Issues related to Economic growth

Road to Net Zero Goes Via Green Financing

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From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Green Financing, India's Net Zero 2070 objective

financing

Context

  • Climate finance, or Green Money, remains a critical bottleneck for India in its journey towards the Net Zero 2070 objective and to create a resilient system through climate adaptation and mitigation. The challenge is daunting to make a climate transition for a nation of 1.4 billion people with increasing aggregate national income and individual wealth inequality.

What is the Present arrangement of external financing for climate change

  • Estimated cost: Finances for climate change were to be channelized through multi-tiered systems in the form of national, regional, and international bodies. It has been estimated that India will need $15 trillion to finance its Net Zero journey.
  • Concessional loans: In most cases, small amounts flowing now into the developing component of the G20 nations are actually in the form of concessional loans rather than grants.
  • Technological support from developed countries: There is no doubt that India will need international financial commitments and technological support from developed countries, who have been erratic with their promised deliveries so far.

What is green financing?

  • Green finance is a phenomenon that combines the world of finance and business with environment friendly behavior. It may be led by financial incentives, a desire to preserve the planet, or a combination of both.
  • In addition to demonstrating proactive, environment friendly behavior, such as promoting of any business or activity that could be damaging to the environment now or for future generations.

Green financing through domestic market

  • Status of Green Bonds: As for domestic financial sources, according to an RBI Bulletin from January 2021, green finance in India is still at the nascent stage. Green bonds constituted only 0.7% of all the bonds issued in India since 2018, and bank lending to the non-conventional energy constituted about 7.9% of outstanding bank credit to the power sector as of March 2020.
  • Provision of Green loans: The report also mentioned that the development of green financing and funding of environment-friendly sustainable development is not without challenges, which may include false compliance claims, misuse of green loans, and, most importantly, maturity mismatches between long-term green investments and relatively short-term interests of investors.

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What are the challenges to green financing?

  • No assessment of climate finance risk: Research report indicates that banks in India, like in many parts of the world, are not prepared to adapt to climate change; and have not yet factored in any climate-related financial risks into their day-to-day decision-making. Some of the criteria used to assess the banks include a commitment to phase out investments in coal, disclosing and verifying direct and indirect emissions, issuing green loans, financing climate mitigation, and Net Zero targets for different types of emissions and their implementation plans.
  • Lack of enthusiasm among bankers: The report is also critical that none of the 34 banks have tested the resilience of their portfolios in the face of climate change. Yet, the bankers’ noise around the green finance topic is euphorically loud, without action.
  • No standard definition of green financing: These banks and financial institutions are also not geared up for financing green transition. India faces the big challenge of “how to define green”, as there is no uniform green definition and green taxonomy.
  • Poor debt market for green finance: The green money is generated through largely debt-based products (green bonds, climate policy performance bonds, debt for climate swaps, etc.), while the fund deployment occurs through debt-based, equity-based, and often, insurance-based instruments, apart from grants and loans. However, the Indian market lacks the depth of its debt markets or the heft of the bond markets.
  • Lack of green data governance: There is an inherent problem with “green data governance” that entails tracking the entire data-chain of a green financing initiative.
  • Unviable green projects: Like many other private sectors funding, the banks look at rates of return that do not really often make financing “public goods” as viable investments. They are even apprehensive about financing projects with long gestation periods with uncertain returns.

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What is way forward for green financing?

  • Considering social cost of carbon: An economic return alone might not be sufficient to induce green financing. A more holistic rate of return, considering the social cost of carbon, will be appropriate.
  • Return on green investment should include social returns: A longer time horizon will be needed for the cost-benefit analysis and the estimation of the return on investment. This is because, for climate-related projects, the returns increase over time. The extent to which the particular project could result in CO2 reduction and, eventually reduction in the social cost of carbon need to be assessed. As an example, India intends to reduce 1 billion Tonnes of CO2. The present social cost of CO2 (SCC) is $86/tonne. Therefore, the sheer economic gain is to the tune of $86 billion, or 2.1% of the current Indian GDP. Social cost saving is a public good and is enjoyed by all businesses, including the financial institutions.
  • Applying the green taxation: Hence, for a stronger business case for climate finance, experts propose to include in its Return-on-investment calculations the cost-benefit returns of the project through NPVSCC20 the Net Present Value of Social Cost of Carbon over 25 years of the project, a time period that compares well with tenor of infra and sovereign bonds. As an incentive, the government could introduce taxation sops for using NPVSCC25.

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You may want to know about Net Zero

  • Net zero means cutting greenhouse gas emissions to as close to zero as possible, with remaining emissions re-absorbed by oceans/ forests.
  • China, US, EU and India contribute 75% of total GHG emissions
  • However, per capita GHG emissions for US, EU and China are7,3 and 3 times of India
  • India has set target to achieve net zero emissions by 2070.

Conclusion

  • The way India finances its journey to Net Zero 2070 could very well be a framework for other nations, for it would need to have contours of social inclusion, economic flexibility, and sustainable financing, while keeping in mind the political compulsions, as well as serving the demographic requirements of creating and sustaining livelihood in decades to come.

Mains Question

Q. Green financing is the most crucial part of achieving Net zero target. Comment. What are the India’s efforts to finance its climate action goals?

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