India needs a ‘Green Bank’ to finance decarbonisation
The 29th Conference of Parties to the United Nations Framework Convention on Climate Change (COP29) ended with the assurance of $300 billion annually as climate finance to the developing countries from the developed countries. This fell way short of the demand of $1.3 trillion by the Global South.
The countries in the Global South have contributed the least to anthropogenic climate change but suffer the most. Therefore, climate justice calls for reparations on part of the Global North. However, several COPs have gone by with lofty talks and scanty funds. This puts the developing countries in a challenging juncture.
Dependence on the Global North does not bring about any tangible relief. How should the Global South deal with this?
In this scenario, the developing countries would have to chalk out their own path to arrange for the deficit in climate finance. In this pursuit, one can take cues from the global best practices and figure out a market-based solution to achieve sustainable finance for decarbonisation.
Establishment of a 'Green Bank' could help considerably in this regard. Green banks are a financial institution established with a purpose to finance projects that lead to climate change adaptation or mitigation.
There are several green banks around the world that are pioneering the transition towards a greener future. India could take a cue from the same and come up with its own green bank.
Need for Green Bank
A detailed study by the Council on Energy, Environment and Water (CEEW) and the Natural Resources Defense Council India (NRDC) highlighted the need for a green bank in India.
Generally, commercial banks offer high interest rate credit facilities with shorter duration that do not go well with the nature of the green projects.
Residents of developing countries, where the interest rates are usually higher than the developed countries, find it difficult to access cheaper credit. This fails to bring investments into green projects.
It also leads to green projects seeking loans at cheaper rates from abroad, ultimately leading to capital flight and non-reinvestment scenarios.
If an affordable credit source is located in India, that would lead to sustainable finance in the long run.
The green bank could procure capital by several sources such as governmental grants, proceeds from environmental cesses, channelisation of funds from foreign and multilateral financial institutions, issuance of bonds, and other dedicated investment policies.
The funding could also be increased and decentralised by government policies that provide tax benefits to investors who invest into the financial instruments of the green bank. Since some of these funds would be unilateral and won't need to be repaid, the cost of capital for the green banks would be much lower than a commercial bank. This would, in turn, lead to cheaper credit for green projects.
Meticulous lending would still be required to get back the capital for re-investment. However, this would create great positive externalities for the entire economy. It would lead to more jobs, more investment and more research, apart from emission reduction.
If funding is channelised through the small finance banks to farmers and MSMEs, it would lead to a smoother transition to a greener and circular economy at the grassroots. This would boost India’s carbon market and the benefits would be reaped by populations most vulnerable to the impacts of climate change.
After NABARD, a green bank could be India’s economic, ecological and developmental solution to climatic woes.
India has to achieve Net Zero emissions by 2070, which would require huge finances. The developing countries cannot rely on the developed countries to finance their green pathways. India, being one of the leaders of the global south in climate actions, needs to set examples of finding ways to a sustainable future.
India has already made noteworthy advancements in financial inclusion through fintech, which is being adopted by several other countries of the global south. India is also in a position to pave way for innovative solutions in climate finance, which would lead to climate justice across the globe.
Aakash Bajpai is a student of Indian Institute of Forest Management and an alumnus of Tata Institute of Social Sciences.
Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth.