respective capabilities.”
Background
Through the Cancun Agreements in 2010, developed countries committed to mobilize jointly USD 100 billion per year by 2020 to address the needs of developing countries. The Green Climate Fund (GCF) was established in Cancun Agreement and designated as an operating entity of the financial mechanism. In the Paris Agreement 2015, developed countries confirmed this goal and agreed that a new collective quantified goal having a floor of USD 100 billion per year should be set before 2025.
Globally the scale of needed investment
The World Economic Forum projected that by 2020, about $5.7 trillion was needed to be invested annually in green infrastructure. The current commitment of $100 billion annually is only a tiny piece of the $5.7 trillion puzzle (Climate Finance, 2020). Therefore, funding was needed to meet the investment required in 2020 and beyond. It is also crucial to support developing countries in building resilience to address climate impacts and catalyze private sector investment for the same. Climate Finance is needed to direct the world’s economy towards low-carbon production pathways. Multilateral Development Banks’ (MDBs) committed US$ 61,562 million for climate finance of US$ 46,625 million (76% for climate change mitigation finance 24% for climate change adaptation finance) in 2019 (Climate Finance, 2020). The total net climate co-finance committed during 2019 alongside MDB resources was US$ 102,683 million. Together, MDB climate finance and climate co-finance totaled US$ 164,245 million (Climate Finance, 2020)
(Source: Climate Finance, 2021)
The scale of needed investment in India
Under Paris Accord, India has planned to reduce its carbon emission intensity [emission per unit of GDP] by 33-35%. Recently, at COP26 Glasgow Summit, India committed to reducing its carbon emissions by 2030 by a billion tonnes, minimizing its emissions intensity per unit of GDP by less than 45%, and installing 500 Gigawatt of renewable energy by 2030, a 50 GW increase from its existing targets. India needs climate finance to achieve these targets and build its renewable energy capacity. India’s Green Bond market is in the growth stage, and the first green bonds were issued in 2015, which indicates the need to explore more options for climate financing (RBI Bulletin, 2021). Banks and non-banking financial companies in India have a limited appetite for long-term debt due to asset-liability mismatch. India also faces different challenges in the area of population poverty, pollution, education and skill gaps, etc., along with climatic shocks. Hence, there is a greater need for climate finance to address various issues to address the climate change impact in different domain of the society.
Green Finance in India
Green finance refers to the financial arrangements specific to the use of environmentally sustainable projects or projects that adopt the aspects of climate change. New financial instruments such as green bonds, carbon market instruments (e.g., carbon tax), and new financial institutions (e.g., green banks and green funds) are being established to meet the financial needs of these types of projects.
Progress of Green Finance in India
As part of the green finance initiative, the Reserve Bank included the small renewable energy sector under its Priority Sector Lending (PSL) scheme in 2015 (RBI Bulletin, 2021). As of end-march 2020, the aggregate outstanding bank credit to the non-conventional energy sector was around 36,543 crores, constituting 7.9% of the outstanding bank credit to the power generation (Table 2) compared to 5.4% in March 2015 (RBI Bulletin, 2021). The commercial banks’ exposure to the non-conventional energy sector varied among bank groups (Table 1) and the major states in India.
(Source: RBI Bulletin, 2021)
India started issuing green bonds in 2015. As of February 12, 2020, the outstanding amount of green bonds in India was US$16.3 billion. Since January 1, 2018, India issued green bonds of about US$8 billion, which constituted approximately 0.7% of all the bonds issued in the Indian financial market. Although the value of green bonds issued in India constitutes a tiny portion of the total bond issuance, India maintained a favorable position compared to several advanced and emerging economies (Table 2).
1: Euro area includes all the European countries except the UK, Russia and Switzerland.
2: Southeast Asia includes Indonesia, Malaysia, Philippines, Thailand and Vietnam.
3: Central and Southern America includes Mexico, Brazil, Argentina, and Chile
(Source: RBI Bulletin, 2021)
Challenges of Green Finance in India
The cost of issuing green bonds has generally remained higher than the other bonds in India. Panel (a) in Fig 2 shows that the average coupon rate for green bonds issued since 2015 with maturities between 5 to 10 years, are generally remained higher than the corporate and government bonds with similar tenure. Panel (b) in Fig 2 shows a similar pattern for the INR denominated green bonds. For the US$ denominated green bonds with tenure more than or equal to 10 years, the coupon rate was, however, lower than the corporate bonds.
(Source: RBI Bulletin, 2021)
Green finance is fast emerging as a priority for public policy. The developments of green finance in India indicate that there have been some improvements in India’s public awareness and financing options in recent years. Existing literature suggests that reducing the asymmetric information regarding Green Projects through better information management systems and increased coordination amongst stakeholders could pave the way toward sustainable long-term economic growth. At this juncture, the world is fighting COVID-19 and its impact on global economic growth. Undoubtedly, the immediate policy challenge is to kick-start the global economy. However, the pandemic has also offered an opportunity for all stakeholders to rethink the policies, financial and operational strategies that they have adopted so far and espouse an approach that is more environmentally sustainable in the long run. Green finance is necessary to facilitate such a shift towards sustainable economic growth. Hence, the Indian government already proposes to issue sovereign green bonds to mobilize resources for green infrastructure. The proceeds will be deployed in public sector projects that help reduce the economy’s carbon intensity with a commitment to achieving net-zero carbon emissions by 2070.
References
United Nations Adaptation Gap Report (2020), World Adaptation Science Programme, United Nations.
Climate Finance (2020), Joint Report on Multilateral Development Banks’ Climate Finance, World Bank Group.
UNFCCC Annual Report (2020), United Nations Climate Change Annual Report, United Nations.
RBI Bulletin (2021), Green Finance in India: Progress and Challenges, Reserve Bank of India.
(Views expressed in the blog are personal and not of any organization/institution)
By Mr. Shiladitya Dey & Dr. P.K.Singh; ARF group members
(Write to us at aditya11d@iitkgp.ac.in for this blog related views and suggestion)