Bridging the climate finance gap for India’s transition

By Suranjali Tandon 

Every year, at the Conference of the Parties, a new estimate for climate finance needs is published. With delayed action on mitigation, climate finance needs are expected to rise. According to the Independent High-Level Expert Group on Climate Finance, developed countries need to provide $1 trillion per year by the end of the decade to help developing countries meet their targets, and $6.5 trillion per year is required by all economies until 2030. These large sums of money are even harder for developing countries to raise. Thus, the Paris Agreement obligates developed countries to support developing countries through financial resources. A formal agreement to mobilise $100 billion per year remained largely unmet until 2023. However, at Baku, member countries committed to ramping up their contribution under the new collective quantified goal (NCQG) to $300 billion. Although this is still short of the needs, the yawning gap between the funds required and those mobilised remains a critical issue.

To put this gap in perspective, India needs $2.5 trillion by 2030, which is 7.69 percent of global climate finance needs. Given that the NCQG is only a fraction of the total global requirements, it is anticipated that, much to the displeasure of developing countries, domestic resource mobilisation will play an important role in raising capital. Experts almost reflexively suggest bolstering public finances, particularly through taxes. However, a pinch of pragmatism is needed here, as those who advocate for more taxation are often averse to paying it themselves. India’s tax-to-GDP ratio has remained stable, and some argue that it is close to its potential. This means that relying on public finance should only be a last resort. This is particularly problematic for oil-producing countries, which attract capital through investor-friendly regimes. The question then is: what will shift the status quo for private capital?

In recent years, experts have weighed options such as definitional clarity, disclosure of investment practices, and nudging companies to commit to net-zero goals. But do these measures add up in a world that seems intent on drilling more oil? An honest path to transition requires acceptance of two important facts: returns will drive private investment, and oil companies are, in fact, critical to the transition. In fact, ensuring that oil companies transition faster requires that investments in other sectors and jurisdictions offer a comparable steady stream of income. Tilting incentives in favour of renewables could come in the form of regulatory changes. These include the EU’s more stringent approach to carbon pricing, which it seeks to externalise through the Carbon Border Adjustment Mechanism. Unfortunately, unless these measures are coordinated, they may become self-isolating and costly. Moreover, they overlook the differences in the pace of development and transition, as acknowledged under the Paris Agreement.