Issue

Context:

More than three years after the Paris Agreement was finalized at COP21, it is evident that the developing world is unlikely to receive even the modest amount of US$100 billion annually in climate finance by 2020.

Given the weak efforts of the developed world to assist the developing countries so far, India has had to chart a path largely through its own economic and financial arrangements.

Background:

SDG 2030 and Paris agreement paved a guided path to attain Green, low carbon intensive and all inclusive sustainable growth.

Before these policy terms are critically analyzed with reference to India and other developing economies, it is important to briefly list their important attributes.

Paris Agreement

• It opened for signature on 22 April 2016 – Earth Day – at UN Headquarters in New York.
• It entered into force on 4 November 2016, 30 days after the so-called “double threshold” (ratification by 55 countries that account for at least 55% of global emissions) had been met.
• It is aimed to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
• The agreement also aims to increase the ability of countries to deal with the impacts of climate change, and at making finance flows consistent with a low GHG emissions and climate-resilient pathway.
• It requires all Parties to put forward their best efforts through “nationally determined contributions” (NDCs) and to strengthen these efforts in the years ahead.
• This includes requirements that all Parties report regularly on their emissions and on their implementation efforts.
• There will also be a global stock take every 5 years to assess the collective progress towards achieving the purpose of the agreement and to inform further individual actions by Parties.

Analysis

• Official aid and grants promised under Paris agreement are insufficient to meet the burgeoning energy and infrastructure needs of emerging economies.
• Lack of finance for climate action can be attributed to the fact that the international financial community—banks, asset managers, investors and capital markets—have failed to align their operations with the goals of the Paris Agreement.

The role of international investors and institutions:

• Multilateral Development Banks have failed to create bridges between private capital and clean energy/climate resilient infrastructure demands in developing countries
• Bias of international investors towards investing mostly in mitigation efforts: Conventional wisdom in the private sector holds that the costs of adaptation and resilience should be borne by governments.
• Basel norms have been designed to respond to the interests of developed nations.
• By prioritizing macroeconomic stability and implementing new liquidity restrictions, these actors have failed to consider adverse implications on cross-border flows, especially with regards to long-term green investments.

Financing green transitions: India

• India will be the first large country that must transition to a middle-income economy in a fossil fuel-constrained world.
• India is also constricted by the same political, regulatory and financial challenges that confront much of the developing world.
• Therefore, an assessment of India’s capacity to now leverage international financial flows and its ability to undertake a low-carbon transition may well provide a reliable template for developing countries to emulate.

India’s own development policy choices and lessons therein for other developing countries:

• A stable infrastructure policy will have significant implications for green investment choices
• However, India is still evolving its infrastructure trinity - PPP model, regulatory oversight and private financing.

 Reasons for the lack of private-sector involvement in India’s climate-resilient urban infrastructure:

1. The state of its energy distribution companies
2. Underdeveloped financial markets
3. Inflexible international credit and risk assessment practices

Role of human capital in enabling greater green investment:

• The executive pay of 31 of India’s top companies shows that by linking management compensation to short-term performance objective, companies are failing to integrate sustainability objectives into their long-term vision.
• Even though women and marginalized groups are likely to be more exposed to climate change related risks, they are severely underrepresented in the investment and regulatory classes.
• The reasons behind the significant shortfall in private finance in relation to low-carbon investments provide a clue that India must attempt to resolve.

1. The Indian Politico-economy setup must reclaim the power sector.
2. The large-scale subsidization of has created significant distortions in energy use, pricing and policy.
3. State-level reform in India suggests that splitting the electrical grid for agricultural and non-agricultural sectors, implementing a credible metering system and providing subsidies as direct benefits can have significant positive effects on the power sector.
4. Without a viable grid, green investments are likely to remain unviable.

Build capacity amongst international investors to understand risk and opportunity in India:

• There is generally a bias stemming from lack of knowledge (information) and capacity (human resources) to assess risks in emerging economies.
• This ultimately translates into an inability to understand the economic landscape of recipient countries.

India must build innovative policy tools to leverage new financial instruments and mechanisms:

• Currently, regulations related to debt and equity markets restrict the flow of international capital into climate action projects.
• Emerging economies must co-opt their financial sector in the fight against climate change
• Financial markets that allow for debt financing and locally issued green bonds for example create a diverse set of instruments that different types on investors can rely on.

Overhaul regulatory systems:

• This has to be done both in recipient and investing states.
• Vast pools of money are held by multiple categories of investors, such as pension funds and insurance companies.
• However, existing regulations limit the ability of fund managers to invest in climate related projects.

There is an urgent need to review the current set of Basel Accords as well as the next iteration of Basel IV accords.

The macro-prudential regulations were designed to create a more risk-free international banking system but have unintentionally stymied the ability of the financial sector to contribute to climate resilience.

The banking community must acknowledge that planetary risk is the largest systemic challenge to financial stability and that mitigating such risk is the most prudential practice.

Key actions India has taken towards combating and adapting to climate change:

• India’s National Action Plan on Climate Change (NAPCC) which covers eight major missions on Solar, Enhanced Energy Efficiency, Sustainable Habitat, Water, Sustaining the Himalayan Ecosystem, Green India, Sustainable Agriculture and Strategic Knowledge on Climate Change.
• Generating 175 GW of renewable energy by 2022
• Smart cities, electric vehicles, energy efficiency initiative
• Leapfrogging from Bharat Stage -IV to Bharat Stage-VI emission norms by April 2020
• The renewable energy capacity stands at more than 74 GW today which includes about 25 GW from solar.
• India’s forest and tree cover has increased by 1 percent as compared to assessment of 2015.
• Schemes like UJALA for LED distribution has crossed the number of 320 million while UJJWALA for distributing clean cooking stoves to women below poverty line has covered more than 63 million households.
• International Solar Alliances (ISA)
• FAME Scheme – for E-mobility
• Atal Mission for Rejuvenation & Urban Transformation (AMRUT) – for Smart Cities
• Swachh Bharat Mission

India recently submitted its Second Biennial Update Report (BUR) to UNFCCC in December 2018 as per the reporting obligations under the convention.

The report brings out the fact that emission intensity of India’s GDP came down by 21% between 2005 & 2014 and India’s achievement of climate goal for pre-2020 period is on track.

Given the weak efforts of the developed world to assist the developing countries so far, an assessment of India’s capacity to undertake a low-carbon transition may well provide a reliable template for developing countries to emulate.

Learning Aid

Practice Question:

Given the weak efforts of the developed world to assist the developing countries so far, India has had to chart a path largely through its own economic and financial arrangements. Discuss how far this path is sustainable.