Funding reality check for India’s dream to achieve net-zero by 2070

Source: The post is based on the article “Funding reality check for India’s dream to achieve net-zero by 2070” published in the Business Standard on 12^th November 2022.

Syllabus: GS – 3 – Conservation, environmental pollution and degradation.

Relevance: About decarbonising the Indian economy.

News: India lacks the capital to meet its net-zero carbon emissions target by 2070. Decarbonising the Indian economy by 2050 may cost as much as $12.1 trillion.

About Norway’s ambitious plan to decarbonising the economy

Norway announced the world’s biggest carbon capture and storage (CCS) scheme to make Oslo the carbon sink for Europe’s industrial emitters. The transport and storage part of the project will connect continental European CO2 emitters to offshore storage sites on the Norwegian Shelf.

The first phase of the plan is expected by 2024. Phase 1 aims to collect 1.5 million tonnes (MT) of CO2 from industrial emitters, and permanently store the carbon at 2,600 metres under the seabed. Phase 2 aims to quadruple phase 1’s capacity.

Note: ONGC also sought a similar CCS project in India under the seabed off the coast of Gujarat. 

What are the challenges in decarbonising the Indian economy?

a) Lack of cost-competitive technology alternatives in India, b) The government is silent on financially supporting any decarbonisation efforts, except an Rs.100 billion subsidy scheme for EVs, c) India is home to some of the world’s most polluting cities led by Delhi. Despite that, the outlay for the environment ministry is only Rs70 billion, d) India’s renewable energy companies have raised only around $6.8 billion in debt from offshore capital markets since January 2021. This is less than 2% of India’s annual decarbonising costs, e) Last year, the green bond issuance in India was a mere $750 million, f) In 2021 India’s renewable sector attracted only $12-$15 billion in investment. Further, funding costs are the largest expense for renewable projects and g) Indian banks are reluctant to provide funds for decarbonisation. For instance, India’s biggest bank, SBI, rarely funds commercial and industrial renewable projects.

Overall, traditional domestic and foreign sources and debt capital markets will not be able to fund the massive investments needed for decarbonising and they have limited access to foreign capital on concessional terms.

What should be done to decarbonise the Indian economy?

-India should facilitate access to low-cost, long-term and diversified capital to facilitate decarbonising the Indian industry.

-Accelerating investments from sovereign wealth funds which typically have a low cost of funding and represent a more patient investor is critical. For example, Singapore, UAE, Saudi Arabia and Canada have created such funds.

-India can shift tax revenues from fossil fuel sales to emissions and implement a carbon pricing policy that increases the direct taxes on emissions from nil to Rs6,000 a tonne by 2050.

-India can mobilise capital for decarbonisation projects by making them as priority sector lending. 

-Renewable projects are an easier way for corporates to reach net zero. Hence, emission reduction projects should be funded by banks.