National Green Financing Institution

The Government of India is taking steps to establish a national institution aimed at funding green initiatives. This initiative is part of India’s broader goal of achieving net-zero emissions by 2070. The government’s public policy think-tank, Niti Aayog, is exploring various models to create a dedicated green financing institution. Current investment in climate initiatives is falling short, necessitating this new approach.

Need for Green Financing

India needs substantial investments to meet its climate goals. The World Bank estimates that around $170 billion is required annually. Currently, India invests only $44 billion each year. This gap marks the urgent need for a dedicated financing institution to mobilise funds for green projects.

Exploration of Models

Niti Aayog is studying successful green banking models from around the world. The aim is to design an institution that can aggregate green capital from various sources. This institution will help lower the cost of capital for green projects. Options include creating a new bank or repurposing existing institutions.

Focus on Hard-to-Abate Sectors

The proposed green financing institution will focus on sectors that are difficult to decarbonise. Key sectors include steel, cement, shipping, fertilisers, and automobiles. These industries are crucial for India’s economic growth and require investment to reduce their carbon footprint.

Potential Institutional Framework

Niti Aayog is considering several frameworks for the new institution. One model could be similar to the National Bank for Financing Infrastructure and Development (NaBFID) or the National Bank for Agriculture and Rural Development (NABARD). Alternatively, existing institutions like the Indian Renewable Energy Development Agency (IREDA) could be repurposed to support green financing efforts.

Sovereign Green Bonds

To support green initiatives, the Government of India has issued sovereign green bonds (SGrBs). In FY23, SGrBs worth ₹16,000 crore were issued, followed by ₹20,000 crore in FY24. For FY25, the government has already raised ₹11,697.40 crore and plans to raise an additional ₹10,000 crore. These bonds are crucial for funding sustainable projects.

Climate Targets under the Paris Agreement

India’s climate commitments include reducing emission intensity by 45% from 2005 levels by 2030. Additionally, the share of non-fossil fuel energy resources is expected to reach 50% of the installed capacity. Achieving these targets requires substantial financial backing, underscoring the importance of the proposed green financing institution.

Global Context

India is the third-largest emitter of greenhouse gases globally. In 2021, its emissions reached 3.9 billion carbon dioxide-equivalent tonnes. This positions India behind only China and the United States. The establishment of a national green financing institution could play a very important role in addressing this challenge.

Questions for UPSC:

1. Discuss the significance of establishing a national green financing institution in India in the context of global climate change commitments.
2. Critically examine the role of sovereign green bonds in financing India’s transition to a sustainable economy.
3. Explain the challenges faced by hard-to-abate sectors in achieving net-zero emissions in India.
4. With suitable examples, discuss how existing financial institutions can be repurposed to support green initiatives in India.

Answer Hints:

1. Discuss the significance of establishing a national green financing institution in India in the context of global climate change commitments.

1. Supports India’s goal of achieving net-zero emissions by 2070.
2. Addresses the funding gap of $126 billion needed annually for climate initiatives.
3. Facilitates mobilization of green capital from diverse sources.
4. Enhances investment in hard-to-abate sectors crucial for economic growth.
5. Aligns with international climate commitments under the Paris Agreement.

2. Critically examine the role of sovereign green bonds in financing India’s transition to a sustainable economy.

1. Provide a mechanism for raising funds specifically for green projects.
2. Promote investor confidence in sustainable investments through government backing.
3. Help in achieving annual funding targets for climate initiatives.
4. Enhance liquidity in the market for green investments.
5. Contribute to the overall growth of the green finance sector in India.

3. Explain the challenges faced by hard-to-abate sectors in achieving net-zero emissions in India.

1. High capital costs and lack of access to green financing.
2. Technological limitations in reducing emissions effectively.
3. Dependency on fossil fuels for energy and production processes.
4. Regulatory hurdles and lack of incentives for transitioning to greener practices.
5. Need for investment in research and development for sustainable alternatives.

4. With suitable examples, discuss how existing financial institutions can be repurposed to support green initiatives in India.

1. IREDA can be adapted to finance renewable energy projects more effectively.
2. NABARD can expand its role to include funding for sustainable agriculture practices.
3. Infrastructure banks can be restructured to prioritize green infrastructure investments.
4. Existing investment trusts can focus on green bonds and sustainable projects.
5. Leveraging existing frameworks can accelerate the transition to a green economy without starting from scratch.