Expert explains: Why India shouldn’t ignore debt financing to combat climate change

India, in accordance with the Paris Climate Agreement, has committed to specific Nationally Determined Contributions. These commitments involve enhancing environmental stewardship, increasing non-fossil fuel shares in electricity generation to 40%, and reducing emissions by 33-35% by 2030.   

However, research on India's low carbon value chain and climate finance architecture, emphasizes the significant challenge of obtaining long-term financial resources, given the substantial funding required to meet NDC commitments.  

A. Damodaran, Professor, International Council for Research on International Economic Relations (ICRIER), joins Nabodita Ganguly to discuss more about the country’s climate finance architecture.  

Damodaran highlights the historical context of climate finance, starting with the establishment of the Global Environment Facility (GEF) in 1991. The GEF provided grants to developing countries to address climate change and promote adaptation and green energy projects. 

India's climate finance architecture was initially based on the philosophy of public financing and grants from developed countries. However, there has been a shift towards involving the private sector in climate finance, which was exemplified by the creation of the Green Climate Fund (GCF) in 2010. The GCF aimed to de-risk investments and encourage private sector involvement in climate finance. 

Furthermore, green bonds play a pivotal role in financing renewable energy projects. Green bonds are fixed-income securities that raise funds for projects with environmental benefits. India started issuing green bonds in 2014, attracting both private and public sector entities.  

Regarding renewable energy projects in India, Damodaran mentions the challenges they face in terms of financial viability. High costs of debt service, long gestation periods, and the need for long-term funds create hurdles for project developers. The mismatch between short-term resources and the long-term nature of renewable projects further complicates the financing aspect. 

To address these challenges, Damodaran suggests treating green bonds as securities and incorporating them into regular market operations. This would enhance liquidity and attract more investors. The Reserve Bank of India's involvement in buying and selling these securities, both domestically and offshore, is seen as a desirable step. Listen in. Read the full research paper here.  

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