Clean energy rise needs climate finance expansion

UPSC Syllabus Topic: GS Paper 3 –Infrastructure ( Energy).

Introduction

India’s clean energy shift is gathering speed. Solar capacity rose by 24.5 GW in 2024, placing India third after China and the U.S. It is recognised by the UN Secretary-General’s 2025 Climate Report for scaling solar and wind. Clean energy is also creating jobs and growth . The missing piece is large, predictable climate finance to keep this momentum and meet targets. Clean energy rise needs climate finance expansion.

Status of Green Finance in India

1. Green Finance:

Mitigation finance :

• Mitigation finance averaged INR 3,712 billion (USD 50 billion) per year in FY 2021/22, up 20% from 2019/21.
• Domestic sources provided 83%; international sources 17%.
• The private sector contributed 66% of domestic and 63% of international mitigation finance.
• Mitigation allocations: Mitigation money mainly went to clean energy (47%), energy efficiency (35%), and clean transport (18%)..

Adaptation finance

• 98% domestic public budgets (central and state) and 2% international public, mostly from multilateral DFIs.
• Adaptation allocations: Disaster risk management received 42%, flood and cyclone mitigation 32%, and on-farm adaptation 24%. International public finance was small and mainly from multilateral DFIs.

Capital market momentum

• GSS+ (Green, Social, Sustainability, and Sustainability) bonds issuance reached USD 55.9 billion by Dec-2024, up 186% since 2021; green bonds formed 83%.
• Green bond investment crossed USD 45 billion in 2025 with a target of USD 100 billion by 2030, reflecting strong private participation.

2. Global recognition

• India added 24.5 GW solar in 2024, ranking third globally after China and the U.S.
• India is recognised in the UN SG’s 2025 Climate Report for scaling solar and wind, backed by leadership of the International Solar Alliance (ISA).

3. Jobs and macro impact

Renewables employed over a million people in 2023 and supported 5% of GDP growth. These gains show that clean energy supports inclusive growth and local livelihoods.

Issues with Green Finance in India

1. Financing gap

India needs USD 1.5–2.5 trillion by 2030 to align with a 1.5°C pathway and meet national goals.

Large capital is required for grids, battery storage, green hydrogen, transport, and agriculture. Weak system investment can constrain integration and reliability

2. Limited access: Funding is concentrated among large corporates. MSMEs, agri-tech innovators, and local infrastructure developers face.
3. Financing risk in smaller cities: Mid-sized projects in Tier-II/III cities face governance and delivery risks. Lenders demand stronger guarantees and predictable cash flows to lower capital costs.
4. Lack of robust green finance regulation: Without clear regulations in place, stakeholders, who rely heavily on conventional financial practices, may be hesitant to invest in green finance.
5. Mismatch between investment timelines: Long-term green investments do not align with the short-term horizons of investors.
6. Disproportionate investment in sectors and technologies: Certain sectors, such as wind energy, attract less international finance than others, like solar photovoltaics. .

Government Initiatives

1. Sovereign green bonds and SEBI-regulated social bonds have channelled private capital into climate action, education, and health. They set benchmarks for pricing and disclosure in the local market.
2. Solar Park Scheme and auctions: Auctions under the Solar Park Scheme helped crowd-in private financing by offering scale, standardisation, and site readiness. This improved bankability and reduced bid risk.
3. The new Carbon Credit Trading Scheme can unlock finance if transparent, well-regulated, and equitable. Its credibility will shape demand, pricing, and investment signals.
4. National Bank for Financing Infrastructure and Development (NaBFID): It is instrumental in addressing India’s infrastructure needs, notably through the National Monetisation Pipeline (NMP) and the National Infrastructure Pipeline (NIP). Emphasizing sustainable and climate-resilient development, NaBFID concentrates on projects that foster inclusive growth and sustainability.
5. Net-zero targets: India, as a developing nation with growing energy demands, has set a goal of achieving net-zero emissions by 2070. This ambitious target involves balancing the amount of greenhouse gases produced with the amount removed from the atmosphere, promoting sustainability and climate resilience.
6. Green growth as a budget priority: In a recent budget, the government identified “Green Growth” as one of its seven key priorities, emphasizing its commitment to promoting sustainable development and allocating resources accordingly.
7. FDI in renewable energy: To meet the INR 1.5-2 trillion annual investment requirement in renewable energy, the Indian government has authorized 100% annual Foreign Direct Investment (FDI) for renewable power generation and distribution projects.
8. Introduction of “Green Deposits”: The Reserve Bank of India has introduced guidelines for banks and Non-Bank Financial Companies (NBFCs) to accept “green deposits”. These funds are allocated towards environmentally sustainable projects, such as energy efficiency, clean transportation, climate change adaptation, and sustainable water and waste management.
9. Business Responsibility and Sustainability Reporting (BRSR):SEBI has mandated the top 1000 listed companies in India to adhere to the BRSR framework, promoting transparency and accountability in their sustainable business practices. This framework helps in incentivizing green financing and allowing banks to estimate their climate-related exposure.

Way forward

1. Blended finance: Use partial guarantees, subordinated debt, and performance/loan guarantees to lower risk for lenders. Focus on mid-sized and local projects where risk perceptions and delivery gaps are highest.
2. Unlock domestic institutions: Enable EPFO, LIC, insurers, and pensions to invest in climate assets through clear ESG rules, risk-mitigation tools, and a stable pipeline of long-term green projects.
3. Leveraging international funds and partnerships: India could access international climate finance options such as the Green Climate Fund (GCF) and the Global Environment Facility (GEF). Bilateral and multilateral partnerships with developed countries can also provide financial and technical assistance.
4. Boost adaptation finance: Prepare state-level adaptation plans with clear funding gaps. Use public funds to crowd in private capital for resilience in agriculture, water, and disaster management.
5. Data and risk innovation: Adopt blockchain to track climate finance flows and AI-driven risk analytics to improve portfolio assessment. This reduces transaction costs and raises underwriting quality.
6. Enhancing technological capabilities: Upgrading India’s technological capabilities is key to making the green transition cost-effective. This would involve investing in research and development (R&D), technology transfer, and capacity building. Collaborating with international partners can help access cutting-edge technologies.
7. Fostering policy consistency: Policy inconsistency can deter investors and slow down progress. Therefore, there should be consistency and predictability in India’s energy and climate policies.
8. Promoting public awareness and engagement: Raising public awareness about the importance of green transition and creating a societal demand for sustainable products can help incentivize businesses to invest in green technologies and practices.

Conclusion

India has momentum, but finance must scale and reach MSMEs and local projects. Expand blended finance, mobilise EPFO/LIC and other domestic institutions, and tap GCF/GEF and partnerships. Boost adaptation funding, use data and risk tools (blockchain, AI), build technology capacity, keep policies stable, and engage citizens. These steps can close the gap and sustain a jobs-rich transition.

Question for practice:

Discuss how India can expand climate finance for its clean energy transition.

Source: The Hindu