Photo: Outlook India

“Climate actions will have to become good business to attract finance”

In the second of a two-part interview, Rajni Ranjan Rashmi, former principal negotiator for India at the UN climate change negotiations and ex-special secretary in the MoEFCC, speaks to CarbonCopy on how India can fund its own climate action at a time when climate finance from developed nations remains woefully inadequate

On August 9 this year, the Intergovernmental Panel on Climate Change (IPCC) launched its latest report, which warned that without immediate, rapid and large-scale reductions in greenhouse gas emissions, it will be impossible to limit warming to 1.5°C or even 2°C.

This puts pressure directly on large emitters, including India. To achieve deep emission cuts, developing countries like India have a massive task ahead of them. This includes transitioning their energy systems to greener sources while simultaneously providing cheap energy access to its poor, and ensuring jobs for millions of people who currently earn their living in conventional energy systems. These countries will also have to increase forest cover and create an additional carbon sink amid the competing demand for land for infrastructure and business development. They will also have to deal with emissions in hard-to-abate sectors such as cement and steel, and transition to an electric transport system that draws its energy from renewables.

For all this, a country needs massive investments to bear the upfront cost of technology transition. Developed countries are mandated to provide climate finance and technology to growing economies to help the world avoid the dangerous trajectory highlighted by climate science. However, they have been failing to provide both in required quantum. In the current reality, where finance is not coming in desired proportions, developing countries like India cannot postpone their climate actions because a large part of their own population is vulnerable to the impacts of climate change. How can India figure out finance for its climate actions on its own? What are the important aspects of this finance story?

To understand this better, CarbonCopy spoke to Rajni Ranjan Rashmi, a former principal negotiator for India at the UN climate change negotiations and ex-special secretary in India’s Ministry of Environment, Forest and Climate Change (MoEFCC).

The former bureaucrat is now a distinguished fellow with TERI and is associated with the Centre for Global Environmental Research, where he works on areas pertaining to climate change, mitigation and adaptation challenges, carbon markets, and related environmental policies and actions. He also serves on the sub-committee of India’s Ministry of Finance on Climate Finance.

Q- In any scenario of climate action, including one with net-zero targets, countries like India require huge amounts of money up front to decarbonise. For its NDCs alone, India needs $2.5 trillion till 2030. Some estimates say the current tracked green finance in India is only 10% of the total annual requirement across sectors. How can India bridge this gap? Especially keeping the reality in mind that the promised finance flows from the developed world to the developing countries are coming in comparatively little quantities.

There is no doubt that for meeting the NDC goals, the financial requirements of India are huge. The report that was put out in 2020 by the Department of Economic Affairs of India had assessed the gap in terms of financing of India’s NDCs to be about $1.7 trillion till 2030. 

Currently, most of the climate finance requirements in India are being met by commercial banks and the capital is being raised at a commercial rate of interest. So, the cost of capital is extremely high for industry. The challenge before us is to make climate finance available for the purposes of meeting NDCs at affordable rates and to de-risk this finance in a manner that the rate of returns are attractive for the industry to make investments. Thus, the challenge is two-fold. The first challenge is to bring down the cost of capital raised domestically as well as internationally. Second, is to reduce the risk for investments. For that, there are a number of instruments that can be used, but that requires some fiscal and financial support from the government. We will need to have a mix of both, international capital as well as domestic regulatory support. 

International capital will come only if there is some kind of predictability and certainty in the areas where investments can be made. For this, one requirement is the classification of sustainable and green investments, which, so far, has not been done in India. Several countries have come up with their own taxonomy. It may be a good idea to use soft regulatory intervention for this purpose in India, too. Only after an appropriate classification of green or sustainable investments is made can we expect the fiscal authorities, financial regulatory agencies as well as the investors to make clear decisions. A second set of instruments to de-risk these investments will also be required. They can be partial guarantees or credit enhancement or pure subsidies in mitigation projects or Viability Gap Funding in case of adaptation projects. There will be a cost involved here, which may have to be borne by the government and private sector jointly.

Q- So for a country to mobilise climate finance, climate actions will have to become good business opportunities?

Yes, absolutely! Many of these climate targets will remain aspirational unless we have a good business model or a regulatory intervention. We don’t move towards a target unless the aspiration is backed by sufficient investments and the rate of returns are good for the investor. No investor would put in their money unless the investment is remunerative enough. So, we definitely need a good business model. 

And this can be done. It has happened in the past through the use of a good mix of regulation as well as an investment. Fall in prices of energy efficient LED bulbs and solar PVs through demand aggregation are cases in point. EESL is now experimenting with this even for super efficient ACs or electric vehicles. Large procurements create large demand on the back of regulations. This encourages the business and investor community to make investments and bring down the cost of the product when the efficiencies of scale are achieved. We need both a mix of good regulation as well as a good procurement model, which could be based on the regulatory regime. This is the only model that will work in the long term for innovative products. 

To some extent, India has succeeded with this approach on the energy efficiency side. But on the energy supply side and the hard-to-abate sectors like cement, steel and chemicals, which are extremely carbon intensive, no such experiments are taking place. So, we will need some kind of regulation to create demand for green products in these areas. 

Q- In the past, there have been ups and downs in policies with regard to solar energy in India. How important is it to fix this kind of policy uncertainty to attract more money into climate actions? 

Removal of policy uncertainty is extremely important. Investors look for certainty and predictability in policies much more than fiscal subsidy or fiscal incentives. As long as there is a level playing ground and the policy framework is predictable, the investor is confident. 

Fortunately, with regards to solar, the central government has clarified there will be no change or further tinkering with the policies concerning the sector. To some extent, the predictability of the legacy PPAs between the renewable energy producers and the DISCOMs has been restored. But there is a conundrum here because energy policy in India is divided at the central and state levels. Although there is a central electricity act, the implementing agencies or the energy operators are functioning at the state level. Among states, there is no uniformity in the energy policies. A common framework or orientation does not exist for energy pricing in India. That creates some difficulties. And that is the reason why energy distribution companies [DISCOMs] are in such deep trouble. Some serious work required in terms of creating an energy supply infrastructure based on a framework and predictable policies agreed amongst the Centre and states. 

Q- Coordination between the Centre and the states will have to improve exponentially to create a good ecosystem for climate actions?

I am of the view that both the central government as well as the state governments will play an equal role in protecting the environment. It cannot be driven entirely by either the states or the central government. Even if we want some kind of predictability, uniformity and certainty in the policies, it doesn’t mean that everything should be taken over by the central government. After all, state governments do play a very important role. In the area of climate action, it is not just mitigation or reduction of emissions that matters. Climate resilience and adaptation actions, which affect the large rural communities and livelihoods of people, must also be taken into account. These are extremely important developmental goals. The role of state governments in adaptation and building climate resilience is critical. So the state governments must be co-opted; they must be brought onboard. It is also very important to protect their interests so that they become partners in climate action. 

Q- Private sources of finance will, of course, look for return on investment so they would also ignore the climate actions which are risky investments. What role can public finance play here? Especially for adaptation.

Adaptation is primarily financed from public sources, because most of these actions do not have commercial returns in the typical sense. So public funding is likely to continue to play a large role in supporting adaptation actions and building climate resilience. More so, as the benefits are available only in the long term whereas the costs are incurred in the short term. Hence,  adaptation will always remain an area of climate action where the public agencies and finance plays a key role. However, we should try and see that public funds for adaptation are used not only to de-risk the investments, but also mobilise and leverage private finance. Public funds should create the right conditions for businesses to come in and play their social part. After all, the corporate world also has a social responsibility, so CSR funds should play a larger role in adaptation action.

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