The Indian government has recently announced plans to mobilize resources for green infrastructure through the issuance of sovereign green bonds as part of Budget 2022. The move aligns with India’s commitment towards achieving net-zero carbon emissions by 2070. In this article, we will explore the features of sovereign green bonds, their significance and other climate action measures announced in the budget.
Understanding Green Bonds
Green bonds have become a popular tool for countries, companies and multilateral organizations aiming to fund projects with a positive environmental or climate impact. They provide investors with fixed income payments while channeling funds into projects that reduce carbon emissions, such as renewable energy initiatives, clean transportation and green building construction. Unlike standard bonds, which allow issuers to use funds in any way they see fit, proceeds from green bonds are strictly earmarked for green initiatives.
Since its inception in 2007, the international green bond market has seen an issuance worth more than USD 1 trillion. By 2020, 24 national governments had issued Sovereign Green, Social and Sustainability bonds totalling USD 111 billion, according to data from the London-based Climate Bonds Initiative.
The Significance of Sovereign Guarantee to Green Bonds
When a government issues green bonds, it sends a strong signal of commitment towards climate action and sustainable development. It can catalyze domestic market development and motivate institutional investors. Sovereign issuance provides benchmark pricing, liquidity and a demonstration effect for local issuers, supporting the growth of a local market.
A World Energy Outlook report by the International Energy Agency (IEA) estimates that 70% of the additional USD 4 trillion spending required to achieve net-zero emissions must come from emerging and developing economies. Sovereign issuance of green bonds could be a powerful tool in attracting this capital.
Other Measures on Climate Action in the Budget
Apart from the green bonds, the 2022 budget has included several other measures to promote climate action. These include a battery swapping policy and additional allocation under the Production Linked Incentive (PLI) scheme for manufacturing highly efficient solar modules. The government is also introducing a new bill to provide a regulatory framework for Carbon Trading in India, with an objective to encourage greater use of renewable energy.
Way Forward
As India looks towards achieving net-zero emissions by 2070, there are several strategies it could employ. Following France’s example, India could assign a “green coefficient” to each budget line, reflecting how each expenditure aligns with key environmental priorities. Harmonization of international and domestic guidelines and standards for green bonds can develop a robust green bond market. Similarly, ensuring homogeneity in what constitutes green investments could promote a cross-border green bond market. The private sector’s potential should not be undermined, and capacity building efforts for issuers in emerging markets can spread knowledge on the benefits of, and procedures pertaining to, green bonds.
