Why in the News?

Everyone will be watching Finance Minister Nirmala Sitharaman on February 1 as she presents the FY26 Budget, which needs to focus on climate issues and help India reach its Net-Zero goal by 2030.

How will the proposed climate finance taxonomy influence investment in sustainable projects?

• Standardization and Clarity: The proposed climate finance taxonomy will standardize definitions of green finance, providing clarity and reducing ambiguity for investors. This will help in distinguishing genuinely sustainable projects from those that are not, thereby building investor confidence.

• Increased Investment: By standardizing green finance definitions, the taxonomy can attract a significant portion of the ₹162.5 trillion ($2.5 trillion) needed to achieve India’s Nationally Determined Contributions (NDCs) by 2030. This is crucial for scaling up investments in sustainable projects.
• Market Readiness: The taxonomy will necessitate the development of institutional and technical infrastructure, including market readiness programs, verification systems, and capacity building of financial institutions. This will create a robust ecosystem for green investments.
• Differential Tax Treatment: The Budget could introduce differential tax treatment for investments aligned with the taxonomy, making green investments more attractive compared to conventional ones.

What specific measures are needed to incentivize green investments in the upcoming budget?

• Expanding PLI Schemes for Solar Module Supply Chain: India’s domestic solar module manufacturing capacity stands at 18-20 GW, while the annual demand is 30-35 GW. Imported solar panels are 65% cheaper than domestically produced ones.
  • So, need to expand the scope of PLI schemes can enhance domestic capacity and reduce dependency on imports.
• Public-Private Partnerships for Railway Renewable Energy: Indian Railways has 51,000 hectares of land available for renewable energy projects, yet only 142 MW of solar capacity has been installed so far, against a potential of 5 GW. Public-private partnerships can unlock this potential and align with the Railways’ decarbonization goals.
• Establishing a Climate Action Fund for CBAM Compliance: India’s exports of CBAM-covered products to the EU amount to $8.22 billion annually. MSMEs, which contribute 30% of GDP and 45% of exports, often lack resources for decarbonization. A dedicated Climate Action Fund could support MSMEs in meeting compliance requirements and maintaining competitiveness.
• Fiscal Allocations for the RESCO Model: Only 6.34 lakh (4.37%) of 1.45 crore registrations under the PM Surya Ghar Muft Bijlee Yojana have been completed. Additionally, 60% of Indian households find rooftop solar installations unaffordable due to upfront costs.
  • The RESCO model can help by enabling financing solutions to bridge this affordability gap.
• Tax Deductions and Depreciation Benefits for Circular Economy: India generates 62 million tonnes of waste annually, with only 30% being recycled. Transitioning to a circular economy could contribute ₹40 lakh crore ($624 billion) annually by 2050.
  • Tax incentives and accelerated depreciation benefits can encourage private sector participation in recycling and resource efficiency.

How can India ensure accountability and transparency in its climate financing efforts? (Way forward)

• Sovereign Green Bond Framework: Establish a sovereign green bond framework specifically for financing circular economy infrastructure, ensuring that funds are allocated transparently and used for their intended purposes.
• Verification Systems: Implement robust verification systems to ensure that projects funded through green finance taxonomy are genuinely sustainable and meet the required environmental standards.
• Capacity Building: Invest in capacity building of financial institutions to effectively implement the climate finance taxonomy, including training programs and technical support.
• Government Expenditure Classification: Commit to classifying government expenditure according to green criteria, ensuring that public funds are directed towards sustainable projects.
• Regular Reporting and Audits: Mandate regular reporting and audits of climate-related expenditures and projects to ensure accountability and transparency. This will help in tracking progress and making necessary adjustments to policies and allocations.

Mains PYQ:

Q  ‘Clean energy is the order of the day.’ Describe briefly India’s changing policy towards climate change in various international fora in the context of geopolitics. (UPSC IAS/2022)

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