What can the Finance Minister do for India’s climate change action in Budget 2024-25?

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When Finance Minister (FM) Nirmala Sitharaman presents her first union budget as part of the newly-formed National Democratic Alliance government on July 23, she faces the challenge and the opportunity to push India’s climate action goals.

In a year when extended heat waves and record high temperatures exposed the country’s vulnerability to climate change, all eyes will be on the FM for fiscal and policy measures regarding climate change mitigation and adaptation.

India has made significant climate commitments on the global stage, pledging net-zero emissions by 2070, and to increase its renewable energy capacity to 500 gigawatts (GW) by 2030. These targets align well with the Paris Agreement that aims to limit global warming  within 2°C above pre-industrial levels, and pursue efforts to contain the temperature increase to 1.5°C above pre-industrial levels.

But according to the UNFCCC’s (United Nations Framework Convention on Climate Change) global stocktaking report released on September 8, 2023 these goals are not on track and need more concerted efforts from countries. Closer home, the Reserve Bank of India (RBI) has cautioned about the impact of climate change on the economy.

“The Reserve Bank has initiated steps to address the risks posed by climate change to the financial system… Going forward, our overarching approach would be to consider ‘sustainability aspects’ as a focal point of the entire credit ecosystem. The onus of spearheading sustainability initiatives will, however, reside with the regulated entities,” Shaktikanta Das, Governor, Reserve Bank of India, said in a speech on July 19, 2024.

While the RBI has undertaken initiatives that include a framework for sovereign green bonds, acceptance of green deposits, and  a draft framework for disclosure of climate-related financial risks, budget announcements on the matter can go a long way.

“Adaptation of clean technologies is mostly under the purview of the government or the public sector, not so much the private sector. It is usually done after an incident has happened and people are impacted. Private sector companies are commercial establishments; it primarily becomes the responsibility of the government or the public sector entities, where the public sector banks infuse the capital to meet the needs for the adaptation. What needs to be done is to make sure public-private partnership, or the private sector, also plays a role in it,”  Vibhuti Garg, Director, South Asia, Institute for Energy Economics and Financial Analysis, told Moneycontrol.

Encouraging corporate climate contributions

Given the commitments made by India towards climate action, the industry and experts feel that the government needs to put in place some enablers for the private sector, like tax incentives on the expenditure incurred to achieve such goals.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has recommended changes to section 37 of the Income Tax Act, which allows deductions for business expenses, except capital costs, as well as personal expenses incurred by the assessee. The changes will allow the deduction of such spends as corporate social responsibility (CSR) expenses, while computing business income.

“It is important that companies are encouraged to contribute in the achievement of national commitments by providing tax incentives on the expenditure incurred to achieve such goals,” FICCI said in its recommendations to the Finance Minister.

Funding the green transition

Financing the green transition is a major challenge, especially for developing nations like India,  given the high initial costs and long payback period associated with these projects. The government will have to help the industry bridge this financial gap to ensure a sustainable transition towards renewable energy (RE).

The Confederation of Indian Industry (CII) said in a pre-budget statement that to facilitate the funding required for green transition and achieving the nation’s net-zero goals, India should set up a green transition fund.

“The fund could be set up in partnership with multilateral Institutions like the World Bank, and the private sector. The fund could be structured, leveraged, and managed by the World Bank,” CII said.

CII has also made a pitch for the definition of CSR under section 135 of Companies Act, 2013, to be broadened to include contributions to this fund. Additional resources for this fund can also come from levies, cesses, or surcharges which are to be used for environment related, or ‘green activities,’ like the Rs 400 per ton coal cess, cess on crude oil, the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) fund, etc.

Accelerating clean energy adoption

Incentivising clean technologies, not just for the energy sector but also for other industries, could expedite adaptation by companies.

“The government may announce incentives for clean energy technologies like hydrogen, battery storage, and pumped hydro storage. There has been a lot of representation from the industry for a review of the GST, and I hope that there is some announcement for hydropower and battery storage. The tax rate is about 18 percent or so, and the demand has been to lower it to 12 percent,” Garg said.

The International Institute for Sustainable Development, an independent think tank, believes that for India to reach its renewable energy goals, it needs to deploy energy storage technologies.

“Recent battery energy storage system (BESS) bids have shown that costs have declined by about 60 percent in the last two years, but GST and customs duties on batteries and other BESS components continue to be high, and account for a significant tariff differential of around  Rs 1-1.5 / kWh. We expect the government to support further market development of BESS by lowering GST and custom duties in the upcoming budget. This could have a positive knock-on effect on the country’s energy savings, and reduce the need for a second tranche of the viability gap funding scheme for BESS,” said Swasti Raizada, Policy Advisor, IISD

What can the Budget 2024-25 do for climate action?

Supporting electric vehicles

In her interim budget speech earlier this year, the Finance Minister had said that the government will focus on expanding electric vehicle manufacturing, as well as strengthening the charging infrastructure in its efforts to meet the net-zero target.

The auto industry is pegging its hopes on the third round of Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles, or FAME 3.0, to focus on charging infrastructure and e-buses.

According to recent reports, the incentives may be announced soon, but maybe not in the budget.

“The success of FAME 2.0 is a clear signal that EV subsidies have been effective in bringing down the total cost of ownership for select segments. As a result, we are seeing a shift in consumer preferences in the two- and three-wheeler segments, but the scale of incentives remains insufficient for larger vehicle categories. Also, the absence of a clear roadmap for future subsidies have led to policy uncertainty for the nascent EV industry, which has long lead times. We expect the upcoming budget to lay down a clear roadmap for FAME 3.0, with a bigger focus on charging infrastructure and e-buses,” explained Raizada.

Affordable clean cooking fuels

According to the International Energy Agency, India is expected to make significant progress in enabling access to clean cooking fuel. The number of people without access is expected to fall from 450 million in 2022 to 285 million in 2030, indicating an access rate of 81 percent, up from the current rate of approximately 68 percent.

Even at this rate, there is a need to push for faster adaptation of clean cooking fuel. The World Health Organisation categorises solar, electric, biogas, natural gas, liquefied petroleum gas (LPG), and alcohol fuels, including ethanol, as clean cooking fuels.

“Stronger action  on the affordability of clean cooking fuels, especially for rural households, will be enormously beneficial. IISD’s research has found that LPG remains unaffordable for a large number of poor rural households, and incentivising R&D, making induction stoves affordable, and scaling up biogas, remains a priority. We hope this is addressed in the budget,” Raizada said.

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