Date: 01/03/2023

Relevance: GS-3: Conservation, Environmental Pollution, and Degradation, Environmental Impact Assessment.

Key Phrases: Climate change, Paris Agreement, climate finance, Climate Finance Working Group, Priority Sector Lending for Climate Finance, financial rate of returns, Development financial institutions, green lending.

Why in News?

• Climate change is one of the most significant issues of our time. As a signatory to the Paris Agreement, India is committed to reducing its carbon footprint and transitioning to renewable energy.
• However, to achieve these goals, India needs to develop its own paradigm of climate finance that is not solely dependent on funds from the West.

The Need for a Homegrown Framework:

• India cannot rely solely on the watertight categories of ‘green’ and ‘brown’ projects laid down by the Western world.
• These categories may not be appropriate for Indian needs, and the sheer absence of funds from the West has not kept to its commitment of raising $100 billion annually for developing countries.
• Therefore, India needs to develop its own framework for climate finance and raise funds domestically and from abroad.

Meeting the Funding Gap:

• The Climate Finance Working Group has estimated a funds requirement of ₹118 trillion, available resources of ₹64 trillion, and a gap of ₹54 trillion. This gap has to be met by way of domestic and foreign debt.
• Indian Development Financial Institutions (DFIs) and commercial banks have to contribute by raising domestic funds and channelling resources from abroad.
• Therefore, the government and private sector have to work in tandem to meet the funding gap.

Atmanirbhar in Climate Finance

• Catalytic Funding:
  • To begin with, the government may consider catalytic or start-up funding and capacity building.
  • Catalytic funding should be utilized for ‘re-purposing’ key economic activities into green activities that western finance and its frameworks may not recognize.
  • Repurposing, supported by a simple and inviolable classification framework, oversight, and capacity-building mechanisms, can transform existing economic activities into green activities with smaller amounts of investments.
• Priority Sector Lending for Climate Finance:
  • The banking system is unlikely to finance mitigation and adaptation investments, as they have lower commercial appeal compared to other lending opportunities. Therefore, the priority sector must be defined by including climate finance.
  • The RBI influenced the flow of credit, since the 1970s, to sectors and population groups that did not receive adequate attention from the banking system.
  • Climate change is a significant development issue now, and therefore, the priority sector should focus on climate finance.
• Blended Finance for Investments with Development Payoff:
  • The need for ‘blended finance’ arises from investments that have a ‘development payoff’ but low or no revenue streams.
  • While the financial rate of returns (FRR) is the most important determinant of investment decisions, most CC-related investments will not be able to meet the FRR thresholds.
  • Hence economic rate of return (ERR) methodology, which will take on board development payoffs, is necessary to justify investments relating to mitigation and adaptation investments related to CC.
  • Suitable subventions and subsidies will nudge the bankers towards climate finance and also reduce the actual rates of interest to the borrowers.
  • The revenue from carbon credits can offset the low CC project revenues and make the investments feasible. The revenue from carbon credits can be used to monetize the investments.
• Private sector:
  • The private sector can also play a role in mobilizing climate finance by providing innovative financial products and services, such as green bonds, carbon credits, and climate insurance.
  • These products can help channel more capital towards climate projects and incentivize more private sector investment in the sector.

Conclusion:

• India's commitment to net-zero CO2 emissions is based on a bouquet of options, and coordinated efforts are required to achieve it.
• Shifting to renewable energy, battery storage systems, cleaner transport, climate-resilient sustainable farming, optimization of water use, afforestation to create carbon sinks, and reducing fossil fuel consumption were well articulated in Budget 2023.
• Going forward, DFIs and commercial banks must be nudged to play an active role in designing credit products for managing CC.
• A coordinated strategy between governments, the RBI, and the financial sector can manage the concerns of green lending to commercial and marginalized sectors alike.
• India needs to be atmanirbhar in climate finance and develop its own paradigm.

Source: The Hindu BL

Mains Question:

Q. How can India develop its own paradigm of climate finance to achieve its climate goals while dealing with the challenges of inadequate funding and inappropriate western frameworks? Discuss.