This essay is part of the series "Budget 2024-25"
India is a unique example of a nation striving to decarbonise its economy without risking de-industrialisation. The Finance Minister's (FM’s) recent budget, the first for the newly elected government, underscored this commitment by introducing a slew of measures and concessions aimed at energy transition and security.
The FM emphasised the imperative to develop a roadmap for transitioning ‘hard to abate’ industries. This will involve shifting from the current ‘energy efficiency’ targets to more rigorous ‘emission targets’ and leveraging regulations such as the Indian Carbon Market, an evolution from the existing ‘Perform, Achieve and Trade’ scheme.
High hanging fruit
Industrial emissions account for 21 percent of India’s total emissions. Therefore, decarbonising the sector will be vital for achieving India’s Net Zero targets.
While efforts to decarbonise the power sector (37 percent of emissions) and the transport sector (9 percent of emissions) are progressing steadily, reducing industrial emissions is particularly challenging. This difficulty arises because a significant portion of industrial emissions stem from industrial processes, not just energy consumption. For example, in the cement industry, nearly half of the emissions come from the decomposition of limestone into lime and CO2.
While efforts to decarbonise the power sector (37 percent of emissions) and the transport sector (9 percent of emissions) are progressing steadily, reducing industrial emissions is particularly challenging.
Approximately 67 percent of industrial emissions would need to be mitigated through carbon management techniques such as Carbon Capture, Utilization, and Storage (CCUS) and carbon offsetting measures. However, CCUS technologies are still in their infancy and not yet commercially viable, leading to increased costs. Additional challenges include high initial capital expenditure, technological uncertainty, inconsistent policy and regulatory signals, and the massive socio-economic impacts given that the hard to abate sectors are often quite labour-intensive. All these factors make industrial transitions to near-zero emissions a rather complex task.
Indian Carbon Market
India's pioneering PAT scheme, launched in 2012, marked a significant step towards establishing a market mechanism to enhance energy efficiency in energy-intensive industries. This scheme incentivised industries to invest in energy-efficient technologies and practices, fostering a culture of resource optimisation, competitiveness, and innovation.
Transitioning to the Indian Carbon Market will allow for a crucial shift in focus and approach from energy savings to emission reductions. This will be important to not only demonstrate ambition at a global stage but also provide an impetus for the uptake of affordable and competitive technologies among industries, driving innovation and accelerating progress.
Transitioning to the Indian Carbon Market will allow for a crucial shift in focus and approach from energy savings to emission reductions.
However, India has not yet reached its emission peak in its current development trajectory. The goal is to move towards more efficient energy use and switch from fossil fuels to renewable energy as power generation increases, rather than reducing total absolute emissions as in the case of industrialised countries.
India should consider several critical strategies to effectively manage the Indian Carbon Market. Dynamic Target Setting will be useful to periodically adjust targets based on demand and supply fluctuations to prevent the oversupply of certificates as was the case in the PAT scheme. Cost Containment Reserves (CCR) as well as price ceiling and floors can come handy to control the threshold initially. Ensuring price stability and stable carbon prices is important to maintain investment certainty and market confidence. Lessons must be gleaned from the EU ETS price volatility. Moreover, incremental ambition will also ensure Indian industries seek higher returns and a larger market for trading. A sectoral approach should identify sectors for the Carbon Credit Trading Scheme (CCTS) based on emission trajectories, setting sector-specific obligations and incentives to drive clean technology adoption.
Additionally, offering credit support, capacity building, and skills development, particularly for Micro, Small, and Medium Enterprises (MSMEs), along with leveraging Digital Public Infrastructure Applications, will be crucial for the successful implementation of the Indian Carbon Market. The budget’s emphasis on these areas represents a positive and welcome development.
Transition finance ecosystem
Estimates around investment required to finance India’s transition vary but the message is the same—India will require substantial ramp up in both green finance and transition finance to meet the demand. While green finance has seen a ramp up in the last few years, transition finance is still in the early stages.
Transition Finance can be defined as the financing efforts to reduce emissions in hard-to-abate sectors or for technologies that support emissions reductions in other enabling areas. Often, these activities may not align directly with the Paris Agreement but are essential due to the absence of viable ‘green’ alternatives.
The government should develop a comprehensive roadmap for transitioning hard-to-abate sectors, especially given the rise of global inward-looking domestic industrial policies such as Carbon Border Adjustment Mechanism (CBAM) and the Inflation Reduction Act (IRA). On the green finance side, the industry needs to continue its efforts to increase projects and product offerings.
The government should develop a comprehensive roadmap for transitioning hard-to-abate sectors, especially given the rise of global inward-looking domestic industrial policies such as Carbon Border Adjustment Mechanism (CBAM) and the Inflation Reduction Act.
The Observer Research Foundation and Climate Policy Initiative will soon launch a detailed roadmap for green and transition finance, focusing on the policy, regulatory, and market-based reforms essential for seamless decarbonisation of hard-to-abate sectors including steel, cement, agriculture, power, transport and MSMEs. The thematic pillars of this roadmap include:
1. SCOPE AND DEFINITION – This pillar focuses on the interventions desired by policy makers and regulators to provide clarity on definitions and pathways for decarbonisation, critical for attracting domestic and foreign capital in these sectors. While the ‘taxonomy for climate finance’, has been announced, which focuses on mitigation and adaptation, cues for green and transition taxonomy would be a welcome and much needed addition.
2. TRANSPARENCY – This pillar focuses on the interventions which would help in greater data availability, leading to higher transparency and addressing integrity concerns. While the Budget specifically mentions energy audits for traditional micro and small industries in 60 clusters, third-party assessments for all hard to abate sectors is fundamental to ensure accountability, track progress, and avoid greenwashing concerns. The Quality Council of India, in collaboration with private auditing firms, should lead the development and operationalisation of carbon auditing frameworks. Concomitantly, establishing a cadre of green auditors would align well with the government's agenda of creating employment opportunities and skill development. While the Budget emphasises both these priorities, allocation of resources and capital for skilling and employment for the clean energy sector is wanting.
3. COOPERATION – Climate change is a global challenge and solving it will require greater co-operation at both design and action stages by stakeholders at domestic and international levels. The interventions under this pillar point towards such actions including sector alliances, role of multilateral development banks and government-industry collaboration, among others.
4. SUPPLY CHAIN SUPPORT – While greater emissions may be attributable to the large industries, the value chains are critical in this journey of decarbonisation. The proposed interventions aim to support these value chains and ensure they receive the necessary assistance. The Budget outlines several measures to promote manufacturing and services, which will enhance job creation and skills development. However, a stronger emphasis on green skilling and green jobs is needed as these are key components of the just transition agenda.
5. FINANCIAL INNOVATION – Innovation by the financial sector, supported by policy and regulatory decisions, would be needed to support India’s target of achieving Net Zero by 2070. This pillar examines the necessary interventions across various stakeholders in the financial sector to meet this goal. Key efforts include government-backed guarantees and incentives; dedicated funding mechanisms; Research, Development and Demonstration (RD&D) Facility; and green insurance initiatives, among other recommendations. A credit guarantee scheme for MSMEs and an Anusandhan National Research Fund for basic research and prototype development have been proposed in the Budget. However, there exists a gap in the focus on clean technology specifically, which will be paramount for driving the transition to a low-carbon economy.
Capacity building, Diversity, Equity, and Inclusion (DEI) considerations, and greater coherence between stakeholders including government, industry, regulators and academia will form the base for the above pillars.
Mannat Jaspal is an Associate Fellow at the Observer Research Foundation.
Neha Khanna is a Senior Manager at the Climate Policy Initiative.
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