Bridging the financing gap in the clean energy transition

Relevance: Climate justice, financial help to developing countries, Phase down of fossil fuels.  

News: As per the IPCC report, the world is heading towards warmer climate and higher sea levels. 

To tackle this, government around the world are planning to either to phase out or phase down their fossil fuel consumption. 

Transition to an economy free from fossil fuels will require both private capital and public finance, esp for developing countries who are still dependent on them. A multilateral effort across nations, corporates and sectors will smoothen the process. 

Why India focusses on phase down rather than phase out?

Read the following articles:

– Why India’s coal habit won’t be easy to shake off

– India needs time and money before it can dump coal

How this transition is currently being undertaken?

Companies in high carbon value chains, automobiles, cement and steel, have committed to sustainable practices. This becomes possible as investors are now aware of the long ignored social costs of profits. 

There is increasing investment in green bonds and sustainable bonds and through funds that rely on ESG (Environmental, Social and Governance) disclosures for portfolio decisions. 

What will be the fiscal implications of coal phase down for India?

Decline in revenue: There is a risk to future revenues from the tapering of fossil fuel consumption, as they account for one-fifth of India’s tax revenues.

Risk to future revenues can also affect bank balance sheets that hold sovereign debt. This risk is particularly high for countries such as India, where around 10% of commercial bank loans are to carbon intensive sectors, half of which are in the power sector.

Risk of inflation: The OECD countries suggest that charging a price for emissions through a higher tax is a possible solution. But, as consumption of fossil fuel decreases, these revenues will decline and any increases in the rates to compensate for this decline can potentially spur inflation, leaving consumers to pay for the cost of transition.

Private debt extended to fossil fuel dependent sectors could also turn unviable.

What is the way forward?

As per an estimate by the Council on Energy, Environment and Water (CEEW), the investment requirement for meeting the net-zero target will be $10.1 trillion. The promise of $100 billion from developed countries for climate mitigation is far less in comparison to the needs of developing countries such as India.  

Therefore, multilateral and private capital must enhance their commitments to invest in low-cost technology.  

A development finance institution dedicated to low carbon transition  should be created which can help accurately assess the finance required, and also streamline the spending taking place in transition. 

Source: This post is based on the article “Bridging the financial gap in the clean energy transition” published in The Indian Express on 17^th Dec 2021.