Now Reading
Beyond COP26: Why India Needs a Climate Investment Framework

Beyond COP26: Why India Needs a Climate Investment Framework

Prime Minister Narendra Modi arrives to address the 76th Session of the UN General Assembly in New York, September 2021. Photo: Reuters/Eduardo Munoz

  • There is some uncertainty around what India’s call for a trillion dollars in climate finance represents.
  • The IEA estimates India needs $1.4 trillion in cumulative new energy investments by 2040, but this estimate doesn’t account for the cost of ‘just transition’.
  • To break away from the ‘technological transfer’ paradigm, India also needs climate-responsible investment in research and development.
  • Overall, India must recognise that it needs a long-term ‘climate investment framework’ that combines different sources of finance.

At COP26, India announced an intention to zero out its carbon emissions by 2070. Grounded in the 2018 special report of the Intergovernmental Panel on Climate Change (IPCC) on the 1.5º C threshold, the deadline recognises that decarbonisation is a scientific, economic and political imperative. India also announced four new targets for 2030 and, perhaps most critically, called for $1 trillion (Rs 75.5 lakh crore) in climate finance from developed countries.

There is uncertainty around the exact level of ambition in the announced targets. Depending on how certain parts of the PM’s statement are interpreted – e.g. whether “energy” refers to electricity or includes transport and industrial fossil fuel consumption – they could range from moderately ambitious to potentially transformative. There is also some uncertainty around what the call for a trillion dollars represents, which is the focus of this piece.

The level of emissions reduction ambition will become clearer when India submits a new ‘nationally determined contribution’ (NDC) – the climate targets required by Article 4 of the Paris Agreement. The Glasgow Climate Pact requests countries to submit new NDCs by 2022. However, clarity about emissions reduction in developing countries has always depended on clarity regarding how much and what kind of finance is made available.

Climate finance was in focus at COP26 – developing countries are highly dissatisfied with developed countries’ delivery of the $100 billion a year promised at Paris in 2015. Even the OECD estimates that finance available is around 20% short of that promise; the real availability of funds is likely much lower. Apart from accountability for past promises, a new “Collective Quantified Goal on Long-Term Finance” for the years 2025-2035 was on the agenda.

The new goal needs to be trillions in annual climate finance – $5 trillion per year by 2030, of which $1.25 trillion must be public investments, according to one collaborative study. This is the context for the $1.3 trillion goal that developing countries wanted in the COP26 decision. That reasonable requirement was unmet: the Glasgow decision avoids references to a dollar amount, instead creating a process to set a new goal in the year 2024.

The next three years are hence critical for climate finance, and by extension, climate ambition. Understanding the developing global climate financial architecture requires close attention to the scale of finance needed as well as three ideas – the principles of climate finance, the role of multiple sources of finance and the sequencing of finance vis-à-vis emissions reduction.

India’s finance needs

As one of the world’s largest developing economies, how India balances these ideas is of particular interest. Between 2016 and 2019, India received 7-10% of annual climate finance raised by developed countries for developing countries. If this trend continues and if the new global finance goal is set at $1.3 trillion, India could receive around $100 billion a year between 2025 and 2035. Will this suffice?

The International Energy Agency (IEA) estimates that India needs $1.4 trillion in cumulative new energy investments by 2040. This translates to approximately $93 billion a year starting in 2025 – the year in which a new long-term goal is supposed to kick in. Apart from low-carbon energy, India needs an additional $1 trillion in adaptation and resilience investments between 2015 and 2030, i.e. $67 billion annually around the year 2030.

However, the IEA estimate does not account for the cost of ‘just transition’ – compensating those affected by coal-plant shutdowns. India has around 205 GW of coal power to be phased out by around 2050. In Germany, a recent law allocated around $55 billion to shut down 40 GW of coal power by the year 2038. South Africa just received an $8.5 billion commitment from the US and Europe to transition away from its 38 GW of coal power. A similarly just transition in India would require an additional $2 billion per year between 2025 and 2050.

Finally, to break away from the ‘technological transfer’ paradigm, India needs climate-responsible investment in research and development. The IEA considers technologies like green hydrogen and carbon capture and storage to be critical to decarbonise industries in around 2040 to 2050. Those technologies require billions in R&D investments today to pay dividends closer to mid-century. Without such investments, India will continue to be a net-spender rather than a stakeholder in a ‘new climate economy’. To reflect the collective nature of the climate crisis, this investment must be drawn from around the globe.

Sourcing these investments is complicated by three facts: (1) climate change sits atop preexisting development challenges, (2) finance can come from government and/or private spending, but it is difficult in practice to differentiate the impact of these, and (3) there are many types of financial instruments, with different distributions of risk and reward.

At negotiations, developing countries’ position is that climate finance should, to the maximum possible extent, be “new and additional” to preexisting development finance, sourced from public funds, and provided through grants or concessional loans (i.e. at interest rates below the market rate).

So far, India has argued that unless finance is available on these principles, few decarbonisation commitments are possible. This principled collective position has yielded some benefits – such as the commitment to set a new long-term collective finance goal through negotiations of the UN Framework Convention on Climate Change (UNFCCC). However, India’s climate finance needs are unlikely to be fully met through this route.

So while continuing to retain the principle, India must also recognise that it needs a long-term ‘climate investment framework’ that combines different sources of finance.

Matching needs, sources and principles

This framework should match its finance needs with the sources of finance outlined above. These are broader than UNFCCC institutions, but their potential is as yet untapped. Realignment of norms at the G20 and the World Trade Organisation (WTO) would have enormous climate financial implications – for which reliable quantitative estimates are not yet available. Attempting to negotiate this realignment needs significant upscaling of policy modelling within the Indian government, as well as joint modelling exercises with key partners.

Second, the basic climate finance principles developed at the UNFCCC have to be deepened and matched to different sources of finance. Finance that flows through UNFCCC institutions must be strongly climate-specific, publicly sourced and grant-based. However, this standard is possibly less effective elsewhere. At the Bretton Woods institutions, for example, mainstreaming climate-responsibility into existing development finance would be transformative. The challenge is to avoid ‘greenwashing’ – by accounting for the actual climate impact of this mainstreaming in rigorous ways.

Third, establishing a sustainable technological advantage is one of the toughest national challenges. Technological development has society-wide benefits, but for any single actor, the link between upfront investment and downstream payoffs is tenuous. A strategic R&D framework is indispensable. India has undeniable advantages on this front, such as a maturing university research system, legacy industrial powerhouses and an exciting startup ecosystem.

However, it is still somewhat short of the capacity to take on investments on the scale of the EU’s ‘Mission Innovation’ or the US’s budget and stimulus spending on clean energy. Meanwhile, China is establishing a “vast research infrastructure” to push toward its own net zero deadline. Presently, India is a beneficiary of these global efforts, particularly in the form of cheap solar modules.

To secure its industrial future, India needs bilateral and mini-multilateral partnerships to jointly create climate-responsible technology. These must secure global finance for indigenous technology development, while charting a new path forward on usefully combining capital-intensive and employment-generating innovation. They must also build on India’s role as a responsible technological custodian, examples of which include its membership in the Nuclear Suppliers Group, initiation of the International Solar Alliance, and contribution to innovating and disseminating vaccines in the developing world.

The right leadership at the right time

Securing this framework will require much greater engagement on climate priorities across forums. These priorities are never far from ‘non-climate’ negotiations. This includes the Ministerial Conferences of parties to the WTO, where India is justifiably pushing back on US and EU attempts to levy ‘carbon border taxes’.

However, India’s hitherto defensive positioning can evolve into a more ambitious agenda. At the WTO, this would include pushing for moratoria on counter-productive trade litigation over climate-critical technology, such as solar panels and batteries. It would also include setting a climate agenda for India’s presidency of the G20, which it will hold from December 2022 until it convenes the G20 Leaders’ Summit in December 2023.

Without such leadership, waiting for the UNFCCC process to set a long-term finance goal in 2024 has questionable benefits – for development and for decarbonisation. There is a real danger of stalled progress, especially since the Glasgow decision calls for new national climate targets in 2022 (i.e. before new financial commitments).

Moreover, 2024 is a presidential election year in the US, meaning the country will likely go slow on climate finance until a new administration is sworn in. Developing and vulnerable communities can’t afford to wait until then – they need a climate finance champion over the next three years. Securing finance will require principled argument, diplomatic endeavour and strategic positioning. It is time for India to better combine the three.

Tarun Gopalakrishnan is a pre-doctoral Fellow at the Climate Policy Lab, The Fletcher School, Tufts University.

Scroll To Top