One of the first decisions of Trump’s second administration was to pull out of the Paris Agreement and retract from its financial contributions to global climate mechanisms. Add to it the sleight of tariffs which increase the risk of continued volatility in global markets, rise in inflation, protectionism, and economic slowdown. These developments can result in countries and firms stepping sideways on climate action, possibly hurting the green transition momentum in the short term.
In these uncertain times, green transition presents itself as a strong economic offering for India. Financing such a climate responsive development transformation is not without challenges. If anything, Trump’s moves should accelerate our efforts domestically and internationally to unlock finance that help us stay the course.
Multilateral climate finance for India
The UNFCCC linked multilateral climate finance, where the US has been the dominant contributor, disbursed by Global Climate Fund (GCF), Global Environment Facility (GEF) and Adaptation Fund (AF) has supported India with a total of $1.16 billion in support until 2024. Quantitatively very small, this kitty is still very important for India as these play a catalytic role in stimulating markets, fostering innovation, reducing risk, and supporting policy and institution-building. Riddled with long drawn process for approvals, this funding does mar any efficiency gains and adds to the opportunity cost.
World Bank and the ADB channel $5 to $6 billion a year in low-cost financing to support India’s climate and development goals. They also come with substantial technical assistance critical for green transition.
The US is the largest shareholder in these banks and is reviewing its support. Rating agencies like the Moody’s conjecture that a US pullout from the multilateral development banks (MDBs) may not happen as it reduces US’ political advantage making way for China to dominate international development finance. But, if the US contribution does reduce materially, this may lower the AAA investment rating of these MDBs making the cost of borrowing from them more expensive for India.
The massive climate finance gap of up to $200 billion a year overshadows the support we receive from UNFCCC funds and the MDBs. And yet without this support many green projects wouldn’t get over the line. Irrespective of Trump, the solution to the financing challenge for India’s green transition does not lie in increasing our reliance on multilateral capital alone.
India needs to prepare its sustainable finance roadmap and augment finance from available and new sources and partners. Financing India’s climate transition will demand unprecedented coordination between state and central governments, financial regulators, development finance institutions, and new domestic and international partnerships including with the emerging economy blocs.
I propose seven areas of action where renewed efforts can help scale up finance, knowledge, capabilities.
1. Cultivate diplomatic realignments: India should proactively negotiate and strengthen green investment compacts with advanced and developing economy blocs such as the EU, Japan, Saudi Arabia, BRICS and in the Indo Pacific
2. Increase cooperation among national and regional development banks: MDBs like the Asian Infrastructure Investment Bank, New Development Bank, and national development banks like that of Brazil, South Africa and Indonesia are natural partners for Indian DFIs for green infra financing
3. Create domestic green capital pools: PFRDA and IRDAI could mandate a five percent investment in green sovereign and corporate debt. This could unlock up to USD 40 billion a year from institutional investors such as LIC and EPFO and create local demand for green projects boosting local currency issuance
4. Bring regulatory and policy coordination for domestic and international capital mobilisation: Climate stress tests and forward-looking disclosures as being considered by the RBI will be needed for entities regulated by other financial regulators such as PFRDA, IRDAI and SEBI, underpinned by a robust, interoperable green taxonomy
5. Draw up a fiscal framework for climate action: This is important to calibrate the amount of government support needed in the form of subsidies, tax credits, carbon linked tax etcetera for market creation
6. Proactively engage with national and international philanthropic capital to scale up blended finance: This will lower investment risk in new climate tech, urban infrastructure, steel decarbonisation, resilient agriculture and other opportunities
7. Strengthen the ecosystem for doing business for international actors in India: This will be critical to advance climate investments and build trans-border climate finance cooperation
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