As the world strives to make a worthwhile transition from fossil fuels to cleaner energy sources, India’s financial sector faces significant challenges. A recent study published in the journal Global Environmental Change reveals that the Indian financial sector is exposed to high risk during the shift. This finding highlights the intricacies and potential fallout of speeding up the green transition in a predominantly fossil fuel-dependent economy.
Impact of Transition on India’s Financial Sector
The transition from fossil fuels to clean energy can negatively affect India’s financial sector due to its deep exposure to fossil fuel-related activities. For instance, 60% of loans to the mining sector are directed towards oil and gas extraction. The petroleum refining and related industries account for 20% of the debt in the manufacturing sector. Furthermore, electricity production, the dominant source of carbon emissions, represents 5.2% of outstanding credit.
Expertise Deficit and Capacity Limitations
India’s financial institutions face a crippling shortage of experts knowledgeable about transitioning from fossil fuels to clean energy. Among ten major financial institutions surveyed, only four gather data on environmental, social, and governance (ESG) risks, and none of them integrate this data systematically into financial planning.
High-carbon industries like power generation, chemicals, iron and steel, and aviation have outstanding debts accounting for 10% of the total owed to Indian financial institutions. Their heavy indebtedness diminishes their ability to manage shocks and stressors, amplifying the financial sector’s risk during transition.
A More Polluting, Costlier Energy Supply
The decision-making of Indian banks and institutional investors seems to be steering the country towards a dirtier, costlier energy supply. Only 17.5% of bank lending to the power sector is invested in pure renewable energy sources. As a result, India’s electricity production relies more heavily on carbon sources than the global average.
In India, coal constitutes 44% of primary energy sources and powers 70% of the nation’s electricity. The national fleet of coal-fired power plants averages 13 years in age, and India’s proposed future coal capacity is second only to China’s at 91,000 MW. While the Draft National Electricity Plan 2022 predicts that coal’s contribution to electricity generation will shrink to 50% by 2030, India still has an uphill battle with carbon emissions.
Transition Risks and Opportunities
India’s financial sector is incredibly vulnerable to the potential risks posed by the green transition. But where there’s risk, there’s opportunity. In fact, this transition could open up avenues for directing finances towards sustainable assets and activities.
India has committed to achieve net-zero emissions by 2070. It also plans to derive half of its electricity from non-fossil fuel sources by 2030. To fulfill these commitments, India would need to mobilize at least a trillion dollars’ worth of financing.
Previous UPSC Civil Services Examination Questions
Past examination questions provide a glimpse into the gravity and complexity of India’s energy challenges. In 2016, aspirants were asked to describe the current situation and goals concerning renewable energy sources in India and discuss the significance of the National Programme on Light Emitting Diodes (LEDs). The 2014 examination contained questions about the value of pursuing carbon credits and clean development mechanisms set up under the United Nations Framework Convention on Climate Change (UNFCCC), despite a significant drop in the value of a carbon credit. These inquiries required candidates to consider India’s energy needs in the context of economic growth.
The transition from fossil fuels to clean energy in India presents both formidable challenges and remarkable opportunities. The country’s financial sector will play a pivotal role in navigating this complex journey, requiring astute management of risks and resources.
