Report on Currency and Finance 2022-23

REPORT ON CURRENCY AND FINANCE 2022-23 TOWARDS A GREENER CLEANER INDIA RESERVE BANK OF INDIA“The fi ndings, views and conclusions expressed in this Report are entirely those of the contributors from the Department of Economic and Policy Research (DEPR) and do not represent the views of the Reserve Bank of India”. In India - ` 575 (Normal) - ` 625 (Inclusive of Postal Charges) Abroad - US $ 22 (Inclusive of Air Mail Courier Charges) © Reserve Bank of India 2023 All rights reserved. Reproduction is permitted, provided an acknowledgement of the source is made. ISSN 0972-8759 Published by G V Nadhanael for the Reserve Bank of India, Mumbai-400 001 and printed at ACME Packs & Prints (I) Pvt. Ltd., A Wing, Gala No.73, Virwani Industrial Estate, Goregaon (E), Mumbai - 400 063.FOREWORD Climate change has always been an integral part of human existence. With rapid industrialisation and urbanisation since the 19th century, climate change has acquired a new dimension, threatening the sustainability of life, livelihood and the surrounding ecosystem. The rising incidence of extreme climate events in recent decades has raised greater public awareness about its adverse effects. Growing scientifi c evidence that climate change is also caused by human activities – a result of excessive burning of fossil fuels; deforestation; inappropriate agricultural practices, etc. – has led to a global consensus on the need for coordinated policy actions, encompassing both adaptation and mitigation strategies. Since the historic Paris Agreement of 2016, climate agenda has increasingly become target-oriented. India has embarked on an ambitious and targeted climate action plan while balancing its growth and environmental objectives. In line with the target of Net Zero emissions by 2070, India has updated its nationally determined contributions (NDCs), which aim at raising the share of renewable energy and reducing the carbon emissions intensity of GDP by 2030. India presented its Long-Term Low Emission Development Strategy at the COP27, covering plans for expansion of green hydrogen production, electrolyser manufacturing capacity and increased use of biofuels. To strengthen solutions-based international cooperation, India has also launched and nurtured the International Solar Alliance, the Coalition for Disaster Resilient Infrastructure, and the Mission LiFE (Lifestyle for Environment). India ranked high (seventh) in the list of most affected countries in terms of exposure and vulnerability to climate risk events as per the Global Climate Risk Index 2021, but it is also the highest ranked G-20 country in its climate protection performance as per the Climate Change Performance Index 2023. This refl ects the progress made on four parameters – greenhouse gas (GHG) emissions; renewable energy; energy use; and climate policy. India will soon become the most populous country in the world. Preserving food and energy security amidst extreme climatic events while obtaining access to technology and critical raw materials required for successful green transition will, therefore, remain a key policy challenge for India. Climate change induced risks to macro-fi nancial prospects of the country and the range of policy options available to mitigate climate risks require dedicated research. Such research becomes even more critical in the context of the complexity and non-linearity of the ways in which climate, economy, fi nancial systems and related policies operate. Hence, this year’s Report on Currency and Finance has “Towards a Greener Cleaner India” as its theme. Structured in four chapters, this Report highlights the importance of climate goals as a policy priority and examines the macro-fi nancial implications of climate change for India in the medium to long term. The focus is on growth, infl ation and fi nancial stability. It explores the range of available policy options – fi scal policy; technology; trade policy; regulatory policy; and monetary policy – for mitigating climate risks. I commend the team from the Department of Economic and Policy Research (DEPR) of the Reserve Bank for examining some of the key aspects of the climate change challenge for India in this Report, with a forward looking perspective. I hope this Report will enrich public policy discourse on the subject. Shaktikanta Das Governor May 3, 2023CONTENTS Sr. No. Page No. Chapter I : The Climate Strikes Back ............................................................... 1-32 1. Introduction ................................................................................................... 1 2. Global Manifestation of Climate Change ...................................................... 3 3. Climate Policy Action .................................................................................... 9 4. India’s Involvement in Global Climate Change and Action ........................... 16 5. Climate Change and the Reserve Bank of India .......................................... 23 6. Concluding Observations ............................................................................. 26 Chapter II : Macroeconomic Effects of Climate Change In India .................. 33-74 1. Introduction ................................................................................................... 33 2. India’s Exposure to Climate Shocks ............................................................. 35 3. Manifestation of Climate Change in India ..................................................... 39 4. Macroeconomic Impact of Climate Change in India ..................................... 45 5. India’s Transition Towards Net Zero .............................................................. 51 6. Sectoral Green Transition Challenges .......................................................... 61 7. Concluding Observations ............................................................................. 68 Chapter III : Climate Change and Financial Sector ........................................ 75-104 1. Introduction ................................................................................................... 75 2. Financial Risks due to Climate Change ........................................................ 77 3. Modelling the Macro-Financial Transmission of Climate Risk ....................... 82 4. Stakeholders’ Survey on Financial Risks ...................................................... 84 5. Climate Stress Test for Indian Banks ............................................................ 85 6. Green Financing Requirement ..................................................................... 89 7. Mitigation of Financial Risks ......................................................................... 90 8. Concluding Observations ............................................................................. 97 ISr. No. Page No. Chapter IV : Policy Options to Mitigate Climate Risks ................................... 105-167 1. Introduction ................................................................................................... 105 2. Fiscal Policy Initiatives .................................................................................. 107 3. Innovation and Technology Adoption ............................................................ 117 4. Trade Policy .................................................................................................. 128 5. Regulatory Measures ................................................................................... 134 6. Market-based Solutions ................................................................................ 141 7. Monetary Policy ............................................................................................ 149 8. Nudging Behavioural Change ....................................................................... 152 9. Impact of Policy Interventions on Reducing Carbon Emissions: A Scenario Analysis ..................................................................................... 153 10. Concluding Observations ............................................................................. 154 IILIST OF BOXES Sr. No. Page No. I.1 Decoupling of Global Growth and GHG Emissions ................................. 11 I.2 International Climate Equity and Justice: Some Analytical Insights ........ 13 I.3 Implications of Climate Risk Factors for Indian Agriculture ..................... 19 I.4 Energy Transition Scenarios for India ...................................................... 22 II.1 Economic Impact of Cyclone Amphan on the Coastal Districts of West Bengal and Odisha ....................................................... 50 II.2 Economic Growth, Energy Consumption and Emissions: The Trade-offs .......................................................................................... 56 II.3 Climate Change Impact on GDP – A Comparative Assessment ............. 60 III.1 Measuring Indian Banks’ Transition Risk using an Energy Intensity Metric ....................................................................................................... 77 III.2 Role of NBFCs in Propagating Climate Change Impact .......................... 80 III.3 Climate Risk Impact Assessment in a DSGE Model for India ................. 82 III.4 Performance of ESG Indices vis-à-vis Broad Market Indices .................. 93 IV.1 Emerging Market (EM) Green Bonds: The Signifi cance of Greenium ..... 116 IV.2 Innovation for Sustainable Energy Transition ........................................... 125 IV.3 Green PLI – Exploring India’s Export Potential in Climate Friendly Goods (CFGs) ......................................................................................... 131 IV.4 Carbon Emissions Embedded in International Trade – India’s Perspective ................................................................................... 132 IV.5 Do Indian Companies Walk the Talk on ESG? ........................................ 142 IIILIST OF TABLES Sr. No. Page No. I.1 Bai-Perron Structural Breaks in GCCI .................................................. 8 I.2 Cumulative CO Emissions: India vis-à-vis World ................................. 18 2 I.3 India’s Action Related to Climate Change ............................................ 20 II.1 Sector-wise Share in GVA and CO Emission Intensity (2018-19) 2 In India .................................................................................................. 38 II.2 Onset and Withdrawal of Monsoon in India .......................................... 42 II.3 Difference-in-Difference Panel Data Results ........................................ 49 II.4 Scenario Assumptions .......................................................................... 53 II.5 Energy Transition and GHG Emissions Towards Net Zero by 2070 vis- a-vis 2021-22 ........................................................................................ 54 II.6 Electricity Tariff in India in 2021-22 ...................................................... 62 II.7 Plant-level Levelised Cost of Electricity (LCOE) Calculation ................ 63 II.8 Transport Sector - Energy Consumption and Emission (2019) ............ 63 II.9 Manufacturing Firms in India: Energy Intensity, Output and Emissions 65 II.10 Share of Fuels in Indian Manufacturing Sector .................................... 66 II.11 Fuel Usage in Indian Manufacturing Sector (2019-20) ......................... 66 III.1 Projected Estimates of Green Finance Requirements ......................... 89 IV.1 Step-wise Considerations for Implementing a Carbon Tax ................... 113 IV.2 Carbon Tax and ETS: Advantages and Disadvantages ........................ 114 IV.3 Carbon Pricing Mechanism in Emerging Market Economies ............... 114 IV.4 Emissions Trading Model in Surat ........................................................ 115 IV.5 Machine Learning and its Deployment for Climate Change Solutions . 124 IV.6 Digital Tools Used for Promoting Energy Effi ciency .............................. 126 IV.7 Environmental Provisions in Most of the Global PTAs .......................... 130 IV.8 Composition of State Energy and Climate Index (SECI) ...................... 141 IVLIST OF CHARTS Sr. No. Page No. I.1 Estimated Global Temperature Over Past 500 Million Years ................. 3 I.2 Causes of Recent Global Warming ...................................................... 4 I.3 Historical GHG Emissions .................................................................... 5 I.4 Global Mean Surface Temperature Anomaly ........................................ 5 I.5 Ocean Heat Content and Sea Level Rise ............................................. 6 I.6 Global Ocean Acidifi cation ................................................................... 6 I.7 Ice and Glacier Balance ....................................................................... 7 I.8 Global Precipitation Anomaly ............................................................... 7 I.9 Evolution of Climate Change ................................................................ 8 I.10 Global Climate Change and Disaster Events ....................................... 8 I.11 Target Year of Commitment for Countries ............................................. 9 I.12 Number of Net Zero Pledges and Share of Global CO 2 Emissions Covered ............................................................................... 10 I.13 Number of Reported Deaths Due to Weather-Related Calamities ....... 10 I.14 Change in Global CO Emissions and GDP ......................................... 11 2 I.15 Global Carbon Emission Paths ............................................................. 14 I.16 Global Temperature Rise over Pre-Industrial Average .......................... 15 I.17 Mobilisation of Climate Finance from Developed to Developing Countries .............................................................................................. 15 I.18 Use of Climate Finance ........................................................................ 15 I.19 Reported Economic Losses from Weather, Climate and Water Hazards ...................................................................................... 15 I.20 Global Carbon Tax Coverage ................................................................ 16 I.21 Global ETS Coverage ........................................................................... 16 I.22 Annual Surface Temperature Anomaly (Compared to baseline 1950 to 1980) ......................................................................... 17 VSr. No. Page No. I.23 Change in Surface Air Temperature over the Indian Region ................ 17 I.24 Climate Change-Related Disaster Frequency (Number of Events) ...... 18 I.25 Per Capita CO Emissions .................................................................... 18 2 I.26 Energy Intensity of GDP ....................................................................... 18 I.27 Climate Change Performance Index, Select Countries ........................... 22 I.28 Share of Electricity Production from Fossil Fuels .................................... 22 I.29 Impact of Climate Risk on Monetary Transmission .................................. 24 I.30 Average Carbon Footprint of Bank Loans in Select Countries ................ 25 II.1 Risks Emanating from Climate Change across Geographical Regions in India ....................................................................................... 36 II.2 Sectoral Composition in GVA and CO2 Emissions in India ..................... 37 II.3 Share of Fossil Fuel and Non-Fossil Fuel based Energy Sources in India’s Energy Consumption .................................................. 37 II.4 India’s Energy-Mix at A Disaggregated Level .......................................... 39 II.5 Average Annual Temperature in India ...................................................... 39 II.6 Minimum and Maximum Temperature in India ......................................... 39 II.7 Global and Indian Temperature Anomaly ................................................ 40 II.8 Mean Temperature and Anomaly from Normal Temperature ................... 40 II.9 Total Rainfall and Rainfall Departure from LPA ....................................... 42 II.10 Frequency of Unseasonal Rains and Heatwaves in India ....................... 43 II.11 Frequency and Intensity of Cyclonic Storms in India during 1901-2022 .................................................................................... 43 II.12 Spatial Distribution and Frequency of Severe Cyclones .......................... 44 II.13 Frequency of Drought/Flood Years in the Indian Coastal States during 1951-2021 ............................................................................................... 44 II.14 Number of Natural Disasters in India ....................................................... 45 II.15 Total Foodgrains Production in India ....................................................... 47 VISr. No. Page No. II.16 Contribution of TOP to Headline and Food Infl ation Volatility .................. 48 II.17 Existing Path of the Kaya Factors ............................................................ 52 II.18 Estimated GHG Emissions - Scenarios ................................................... 55 II.19 GHG Emissions Modelled Pathways for India as per the Climate Action Tracker ............................................................................. 55 II.20 Impact on India’s GDP ............................................................................. 58 II.21 Combined Impact of Physical and Transition Risks on India’s GDP ........ 58 II.22 Impact on India’s Infl ation ........................................................................ 59 II.23 Combined Impact of Physical and Transition Risks on India's Infl ation ... 60 II.24 CO Intensity of Electricity Grids (2019) .................................................. 62 2 II.25 Passenger and Freight Movements by Modes of Transport ..................... 64 II.26 EV Registrations in India ......................................................................... 64 II.27 Decomposition of Energy Use Transition ................................................. 65 III.1 Physical and Transition Risk Indicators.................................................... 76 III.2 Bank Credit to Green vis-à-vis Brown Industries ..................................... 79 III.3 GNPAs of Green vis-à-vis Brown Industries ............................................ 79 III.4 Sectoral Distribution of NBFC Credit ....................................................... 80 III.5 Respondents’ Affi liation ........................................................................... 84 III.6 Source of Climate Threat ......................................................................... 84 III.7 Sectoral Exposure to Climate Risk .......................................................... 85 III.8 Comparison of Climate and Non-Climate Stress Test Methodologies ..... 86 III.9 Studies on Climate Stress Tests for Physical Risks ................................. 87 III.10 Studies on Climate Stress Tests for Transition Risks ............................... 87 III.11 Climate Beta ............................................................................................ 88 III.12 Climate Stress Test: PSBs vis-à-vis PVBs ............................................... 89 III.13 Bank Credit to Non-Conventional Energy Sector .................................... 91 VIISr. No. Page No. III.14 Spatial Distribution of Bank Credit to Non-conventional Energy .............. 92 III.15 Taxonomy as a policy instrument to achieve high-level sustainability goals .................................................................................. 92 III.16 Corporate and Government Green Bonds by Country ............................ 94 III.17 Issuer-wise Break up of Green Bonds Issued in India (per cent) ............ 95 III.18 Non-life Insurance in India vis-à-vis World............................................... 95 IV.1 Summary Map of Carbon Pricing Initiatives ............................................ 109 IV.2 Tax Revenues from Non-Renewable Energy ........................................... 110 IV.3 Countries with Highest Subsidies on Non-renewable Energy ................. 110 IV.4 CO Emissions and Carbon Tax .............................................................. 111 2 IV.5 Sovereign Green Bond Issuances .......................................................... 116 IV.6 Cost and Use Trends of Various Energy Sources .................................... 118 IV.7 Net Electricity Production by Source (TWh) ............................................ 119 IV.8 Mineral Intensity of Selected Clean and Fossil Energy Technologies...... 121 IV.9 Geographic Concentration of Selected Clean Energy Technologies by Supply Chain Stage and Country/Region, 2021 ................................. 122 IV.10 Digitalization’s Potential Impact on Energy Demand Sectors .................. 126 IV.11 Trade Imbalances in GHG Emissions ...................................................... 128 IV.12 Sector-Wise CSR Expenditure ................................................................ 138 IV.13 CSR Expenditure by Companies ............................................................. 139 IV.14 States Ranking and Score in SECI .......................................................... 141 IV.15 Sectoral Average ESG Score .................................................................. 144 IV.16 Relationship between Market Capitalisation and ESG Score .................. 144 IV.17 ESG Funds in India ................................................................................. 147 IV.18 Private Capital Assets Management ....................................................... 148 IV.19 Scenario Analysis for CO Emission Reduction ...................................... 155 2 VIIIANNEX Sr. No. Page No. I.1 Major Global Interventions for Climate Change .................................... 30 I.2 Climate Policies Being Implemented in Select Countries ..................... 32 II.1 The NIGEM Model – Key Features ....................................................... 74 III.1 Methodology and Underlying Assumptions for Measurement of Green Finance Requirements .......................................................... 104 IXLIST OF ABBREVIATIONS ACC Automotive Cell Company CAGR Compound Annual Growth Rate ACES Automated, Connected, Electric CAMPA Compensatory Afforestation and Shared Fund Management and Planning Authority ACPR Autorité de contrôle prudentiel et de resolution [French Prudential CAPEX Capital Expenditure Supervision and Resolution CAT Climate Action Tracker Authority] CaT Cap-and-Trade AEs Advanced Economies CBA Cost-Benefi t Analysis AI Artifi cial Intelligence CBAM Carbon Border Adjustment APS Announced Policies Scenario Mechanism ASI Annual Survey of Industries CBDC Central Bank Digital Currency AUM Assets Under Management CBG Compressed Biogas BAU Business As Usual CBT Carbon Border Tax BB Bank of Bangladesh CCA Climate Commitment Act BC Benefi t-Cost CCM Climate Change Mitigation BCAs Border Carbon Adjustments CCPI Climate Change Performance BCBS Basel Committee on Banking Index Supervision CCPT Climate Change Principle-based BEE Bureau of Energy Effi ciency Taxonomy BF/BOF Basic Oxygen Furnace CCUS Carbon Capture, Utilisation and BIS Bureau of Indian Standards Storage BIS Bank for International CCUS Carbon Capture, Usage and Settlements Storage BoE Bank of England CDM Clean Development Mechanism BoJ Bank of Japan CDRI Coalition for Disaster Resilient Infrastructure BRICS Brazil, Russia, India, China, South Africa CEA Central Electricity Authority BRRs Business Responsibility Reports CERF Climate Equity Reference Framework BRSR Business Responsibility and Sustainability Report CFBL Carbon Footprint of Bank Loans BSE Bombay Stock Exchange CFCs Chlorofl uorocarbons XCFGs Climate Friendly Goods EBF European Banking Federation CH4 Methane ECB European Central Bank CI Carbon Intensity eCoC Electronic Certifi cate of Compliance CMEMS Copernicus Marine Environment Monitoring Service E-DSGE Environment-DSGE CMIE Centre for Monitoring Indian EI Energy Intensity Economy EIBs European Investment Bonds Cms centimetres EIE Emission Intensity of Value- CO Carbon Monoxide added on Exports CO Carbon Dioxide EIM Emission Intensity of Value- 2 Added on Imports COP Conference of the Parties EKC Environmental Kuznets Curve CPHS Consumer Pyramids Household Surveys ELIS Environmental Labelling and Information Schemes CRISK Capital Shortfall Risk EM-DAT Emergency Events – Database CRP Climate Risk Portfolio EMEs Emerging Market Economies CSA Climate Smart Agriculture EMS Emission Trading Systems CSE Centre for Science and EPPA Economic Projection and Policy Environment Analysis CSIRO Commonwealth Scientifi c and ERPs ESG Rating Providers Industrial Research Organisation ESCS Extremely Severe Cyclonic CSR Corporate Social Responsibility Storms DFM Dynamic Factor Model ESG Environment, Social and DICE Dynamic Integrated model of Governance Climate and the Economy ESRB European Systemic Risk Board D-i-D Difference in difference ETR Environmental Tax Reform DISCOMs Distribution Companies ETS Emissions Trading System DNSH Do No Signifi cant Harm EU European Union DP Detailed Process EVs Electric Vehicles DSGE Dynamic Stochastic General FAME Faster Adoption and Equilibrium Manufacturing of Hybrid Electric EAF Electric Arc Furnace Vehicles XIFAO Food and Agriculture Organisation ICE Internal Combustion Engine FDI Foreign Direct Investment ICSU International Council of Scientifi c Unions FIT Feed-in-Tariffs ICT Information and Communications FSB Financial Stability Board Technology FTA Free Trade Agreements IEA International Energy Association GAR Green Asset Ratio IFRC International Federation of GCCI Global Climate Change Index Red Cross and Red Crescent Societies GDP Gross Domestic Product IMD India Meteorological Department GDP GDP Per Capita PC IMF International Monetary Fund GFSG Green Finance Study Group INCCA Indian Network for Climate GGEF Green Growth Equity Fund Change Assessment GHG Green House Gases INFORM Index for Risk Management GIS Geographic Information System IOSCO International Organization of GMSL Global Mean Sea Level Securities Commissions GNPA Gross Non-Performing Assets IoT Internet of Things GOBARdhan Galvanising Organic Bio-Agro IPCC Intergovernmental Panel on Resources Dhan Climate Change GoI Government of India IPM Integrated Pest Management GPCB Gujarat Pollution Control Board IPSF International Platform for Sustainable Finance GSDP Gross State Domestic Product IRA Infl ation Reduction Act GSF Green Supporting Factor IRDA Insurance and Regulatory GST Goods and Services Tax Development Authority Gt Gigatonnes IRENA International Renewable Energy GtCO eq Gigatonnes of CO equivalent Agency 2 2 GVA Gross Value Added ISA International Solar Alliance GVCs Global Value Chains ISTS Inter-state Transmission Systems IAM Integrated Assessment Model KLEMS Capital, Labour, Energy, Material, and Services IBFI Index Based Flood Insurance Km2 Kilometer Square ICAAP Internal Capital Adequacy Assessment Process KPIs Key Performance Indicators XIIkWh Kilowatt-hour MW Megawatt LCOE Levelised Cost of Electricity MNRE Metric tonnes per year LiDCs Low-Income Developing MoEFCC Ministry of Environment, Forest Countries and Climate Change MoES Ministry of Earth Sciences LED Light Emitting Diode MoPNG Ministry of Petroleum and Natural LiFE Lifestyle for Environment Gas LIMITS Low climate Impact scenarios MoSPI Ministry of Statistics and Program and the Implications of required Implementation Tight emission control Strategies MoU Memorandum of Understanding LMDI Logarithmic Mean Divisia Index MRTS Mass Rapid Transit Systems LPA Long Period Average MRV Monitoring, Reporting, And LST Land Surface Temperature Verifi cation LT-LEDS Long-term Low Greenhouse MRV Measurement, Reporting, and Gas Emission Development Verifi cation Strategies MSCI Morgan Stanley Capital LULC Land Use and Land Cover International MaaS Mobility as a Service MSMEs Micro, Small and Medium Enterprises MARS Multivariate Adaptive Regression Splines N O Nitrous Oxide 2 NBFCs Non-Banking Finance MFs Mutual Funds Companies MGNREGA Mahatma Gandhi National Rural NCEF National Clean Energy Fund Employment Guarantee Act NCR National Capital Region MGNREGS Mahatma Gandhi National Rural Employment Guarantee Scheme NDC Nationally Determined Contribution MIGA Multilateral Investment NDTL Net Demand and Time Liabilities Guarantee Agency NECR Net Effective Carbon Rate MIT Massachusetts Institute of Technology NeML National Commodities and Derivatives Exchange e-Market ML Machine Learning Limited Mm Millimetre NFCI National Financial Conditions Index MMT Million Metric Tonnes NGBRC National Guidelines on MT Million Tonnes Responsible Business Conduct XIIINGFS Network for Greening the PLI Production Linked Incentive Financial System PM-PRANAM PM Programme for Restoration, NGO Non-governmental organization Awareness, Nourishment and Amelioration of Mother Earth NHPC National Hydroelectric Power Corporation PPP Public-Private Partnerships NIFTY National Stock Exchange Fifty PRA Prudential Regulation Authority NIGEM National Institute Global PRI Principles of Responsible Econometric Model Investment NIO North Indian Ocean PSBs Public Sector Banks NMEEE National Mission for Enhanced PSL Priority Sector Lending Energy Effi ciency PTAs Preferential Trade Agreements NMSA National Mission for Sustainable PV Photovoltaic Agriculture PVBs Private Banks NOAA National Oceanic and Atmospheric Administration QE Quantitative Easing NPAs Non-Performing Assets R&D Research and development NRDC Natural Resources Defence RBI Reserve Bank of India Council RCPs Representative Concentration NSDP Net State Domestic Product Pathways NSO National Statistical Offi ce RPO Renewable Purchase Obligations NSSO National Sample Survey RTAs Regional Trade Agreements Organisation SAARC South Asian Association for NVA Net Value Added Regional Cooperation O3 Ozone SCBs Scheduled Commercial Banks OHC Ocean Heat Content SCS Severe Cyclonic Storms OECD Organisation for Economic SDG Sustainable Development Goals Cooperation and Development SEBI Securities and Exchanges Board OWID Our World in Data of India PAT Perform, Achieve, Trade SECI State Energy and Climate Index PBoC People’s Bank of China SGBs Sovereign Green Bonds PE Private Equity SGS State Government Securities PIB Press Information Bureau SME Small to Medium Enterprise XIVSST Sea Surface Temperature UNFCCC United Nations Framework Convention on Climate Change STEPS Stated Policies Scenario UNICEF United Nations International SuCS Super cyclonic storms Children’s Emergency Fund SWM South-west Monsoon UNISDR United Nations International Strategy for Disaster Reduction TBC To be Continued US United States tCO e Tonne of Carbon Equivalent 2 USA United States of America TECO Trade in embodied CO database USD US Dollar 2 2 TiVA Trade in Value Added UTs Union Territories TOP Tomato, Onion, Potato VAT Value Added Tax VC Venture Capital TPA Tonnes per annum VRE Variable Renewable Energy TSC Technical Screening Criteria VSCS Very Severe Cyclonic Storms UK United Kingdom VSIC Vietnam Standard Industrial UN United Nations Classifi cation UNCTAD United Nations Conference on WCP World Climate Programme Trade and Development WEO World Economic Outlook UNDP United Nations Development WGMS World Glacier Monitoring Service Programme WMO World Meteorological Organisation UNEP UN Environment Programme ZJ Zeta Joules XVI THE CLIMATE STRIKES BACK* Climate change is manifesting itself at an alarming scale and pace globally. Emerging and developing economies are the most vulnerable in terms of technological capabilities and access to finance for adaptation and mitigation. There has been a significant increase in climate action, both multilaterally and in individual countries. Alongside fiscal policies, recent years have seen a growing experimentation with regulatory instruments and hence, the role of central banks in combating climate change is coming to the fore. The Reserve Bank of India is actively involved in fortifying India’s climate defence through various policy and research initiatives. 1. Introduction average in four wet seasons consecutively, the longest in 40 years (WMO, 2023). The persistent I.1 Climate change is upon us. According to drought resulted in the worst levels of food crisis the World Meteorological Organisation (WMO), for an estimated 18.4-19.3 million people (WMO, the period 2015-22 is the warmest on record. 2022). Despite the cooling effects of La Nina into its third year, 2022 was the eighth consecutive year in I.3 Pakistan witnessed record breaking rains which annual global temperature reached at least in July and August 2022 leading to extensive 1 degree Celsius above pre-Industrial Revolution fl ooding, taking at least 1,700 lives and affecting levels, fuelled by ever-rising greenhouse gas 33 million people. The fl ooding occurred on the (GHG) concentrations and accumulated heat. heels of an extreme heat wave in March and April in both Pakistan and India. China experienced the I.2 In the European Alps, glacier melt records most extensive and long-lasting heatwave since were broken in 2022. Switzerland lost about 6 per cent of its glacier ice volume between 2021 and national records began. Large parts of Europe 2022. For the fi rst time in history, there was no sweltered in repeated episodes of extreme heat. accumulation of fresh ice even at the very highest More than 15,000 excess deaths associated measurement sites (WMO, 2023). Sea levels with extreme heat were reported across Europe increased by about 5 millimetres during January (WMO, 2023). European rivers, including the 2021 – August 2022 due to increasing ice melt. Rhine, Loire and Danube, fell to critically low In 2021, the upper 2000 metres of the ocean levels. In the United Kingdom (UK), temperatures continued to warm to record levels. Furthermore, rose above 40 degrees Celsius in July 2022 for 58 per cent of the ocean surface experienced at the fi rst time. Southern Africa was battered by a least one marine heat wave during 2022 (ibid). series of cyclones over two months at the start There was a drop in the Antarctic sea ice extent of 2022. Hurricanes swept across Cuba and to 1.92 million km2, which was the lowest level on Florida, causing extensive damage and loss of record and was almost 1 million km2 below the long- life in 2022. During 1970-2019, weather, climate term average. In East Africa, rainfall was below- and water hazards claimed 45 per cent of total * This chapter has been prepared by a team comprising Michael Debabrata Patra, Pallavi Chavan, Harendra Behera, Soumasree Tewari, Kovuri Akash Yadav, Ranjeeta Mishra, Paritosh Jha, Amarendra Acharya and Jessica Maria Anthony. 1REPORT ON CURRENCY AND FINANCE reported deaths and 74 per cent of total reported eastern India saw their warmest and driest July economic losses (WMO, 2021). These hazards in 121 years. These regions also recorded their have undermined livelihoods and infrastructure second warmest August and the fourth warmest as well as health, food, energy and water security. September in 2022. India seems to be at the Human well-being is endangered and so is the watermark of climate change – rather than single future of the planet. events, it is the increased frequency of extreme weather occurrences that is breaking the back of I.4 India has faced its hottest February in 2023 our capability to cope with natural disasters. There since record-keeping began in 1901 (IMD, 2023). is a defi nite rising trend; but more than the events In March, large parts of the country experienced themselves, India is grappling with severe losses hailstorms and torrents of unseasonal rain, and damages – the human toll of the impact of leading to apprehensions of extensive damage climate change. to standing crops. According to India’s Centre for Science and Environment (CSE), the country I.6 Awareness of the impact of greenhouse experienced extreme weather events on 314 gases on earth’s temperature is not new. Joseph of 365 days of 2022, which claimed 3,026 lives, Fourier, a French physicist, had identifi ed the affected 1.96 million hectares of crop area and “greenhouse effect” in 1824, which was quantifi ed 4,23,249 houses, and killed over 69,899 animals1. in 1896 by Svante Arrhenius, a Swedish scientist Central India witnessed the highest intensity (Steiner and Fortuna, 2020). Since the 18th of extreme weather events. Among the states, century, the impact of climate and environment Madhya Pradesh had the highest number of days on the course of human development has drawn with extreme weather, but Himachal Pradesh attention (Livingstone, 2011)3. While natural from the north-west region reported the highest factors can contribute to climate change, it is now number of deaths. In the eastern and north- widely recognised that the current scale and pace eastern regions, Assam suffered from the highest of climate change is primarily attributable to the number of damaged houses and animal deaths. anthropogenic factors (NRC, 2001). In fact, the In the southern peninsula region, Karnataka period from the mid-20th century has been defi ned experienced extreme weather events on 91 days as the “Anthropocene” epoch, marking a signifi cant during the year and accounted for 53 per cent of impact of human activity on earth’s climate due to the total crop area affected across the country. an increased use of oil, coal and other fossil fuels to support economic growth (Subramanian, 2019). I.5 In 2022, India recorded its seventh wettest January since 19012. March was the third driest I.7 It is only from the late 20th century that and warmest ever in 121 years. Eastern and north- there has been an increased interest in the 1 India’s Atlas on Weather Disasters, https://www.downtoearth.org.in/weather_disasters_india/india.html, Accessed on April 28, 2023. 2 India-2022: An Assessment of Extreme Weather Events, Down To Earth, New Delhi; see https://cdn.downtoearth.org.in/pdf/extreme- weather-report-20221102.pdf?utm_source=Mailer&utm_medium=Email&utm_campaign=Down%20To%20Earth-extreme-weather- report-20221102 3 Baron de Montesquieu argued that “there are countries where the excess of heat enervates the body, and renders men so slothful and dispirited that nothing but the fear of chastisement can oblige them to perform any laborious duty…” (1748, p. 354). Alfred Marshall regarded climate as being a determinant of racial characteristics. He argued that in warm countries we fi nd early marriages and high birth rates, “and in consequence, a low respect for human life: this has probably been the cause of a great part of the high mortality that is generally attributed to the insalubrity of the climate…Vigour depends partly on race qualities: but these, so far as they can be explained at all, seem to be chiefl y due to climate” (Marshall, 1895, p. 276). 2THE CLIMATE STRIKES BACK “economics of climate change”, relating to (a) I.10 Against this backdrop, the Report on assessing the economic impact of climate change Currency and Finance for the year 2022-23 adopts on growth and development; and (b) economic “Towards a Greener Cleaner India” as its theme. assessment of climate change policies. Seminal The following section underscores the need for work attempting to understand the economics of speed and resolute commitment by analysing climate change has been undertaken through the the manifestations of climate change through key Integrated Assessment Models (IAMs) such as physical indicators at the global level. The third the Dynamic Integrated model of Climate and the section reviews the state of play that is leading Economy (DICE) (Nordhaus, 1992; Stern, 2007). up to global climate policies. India’s position in global negotiations is set out in the fourth section. I.8 Affi rmative action in pursuit of the climate Central banks, including the Reserve Bank of as a global policy good is of even more recent India (RBI), have emerged as stakeholders in the vintage. The Paris Agreement of 2016 has been global climate change discussions and this forms a landmark in achieving the fi rst legally binding the subject matter of the fi fth section, which is international treaty on climate change for all followed by the lay-out of the rest of the Report to signatories, a successor to the Kyoto Protocol conclude this chapter. of 2005. This Agreement has introduced long- term goals regarding the reduction of GHG 2. Global Manifestation of Climate Change emissions, and provision of fi nance to developing I.11 The global mean surface temperature countries by developed countries to adapt to today is about 14.8 degrees Celsius (Chart I.1)5. and mitigate climate change. Despite the slow pace of implementation, unfulfi lled commitments Chart I.1: Estimated Global Temperature Over towards collectively fi nancing climate action Past 500 Million Years and vulnerability/discord/knowledge gaps, the Agreement has offered a glimmer of hope about the transition towards a greener cleaner world. I.9 India’s development strategy since independence has left certain environmental imprints4. This recognition is belatedly spurring investments in environment-friendly alternative sources of energy and in climate science and technology. Today, India is striving to consolidate its position in the ongoing global climate policy Notes: a. (1): Marine life diversified in extreme heat; (2): Land-based discourse with an urgency not seen before as the plant absorbed CO 2 and polar ice caps formed; (3): Volcanoes and erosion increased CO levels; (4): Mammals evolved in a 2 world races to head off the debilitating effects of warm period; (5): Humans are rapidly warming the climate. b. Based on preliminary results from a Smithsonian Institute climate change. project led by Scott Wing and Brian Huber. Source: Scott and Lindsay (2020). 4 For instance, see Pingali (2012) for an illustration of the environmental impact of green revolution in developing countries, including India. 5 Global temperature is worked out based on data from National Centers for Environmental Information. Accessed on April 28, 2023 from https://www.ncei.noaa.gov/access/monitoring/monthly-report/global/202113. 3REPORT ON CURRENCY AND FINANCE related challenges are unprecedented. Fourth, Chart I.2: Causes of Recent Global Warming the current experience with climate change is truly global in nature with accentuated regional implications. I.13 Climate scientists recognise three anthropogenic drivers of climate change: GHG emissions; aerosols; and land use and land cover (LULC) (ibid). While GHGs help to keep the earth warm and habitable, it is the imbalance in GHGs in earth’s atmosphere that leads to global and regional warming. The amount of GHGs in the atmosphere prior to the Industrial Revolution was relatively constant, but their concentration has Note: Changes in global surface temperature for the past 170 years, by simulating the data for 1850-1900, highlight the dominance of increased signifi cantly and consistently since then anthropogenic factors in the recent global warming. Source: IPCC Sixth Assessment Report - Summary for Policymakers (IPCC, 1990). Among the GHGs, the concentration (2021). of carbon dioxide (CO ) has shown the highest 2 increase since pre-industrial times (Chart I.3a). Although temperature increases have been Atmospheric CO gets stored transiently in land or recorded during the course of earth’s history, 2 oceans as mineral deposits before it gets removed the current episode of anthropogenic climate change is qualitatively different from the historical over centuries or even more, making the mitigation experience in four major ways. First, changes in of climate change a daunting task (ibid)6. the earth’s climate that are underway are largely I.14 Methane (CH ), the second highest GHG 4 human-induced, as noted earlier, while the earlier in occurrence, has been growing primarily due incidences were primarily the result of various to agricultural activities7. The concentration of natural factors (Chart I.2). nitrogen oxides and carbon monoxide (CO) I.12 Second, the pace of climate change is also on the rise, leading to an increase in during the current phase is remarkably rapid tropospheric ozone (O ), another GHG (ibid). 3 – it is unfolding over decades whereas earlier Chlorofl uorocarbons (CFCs), which damage the occurrences of climate change happened over O layer in the stratosphere that is responsible 3 centuries and millennia (Krishnan et al., 2020). for fi ltering the sun’s ultraviolet radiation also Third, costs involved in the policy responses for contribute to global warming8. Among various adaptation to and mitigation of climate change- economic sectors, energy has contributed the 6 As observed by Natural Resources Defence Council (NRDC), “accounting for about 76 per cent of global human-caused emissions, carbon dioxide (CO) sticks around for quite a while. Once it is emitted into the atmosphere, 40 per cent still remains after 100 years, 20 2 per cent after 1,000 years, and 10 per cent as long as 10,000 years later”. 7 Paddy fi elds emit signifi cant amounts of CH as they are fl ooded with (often warm) water for better yields (Krishnan et al., 2020). This cuts 4 off the oxygen supply to the soil from the atmosphere, leading to anaerobic fermentation of soil organic matter, and CH is a result of this 4 fermentation (Neue, 1993). Similarly, belching of cattle also leads to the release of CH. 4 8 Chlorofl uorocarbons (CFCs) such as freon used in refrigerators are halogenated hydrocarbons that contain carbon, hydrogen, chlorine and fl uorine and contribute to ozone depletion in the upper atmosphere. 4THE CLIMATE STRIKES BACK Chart I.3: Historical GHG Emissions a. Emissions by Type of GHG b. Emissions by Sector Note: Fgas refers to Fluorinated gas. Sources: Gutschow et al. (2016); and Potsdam Institute for Climate Impact Research. most to GHG emissions, followed by agriculture from 2012 onwards, the earth has turned and industry (Chart I.3b). warmer by more than 1 degree Celsius as compared with the 1850-1900 average, I.15 Aerosols are small, suspended particles with each decade being warmer than the or droplets that either scatter solar energy or previous one by around 0.2 degree Celsius absorb it or do both. By scattering solar energy, since the 1980s (Chart I.4). they can offset the warming caused by GHGs but by absorbing it, they contribute to global warming (ibid)9. The common sources of anthropogenic Chart I.4: Global Mean Surface Temperature Anomaly aerosols are urban/industrial emissions and 1 .2 smoke emanating from biomass burning (ibid). The changes in LULC caused by deforestation 0 .2 owing primarily to agricultural and pastoral activities reduce the ability of the earth’s surface -0 .8 to sequestrate (absorb) CO , thus contributing to 2 climate change (ibid). -1 .8 I.16 Climate scientists use many physical indicators, including atmospheric, oceanic and cryospheric, to assess climate change: Notes: Anomalies are calculated relative to a 1981 to 2010 baseline and offset by 0.69 degree Celsius which is the best estimate difference for • Global mean surface temperature (the that period from the 1850-1900 average reported by IPCC. Overall global temperature refers to HadCRUT5, sea surface temperature is HadSST4 average of land surface temperature (LST) and land surface air temperature denotes Berkeley Earth Land. Source: Met Office, UK. and sea surface temperature (SST)): 9 The IPCC has acknowledged that aerosols so far have had a net cooling effect on earth’s climate, partially counterbalancing the heating effect of GHGs (ibid). 5 suisleC eergeD 0581 8581 6681 4781 2881 0981 8981 6091 4191 2291 0391 8391 6491 4591 2691 0791 8791 6891 4991 2002 0102 8102 Overall (SeaandLand) Sea surface Land TrendREPORT ON CURRENCY AND FINANCE Chart I.5: Ocean Heat Content and Sea Level Rise a. Ocean Heat Content b. Global Mean Sea Level Since 1880 Notes: Global sea level data are from Church and White (2011) and updated with Commonwealth Scientific and Industrial Research Organisation (CSIRO) latest information. The shaded area indicates 95 per cent confidence intervals. Sources: Met Office, UK; Cheng et al. (2017); Church and White (2011); and CSIRO. • Long-term warming and acidifi cation of including snow and ice (Sejas et al., 2014) oceans: more than 90 per cent of the net (Chart I.7)13. energy or heat increase in the climate Chart I.6: Global Ocean Acidification system is stored in oceans and over 60 per cent in the upper ocean (0-700 metres). The heat absorbed in the upper layer of the ocean has increased at an annual average level of 1.9 zeta joules (ZJ)10 during 1940- 1970 to 5.2 ZJ during 1971-2022 (Chart I.5)11, causing thermal expansion, melting of glaciers and ice caps, rise in sea level and ocean acidifi cation (Chart I.6)12. 1985-2020 trend: -0.0016 ± 0.0006 year -1 • Changing mass of cryosphere (all regions on and beneath the surface of the earth where water is in solid form): this has resulted in high refl ectivity of solar radiation Note: Lower pH value means higher acidity. Source: Copernicus Marine Environment Monitoring Service (CMEMS). and depletion of fresh water supply, 10 Ocean heat content (OHC) is measured in joules with 1 zeta joule = 1021 joules. According to the United States Environmental Protection Agency estimates for 2018, a one unit (1 x 1022 joules) increase in OHC is equal to approximately 17 times the total amount of energy used by all the people on earth in a year. 11 Cheng et al., 2019. 12 The global mean sea level (GMSL) has swelled by over 26 centimetres (cms) from 1880 to 2022 at an average rate of 1.8 mm per year. The IPCC Special Report on the Ocean and Cryosphere in a Changing Climate concluded that sea level rise has accelerated (extremely likely) due to the combined loss from Greenland and Antarctic ice sheets (very high confi dence). 13 Decadal means for Arctic sea ice area have decreased signifi cantly, although the relative changes in the Antarctic sea ice area have been small. 6THE CLIMATE STRIKES BACK Ch Chart I.7: Ice and Glacier Balance be a. Sea Ice Extent b. Global Cumulative Mass Balance of Reference Glaciers Note: The sea ice extent is calculated in relation to 1981-2010 average. The cumulative mass change of reference glaciers is relative to 1976. Sources: Met Office, UK; and World Glacier Monitoring Service (WGMS). • Global average precipitation: wet areas are I.17 Using select key physical indicators14 of getting wetter while dry land is becoming climate change, a dynamic factor model (DFM) drier as global average precipitation has capable of extracting unobserved underlying increased since the 1950s, marked by factors has been developed to create a composite years of extremely heavy rainfall and measure of global climate change, namely, severe droughts (Chart I.8). the Global Climate Change Index (GCCI). Constructed by taking data from 1850 to 2022, Chart I.8: Global Precipitation Anomaly the GCCI shows an upward trend since the late 19th century following the Industrial Revolution (Chart I.9). I.18 The correlation between the GCCI and the total number of extreme weather events is estimated at 0.9. Evidently, the frequency of disaster events has gone up with climate change (Chart I.10). I.19 The Bai-Perron structural break test shows fi ve major statistically signifi cant breaks (1880; 1913; 1938; 1973; and 1998) in the Notes: 1. Global anomalies are calculated from the average precipitation GCCI (Table I.1). As the year 1880 marked the during 1901-2000. 2. Dotted line indicates the trend. beginning of modern record-keeping for global Source: National Oceanic & Atmospheric Administration (NOAA) via the US EPA. temperatures, the availability of robust data 14 The selected 11 key indicators of climate change are the global mean surface temperature; land surface temperature; sea surface temperature; ocean heat content; sea level rise; Arctic sea ice extent; Antarctic sea ice extent; snow cover; glacier mass balance; global precipitation; and global CO emissions. 2 7REPORT ON CURRENCY AND FINANCE Chart I.9: Evolution of Climate Change Chart I.10: Global Climate Change and Disaster Events Source: Authors’ calculations. Sources: Our World in Data (OWID); and Authors’ calculations. on global temperatures could explain the fi rst Second Industrial Revolution involving several structural break in the GCCI15. The period from technological advances majorly benefi tting the 1880 to 1912 is considered as the period of the advanced countries outside Europe. The period from 1913 to 1937 included the outbreaks of the Table I.1: Bai-Perron Structural Breaks two World Wars, possibly refl ecting increased in GCCI emissions. The last break in 1998 was marked by Variable Coeffi cient Std. Error t-Statistic Prob. a well-known El Nino effect in the tropical Pacifi c, 1850 - 1879 -- 30 obs which resulted in signifi cant climate disruptions C -3.57 0.07 -52.62 0.00 in the form of fl oods in Latin America and Africa, 1880 - 1912 -- 33 obs and droughts in south-east Asia. C -4.27 0.06 -66.09 0.00 1913 - 1937 -- 25 obs I.20 In sum, climate change is manifesting C -3.41 0.07 -46.00 0.00 itself through multiple indicators. Given that most 1938 - 1972 -- 35 obs environmental and natural processes are “silent” C -2.24 0.06 -35.75 0.00 and “invisible”, they may not be discernible 1973 - 1997 -- 25 obs immediately or experienced as intensely C -1.10 0.07 -14.86 0.00 1998 - 2022 -- 25 obs (Dasgupta, 2021). Silence and invisibility can C 0.80 0.07 10.75 0.00 no longer be associated with climate change, Adj. R2 0.95 however, as increasingly frequent and intense Prob(F-stat) 0.00 extreme weather events take a rising toll on human Source: Authors’ calculations. life and the environment. 15 Three of the world’s comprehensive global temperature records began in 1880; see https://climate.nasa.gov/faq/21/why-does-the- temperature-record-shown-on-your-vital-signs-page-begin-at-1880/, Accessed on April 28, 2023. 8THE CLIMATE STRIKES BACK 3. Climate Policy Action I.24 The implementation of the Paris Agreement is based on Nationally Determined I.21 The global consensus around climate Contributions (NDCs), which are plans of action policies has been spearheaded by the United for climate change submitted by each signatory, Nations (UN), although originally, its focus was followed by a fi ve-year cycle of increasingly more on the utilisation of the environmental ambitious climate actions16. Countries also have or natural resources for greater economic to frame long-term low emission development development (Jackson, 2007). Among the strategies (LT-LEDS). Unlike NDCs, LT-LEDS are international organisations, it was the WMO not mandatory. Developed countries have been which has been instrumental in generating assigned the added responsibility of providing international cooperation on climate matters and support to developing countries for adaptation and strengthening post-second World War advances transition to clean energy through climate fi nance. in climate research (Zillman, 2009). There have been numerous global dialogues and I.22 Environmental conservation engaged the interventions leading up to and following the Paris attention of the UN for the fi rst time in the fi rst Earth Agreement (Annex I.1). Summit held in Stockholm in 1972, which led to I.25 The achievements of climate policy action the creation of the UN Environment Programme can be ascertained using several parameters. (UNEP), the fi rst landmark in global cooperation First, almost all countries have committed to and consensus on climate change. The second timelines for the transition to net zero emissions, landmark occurred 16 years later in the form of with the majority committing to achieve this creation of the Inter-Governmental Panel on target by 2050 (Chart I.11). 23 per cent of the Climate Change (IPCC) in 1988 by the UNEP and the WMO for regular scientifi c assessments on Chart I.11: Target Year of Commitment for Countries climate change and their implications for informed 70 policy making (Annex I.1). Till now, there have 61.7 60 been six assessment cycles by the IPCC. 50 I.23 The third landmark was the Paris Agreement in 2016, about three decades nt 40 e c later. This agreement bound all signatories to Per 30 26.4 undertake targeted efforts to combat climate 20 change. It was aimed at ensuring that GHG 10 6.2 emissions from human activity are maintained 3.1 2.6 at the same levels as can be absorbed by the 0 environment - known as net zero - between 2050 030 040 050 050 rget 2 2 2 2 a and 2100. This would limit global warming to 1.5 By 031- 041- ond No T 2 2 y e B degrees Celsius as compared with pre-Industrial Source: Net zero tracker, https://zerotracker.net Revolution levels. 16 See https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement 9REPORT ON CURRENCY AND FINANCE funding arrangements, including a dedicated Chart I.12: Number of Net Zero Pledges and Share of Global CO Emissions Covered fund for loss and damage. The G20 and G7 have 2 jointly launched the Global Shield against Climate Risks to provide vulnerable countries more means to protect themselves from increasingly extreme weather, with Germany providing 170 million in grants. Many of the advanced economies have made fi nancial commitments addressing loss and damage, with the UK also announcing that it will suspend vulnerable nations’ debt repayments for up to two years following a climate disaster. The UN has unveiled a US$ 3.1 billion plan to ensure Notes: In law = a net zero pledge has been approved by respective parliament and is legally binding; that everyone is covered by early warning systems Proposed = a net zero pledge has been proposed to the parliament to be voted into law; in the next fi ve years to bolster countries’ ability to In policy document = a net zero pledge has been proposed but does not have a legally binding status. prepare for hazardous weather. Source: International Energy Agency (2021). I.27 Third, weather-related mortality has countries have made the target a legal obligation, declined over the decades as advances in 18 per cent have proposed to make it into a legal technology and early warning systems across obligation and remaining 59 per cent have made countries have reduced the incidence of death their pledges in offi cial policy documents. All these signifi cantly (Chart I.13). countries together account for around 73 per cent Chart I.13: Number of Reported Deaths Due to Weather- of global CO emissions (Chart I.12). 2 Related Calamities I.26 Second, the fi nancial commitments made 800 towards providing climate fi nance for adaptation 700 667 and mitigation have also grown over time. In 600 556 COP1517 in Copenhagen in 2009, developed 500 countries committed to US$ 100 billion per year 400 329 329 by 2020 for climate action in developing countries. 300 In COP27 in Sharm-El-Sheikh in 2022, the 185 200 Parties acknowledged that the initial pledge was 100 not suffi cient and adapting to climate crisis would 0 require US$ 160-340 billion annually by 2030, accelerating to US$ 565 billion annually by 2050 if climate conditions deteriorated further. Parties have also reached a consensus to establish Source: WMO. 17 COP or Conference of the Parties is the supreme decision-making body of the UN Framework Convention on Climate Change (UNFCCC). All countries that are parties to the UNFCCC are represented at the COP which meets every year to review the Conventions’ implementation; see https://unfccc.int/process/bodies/supreme-bodies/conference-of-the-parties-cop 10 )sdnasuoht ni( rebmuN 97-0791 98-0891 99-0991 9002-0002 9102-0102THE CLIMATE STRIKES BACK I.28 Fourth, NDCs have increased the Chart I.14: Change in Global CO Emissions and GDP 2 momentum of emission reduction, resulting in a glide path towards net zero. While relative decoupling of economic growth and emissions is currently underway at the global level, the trends vary signifi cantly across high-income and middle- income countries (Chart I.14; Box I.1). I.29 Notwithstanding the progress, the pace of implementation of climate policy remains far from adequate. There are still considerable gaps in scientifi c knowledge on informed climate-resilient pathways, strategies, choices and actions that can reduce climate change and its impact (Denton et al., 2014). Delays in current policy action can limit the scope for setting future climate-compatible Source: Our World in Data (OWID). Box I.1 Decoupling of Global Growth and GHG Emissions The carbon-growth nexus is based on the argument that for energy intensity of GDP during 1965-2021: as economies grow, energy usage requirement increases, ……….(1) leading to higher emissions (Torun et al., 2022). The environmental Kuznets curve (EKC) hypothesis argues that CO: Per capita emissions; GDP : Per capita GDP; and 2 PC this relation is non-linear, with emissions increasing faster EI: Energy intensity of GDP. at lower stages of economic development and falling at The results show a non-linear relationship between per higher stages with the use of energy-effi cient resources, capita GDP and emissions over time. After 2000, however, ceteris paribus (Stern, 2004). Under relative decoupling, the the decoupling elasticity has increased, though moderately carbon intensity of GDP declines even though it may still be (Chart 1). on a rise in absolute terms. Decomposition of the contributing factors, based on the With the various policy interventions for addressing climate Logarithmic Mean Divisia Index (LMDI)18 (an extension of change in the last few decades, the decoupling elasticity, the Kaya identity19), brings out the role of declining energy defi ned as the response of emissions to a one per cent change in GDP, has weakened. The changes in the intensity of output which has helped in containing global decoupling elasticity can be seen from the response curve emissions growth, despite higher per capita economic of the time varying estimate ( ) in equation (1), controlling t (Contd...) 18 LMDI is defi ned as the decomposition of the weighted contribution of each factor in the change in emission level (Kar, 2022) in period t over base period 0 as: ………… (1) where each component C viz., GDP per capita (GDP ), energy intensity of GDP (EI) and carbon intensity of energy use (CI) is defi ned as: it PC 19 Kaya identity is a simple mathematical framework to assess the main factors governing global CO emissions (Kaya, 1989). The identity 2 relates GHG emissions to population growth, economic growth and energy use, and quantifi es the emissions generated from human sources in terms of population, economic activity, energy intensity of output and carbon intensity of energy consumption. 11REPORT ON CURRENCY AND FINANCE Chart 1: Global Growth Sensitivity of CO Emissions Chart 2: Contribution to Global CO Emissions (LMDI) 2 2 Source: Authors’ calculations. Sources: OWID; and Authors’ calculations. growth. This is weakening the carbon-growth nexus growth in their high growth phase (Charts 3 and 4). Policy (Chart 2). The pace of emissions, however, has increased interventions, however, have signifi cantly moderated the since 2000 and has remained elevated, as the moderation absolute change in emissions since 2015 for the middle- in energy intensity of output has been outweighed by carbon income countries. intensity of energy use associated with economic growth, In sum, while the growing recognition of and actions which has shown only a moderate decline. concerning climate change have weakened the correlation The carbon-growth nexus path has been quite diverse between carbon emissions and GDP growth globally, among countries at different income levels. While both an absolute decoupling is yet to happen. Reduction in relative and absolute decoupling is evident in the high- energy intensity of GDP and carbon intensity of energy income countries, the middle-income countries have not consumption are two important channels for ensuring an been successful in reaching carbon-effi cient economic absolute decoupling, going forward. References: Kar, A. K. (2022). Environmental Kuznets Curve for CO Emissions in Baltic Countries: An Empirical Investigation. Environmental 2 Science and Pollution Research, 29(31), 47189-47208. Kaya, Y. (1989). Impact of Carbon Dioxide Emission Control on GNP growth: Interpretation of Proposed Scenarios. Intergovernmental Panel on Climate Change/Response Strategies Working Group, May. Stern, D. I. (2004). The Rise and Fall of The Environmental Kuznets Curve. World Development, 32(8), 1419-1439. Torun, E., Akdeniz, A. D. A., Demireli, E., and Grima, S. (2022). Long-Term US Economic Growth and the Carbon Dioxide Emissions Nexus: A Wavelet-Based Approach. Sustainability 2022, 14, 10566. 12 htworg PDG ot snoissime OC fo ytivitisneS 2 Chart 3: Decoupling in High-Income Countries Chart 4: Decoupling in Middle-Income Countries 1 0.8 0.6 0.4 0.2 0 -0.2 Sources: OWID; and Authors’ calculations. Sources: OWID; and Authors’ calculations. 0991 esabrevo egnahC 2991 4991 6991 8991 0002 2002 4002 6002 8002 0102 2102 4102 6102 8102 0202 100 1 80 0.8 60 0.6 40 0.4 20 0.2 0 0 -20 -0.2 Decouplingelasticity Change inGDPPPP Change inemissions 0991 esabrevo egnahC 5991 7991 9991 1002 3002 5002 7002 9002 1102 3102 5102 7102 9102 Decouplingelasticity (RHS) Change inGDPPPP Change inemissionsTHE CLIMATE STRIKES BACK trajectories. There are also potential trade-offs greener path for them could be higher relative to between adaptation and mitigation policies, their advanced economy peers. Their contribution resulting in implementation challenges. Cross- to GHG emissions has been relatively limited and country differentials in historical emissions and they demand a larger slice of the future carbon development priorities make the issue of “equity” space as well as compensation for climate change central to adaptation and mitigation policies. While (Box I.2). climate change is a global phenomenon, it is the emerging and less-developed economies that are I.30 In the current state of climate policy most vulnerable in terms of (i) climate science action that incorporates all pledges and targets and technological capabilities; and (ii) fi nance for announced so far, the global rise in temperature adaptation and mitigation. Climate change can can reach a minimum of 1.9 degrees Celsius push them several places down the development above pre-Industrial Revolution levels under the ladder as the potential costs of transitioning to a most optimistic path of global emission reduction Box I.2 International Climate Equity and Justice: Some Analytical Insights Any sustainable solution to climate change needs to factor in Framework (CERF) includes elements of responsibility the unequal contributions to past emissions and the unequal and capability to arrive at country-specifi c mitigation future ramifi cations for development across countries. This and adaptation plans (Kanitkar and Jayaraman, 2019). has been emphasised in the principle of “Common but The major role played by high-income countries in Differentiated Responsibilities and Respective Capabilities” of the UNFCCC (UN, 1992). 58 per cent of the historical global CO emissions is borne out when we consider 2 cumulative net emissions occurred between 1850 and the per capita emissions instead of absolute emissions 1989 and about 42 per cent between 1990 and 2019. High- (Chart 3). Taking consumption-based emissions instead of income countries have cumulatively contributed about 57 production-based emissions also underlines the greater per cent of total CO emissions during the period of 1750- contribution of high-income countries to global CO 2 2 2020 (Charts 1 and 2). emissions. This is because even if the domestic production In comparison with the earlier Contraction and in these countries may entail lower emissions, they are net Convergence approach, the Climate Equity Reference importers of emissions (Chart 4). Chart 1: Cumulative Emissions of CO Chart 2: Contribution to Cumulative CO Emissions, 1750-2020 2 2 60 56.9 50 40 29.7 30 20 9.8 10 0 High-income Upper-middle- Lower-middle- incomecountries incomecountries Sources: OWID; and Authors’ calculations. Sources: OWID; and Authors’ calculations. (Contd...) 13 tnec reP countriesREPORT ON CURRENCY AND FINANCE Chart 3: Average Per Capita CO Emissions and Income of Chart 4: Consumption-based CO Emissions, 2019 (Per capita) 2 2 Countries - 1990-2019 Sources: WDI; World Bank; OWID; and Authors’ calculations. Sources: WDI; World Bank; OWID; and Authors’ calculations. The current central estimate of the carbon budget from 2020 Intergovernmental Panel on Climate Change. Cambridge onwards for limiting warming to 1.5 degrees Celsius (with University Press, Cambridge, UK and New York. Doi: a probability of 50 per cent) has been assessed at 500 CO 10.1017/9781009157926.001. 2 gigatonnes (GtCO), and 1150 GtCO for limiting warming 2 2 to 2 degrees Celsius (with a probability of 67 per cent) Kanitkar, T. and T. Jayaraman (2019). Equity in long-term (IPCC, 2022). In apportioning this remaining carbon space, mitigation. In Dubash. N. K. (ed.). India in a Warming World: the cumulative carbon space used by countries since their Integrating Climate Change and Development. Oxford industrialisation needs to be an important consideration for University Press, pp. 92-113. ISBN 9780199498734. ensuring global equity and justice. United Nations (UN) (1992). Report on United Nations References: Conference on Environment and Development. IPCC (2022). Summary for Policymakers. Climate Change https://www.un.org/en/development/desa/population/ 2022: Mitigation of Climate Change. Contribution of migration/generalassembly/docs/globalcompact/A_ Working Group III to the Sixth Assessment Report of the CONF.151_26_Vol.I_Declaration.pdf – above the current target of 1.5 degrees Celsius Chart I.15: Global Carbon Emission Paths (Charts I.15 and I.16). 60 I.31 Implementation of various climate fi nance 50 commitments from advanced economies has 40 been far from satisfactory. The extent of green 30 fi nancing for climate change adaptation has 20 been about 5-10 times lower than required, and 10 the gap between the required and actual has only grown (UNEP, 2022). As against the amount of 0 US$ 100 billion pledged by advanced economies, -10 only US$ 83.3 billion has been provided in 2020, marking an increase of just 4 per cent from 2019 (Chart I.17). While the Paris Agreement has emphasised on maintaining a balance between Source: Climate Action Tracker, Climate Analytics and New Climate Institute. adaptation and mitigation fi nance, fi nancial 14 )eOCtG( tnelaviuqe OC fo sennotagiG 2 2 0991 6991 2002 8002 4102 0202 6202 2302 8302 4402 0502 6502 2602 8602 4702 0802 6802 2902 8902 Currentpolicy Historical 2030targetsonly Pledges andtargetsannounced Targettedglobal p athto reachnetzeroTHE CLIMATE STRIKES BACK Chart I.16: Global Temperature Rise over Chart I.18: Use of Climate Finance Pre-Industrial Average 100 9 8 90 80 70 58 60 67 50 40 30 20 34 10 24 0 2016-2020 2020 Adaptation Mitigation Cross-cutting Note: Cross cutting projects include a combination of adaptation and Source: Climate Action Tracker, Climate Analytics and New Climate mitigation financing. Institute. Source: OECD. support for mitigation has remained higher than 3.1 Instruments of Climate Policy for adaptation (Chart I.18). I.33 Most economies have adopted fi scal policy I.32 While the number of deaths associated as the primary instrument to achieve climate with extreme weather events has been on the change commitments and targets (Annex I.2), as wane, refl ecting better adaptation, the economic it is widely regarded as the most effective means costs associated with such events have been on a for internalising the externalities of climate change rapid rise (Chart I.19). and curbing emissions (Barker and Ekins, 2001; Chart I.17: Mobilisation of Climate Finance from Chart I.19: Reported Economic Losses from Weather, Developed to Developing Countries Climate and Water Hazards Source: OECD. Source: WMO. 15 tnecrePREPORT ON CURRENCY AND FINANCE Nordhaus, 2007; Weitzman, 2014). The commonly Chart I.21: Global ETS Coverage used fi scal policy instruments include (a) price- 20 based instruments – carbon taxes; feed-in tariffs; 18 renewable subsidies; and (b) quantity-based 16 instruments – emissions trading system (ETS) 14 and renewable quotas. 12 I.34 Carbon taxes are expected to shift power 10 generation from coal towards renewables while 8 supporting public revenue mobilisation and 6 bringing down the distortionary effects of other 4 taxes20. Emissions trading systems (ETS), being market-based, are easier to implement; however, 2 they have limited coverage, as they are used 0 2005 2010 2015 2020 2022 primarily by large emitters (Parry et al., 2022). Source: Carbon Price Dashboard, World Bank. Unlike carbon taxes which can help in the price discovery of carbon emissions, emission trading targets the quantum of emissions while keeping I.21), but they still account for a small share of the carbon price uncertain (Weitzman, 2014). total global emissions. Globally, there has been a rapid increase in the I . 35 Traditionally, monetary and regulatory use of carbon taxes and ETS (Charts I.20 and policies have been considered neither necessary nor effective in addressing climate change. In recent years, however, there has been a growing role of regulatory policies in the climate policy toolkit (Annex I.2). This refl ects the recognition of their role in encouraging green or Environmental, Social and Governance (ESG) fi nance and incentivising investors towards low-carbon instruments. Making further headway in climate action requires not just meeting the earlier commitments but also entering into swifter and stronger policy commitments for the future. 4. India’s Involvement in Global Climate Change and Action I.36 India will surpass China in 2023 to become the most populous country in the world. Alongside 20 This is known as the “double dividend” hypothesis and has been illustrated taking country-specifi c cases, see Mckitrick (1997). 16 snoissimelabolg fotnecrep sA Chart I.20: Global Carbon Tax Coverage 6 5 4 3 2 1 0 1990 2000 2010 2015 2020 2022 Source: Carbon Price Dashboard, World Bank. snoissimelabolg fotnecrep sATHE CLIMATE STRIKES BACK its aspiration to transform into the manufacturing Chart I.23: Change in Surface Air Temperature hub of the world, India’s energy needs will rise and over the Indian Region hence, a large and more intense involvement in global climate action is crucial. This also assumes urgency in view of India’s vulnerability to climate change. 4.1 India’s Vulnerability to Climate Change I.37 The natural impact of climate change on India is evident in more than one way. First, the average air surface temperature for India has risen Notes: Estimates are “best” estimate and range in the change in surface by around 0.7 degree Celsius during 1901-2018 air temperature. Changes are relative to their climatological average from 1976 to 2005. Projected changes are reported under the RCP4.5 and (Krishnan et al., 2020). When compared globally, RCP8.5 scenarios of IPCC. RCPs (Representative Concentration Pathways) are standardised forcing scenarios with each scenario being a time series however, the rise in India’s temperature across all of emissions and concentrations of GHGs, aerosols and LULC changes through the 21st century predicting a Radiative Forcing for 2100. decades seems limited (Chart I.22). Source: Krishnan et al. (2020). I.38 The average temperature in India by the end of the 21st century is projected to increase by per year during 1874-2004, which accelerated about 4.4 degrees Celsius relative to the average to 3.3 mm per year during 1993-2017 that is during 1976-2005 (ibid) (Chart I.23). comparable to the current rise in the global mean I.39 Second, the rise in the sea level in the sea level (ibid). India remains vulnerable to sea north-Indian Ocean was at a rate of 1.06-1.75 mm level increase, which threatens its low-lying small islands as well as major coastal cities21. Third, the precipitation for June to September in India Chart I.22: Annual Surface Temperature Anomaly (Compared to baseline 1950 to 1980) declined by around 6 per cent during 1951-2015, particularly over the Indo-Gangetic plains and the Western Ghats. This is attributed to aerosol cooling over the northern hemisphere, which has offset the warming from GHGs (ibid). Fourth, there has been a distinct increase in the occurrence of natural disasters in India in recent decades (Chart I.24). 4.2 India’s Contribution to Global Climate Change I.40 India’s contribution to cumulative global emissions of GHGs has been limited, although its cumulative emissions have increased during 1950-1990 and 1991-2020. Its contribution to Sources: International Monetary Fund; and Authors’ calculations. consumption-based emissions is, however, 21 Global Sea-Level Rise and Implications: Key Facts and Figures, WMO, February 2023. 17 suisleCeergeD 5 4 3 2 1 0 -1 -2 1961-1970 1971-1980 1981-1990 1991-2000 adanaC anihC ecnarF ynamreG aidnI napaJ aissuR aibarA iduaS yekruT KU SU 2001-2011 2011-2021REPORT ON CURRENCY AND FINANCE Chart I.24: Climate Change-Related Disaster Frequency Chart I.25: Per Capita CO Emissions 2 (Number of Events) be Sources: International Monetary Fund; and Authors’ calculations. Source: OWID. signifi cantly lower than production-based I.41 In India, per capita CO emissions have 2 emissions vis-à-vis major developed countries been on a rise in recent decades, as in China (Table I.2). and Russia (Chart I.25); however, the energy intensity of GDP (use of primary energy per unit Table I.2: Cumulative CO Emissions: 2 of GDP) has been on a steady decline since the India vis-à-vis World 1990s across almost all countries, including India Country Cumulative Emissions Difference between (Chart I.26). of CO Consumption and 2 Production-based (Billion tonnes) Emissions (Percentage points) 1950-1990 1991-2020 Chart I.26: Energy Intensity of GDP Developed world US 157.21 167.53 4.3 EU+UK 144.50 118.98 18.6 Three others (1) 40.46 68.44 12.2 Developing world China 41.13 192.56 -13.5 India 9.02 43.40 -7.1 Three others (2) 12.70 32.77 6.9 Oil and coal exporters Russia 59.72 48.96 -21.6 Saudi Arabia 3.06 12.75 -3.9 Three others (3) 17.08 37.84 -14.8 World 577.29 888.92 Note: (1) Japan, Canada and South Korea, (2) Brazil, Mexico and Turkey, (3) Australia, Iran and South Africa. Source: Desai (2022). Source: OWID. 18THE CLIMATE STRIKES BACK I.42 In the deliberations and actions associated that may increase its contribution of future GHGs; with climate change, India’s position is defi ned and (c) its role in designing both supply-side less by its contribution to past global emissions policies and demand-side innovations to manage of GHGs and more by (a) its higher vulnerability future GHGs. The reduction in emissions can have to the ongoing and future disruptions caused by differential effects on various sectors of the Indian climate change; (b) its developmental priorities economy, including agriculture (Box I.3). Box I.3 Implications of Climate Risk Factors for Indian Agriculture Climate change encompasses a host of factors, such as Table 1: Salient Results from Sequential MARS Model variations in temperature, precipitation, CO emissions, 2 Independent Dependent Degrees Coeffi cients R2 humidity, wind, and extreme weather events. These factors Variables/ Variables of individually or in interaction with other factors can infl uence Interactions Interaction agricultural production/productivity. They could either Temperature Area under 2 0.35 0.62 intensify the negative impact on production/productivity foodgrains or improve it. From the emerging world, India offers an CO emissions Foodgrain 2 0.16 0.81 important case study for understanding the implications 2 production of climate change for agriculture, given (a) the critical role CO emissions Foodgrain yield 2 0.11 0.75 played by agriculture in providing an anchor to India’s 2 Precipitation Area under 2 -0.5 0.92 gross value-added and livelihoods through employment oilseeds generation and food security; and (b) the vulnerability of Precipitation Oilseed 2 -0.4 0.94 Indian agriculture to climate risk factors owing to a relatively production weak weatherproofi ng of the sector. Simulated scenarios Precipitation, Oilseed yield 3 0.02, -0.05 0.89 till 2050 suggest high sensitivity of Indian agricultural Irrigation production to climatic factors (Dasgupta, 2018). CO emissions Foodgrain 2 0.72 0.78 2 production Taking the recorded warmest decade of 2011-2020 (NOAA, (kharif) 2021), a non-parametric multivariate adaptive regression CO emissions Foodgrain yield 2 0.91 0.56 spline model (MARS) has been used to examine the non- 2 (kharif) linear impact of climate change ( ) on agriculture ( ): Rainfall Oilseed 2 -0.25 0.77 production (kharif) Rainfall, Irrigation Oilseed yield 3 -0.18, 0.04 0.84 (kharif) where is a weighted sum of basis functions and is a Note: The sequential MARS model parameters presented here refl ect constant function used in a sequential model to uncover the the impacts of climate variables taken either independently or along with interactions of climate change and agriculture, their interactions with other variables. Source: Jha et al. (2022). (eds.). Ecology, Economy and Society: Essays in Honour of Kanchan Chopra, 63-82. where are N sequential MARS models. Jha, P, Chinngaihlian S, Upreti P, and Handa A. (2022). A Machine Learning Approach to Assess Implications of The results indicate that Indian agriculture is sensitive to Climate Risk Factors on Agriculture: The Indian Case. A climate change (Jha et al., 2022). Climate risk factors, mimeo. both independently and when interacted with other climate variables can negatively affect various attributes of NOAA. (2021). National Oceanic and Atmospheric agricultural production (Table 1). Administration. National Centers for Environmental Information. Monthly Global Climate Report for Annual References: 2020. Published online January 2021, retrieved on May 2, Dasgupta, P. (2018). Climatic Change Impacts on Foodgrain 2023 from https://www.ncei.noaa.gov/access/monitoring/ Production in India. In Vikram D. Anantha D. and Nandan N. monthly-report/global/202013. 19REPORT ON CURRENCY AND FINANCE 4.3 India’s Stake in Global Climate Action Table I.3: India’s Action Related to Climate Change I.43 India’s involvement in climate change negotiations can be broadly divided into three Area Salient Initiatives phases (Youdon and Bajaj, 2022). In the fi rst Science & 1. Indian Network for Climate Change Research Assessment (INCCA) phase (1992-1997), India’s priorities were about 2. Himalayan Glaciers Monitoring Programme preserving the interests of developing and least- 3. Launch of Indian Satellite to Monitor developed countries by advocating the principles Greenhouse Gases 4. India’s Forest and Tree Cover as a Carbon of equity, and common but differentiated Sink responsibilities in meeting targets for emission 5. India GHG Emissions Profi le reductions. In the second phase (2000-2009), Policy 6. Expert Group on Low Carbon Economy Development India focused on climate fi nance, technology 7. State Action Plan on Climate Change sharing and the creation of an adaptation fund 8. National Policy on Biofuels for climate action by developing countries. During Policy 9. National Missions under National Action Implementation Plan on Climate Change the third phase covering COP15 in Copenhagen 10. National Conference on Green Building in 2009 to the Paris Agreement in 2016, India Materials and Technologies supported green transition through a more 11. In-Principle Approval to 30 Solar Cities 12. Energy Effi ciency Standards for Appliances fl exible, cooperative, and holistic approach for 13. Fuel Effi ciency Norms formulating its National Action Plans on climate 14. Clean Development Mechanism (CDM) change. Programme International 15. UN Climate Technology Conference I.44 A strong commitment to climate action is Cooperation 16. SAARC Environment Ministers’ Conference refl ected in various national development policies 17. India’s Submissions to UNFCCC and programmes adopted by India in recent Forestry 18. State of Forest Report decades (Table I.3). 19. Green India Mission 20. Capacity Building of Forestry, Intensifi cation I.45 Before COP21 in 2015, India submitted of Forestry Management and Inclusion of its intended NDCs to the UNFCCC with targets Forestry within MGNREGA upto 2030, pledging to: (i) reduce its emissions Source: Ministry of Environment, Forest and Climate Change, Government of India. intensity of GDP by 33-35 per cent from 2005 levels; (ii) increase the share of non-fossil-fuels- based electricity to 40 per cent with the help of I.46 At COP2624, India updated its NDCs, transfer of technology and low-cost international which represent the framework for its transition fi nance mechanisms such as the Green Climate to cleaner energy for the period 2021-2030. It Fund22; and (iii) create an additional carbon sink23 has committed to accommodate the panchamrit, of 2.5 to 3 billion tonnes of CO equivalent through which includes raising the non-fossil-fuels-based 2 extra forest and tree cover. energy capacity of the country to 500 Gigawatt 22 The Green Climate Fund has been designated as an operating entity of the fi nancial mechanism of the UNFCCC in providing support to developing countries to limit or reduce their GHG emissions and to adapt to the impact of climate change. 23 Carbon sinks are natural or artifi cial reservoirs that absorb and store the atmosphere’s CO through physical and biological mechanisms. 2 24 The 26th UN Climate Change Conference was held at Glasgow, UK in 2021. 20THE CLIMATE STRIKES BACK by 2030; 50 per cent of energy requirements from institutional level to share its experience and renewable sources; and 45 per cent reduction learnings with the rest of the world by participating of carbon intensity by 2030. The updated NDCs in research and development activities. reaffi rm India’s commitment to work towards a low- Mitigating the growing GHG concentration in the carbon emission pathway, while simultaneously atmosphere will include harnessing the potential endeavouring to achieve sustainable development in mangroves to absorb more carbon emissions goals. Moreover, the Mission LiFE, i.e., Lifestyle for than landed tropical forests. Accordingly, the Environment, launched by the Prime Minister dedicated commitments have been made towards in 2022, is now a global movement to connect conservation and management of mangroves. the powers of the people for the protection of I.49 The Ministry of Science and Technology the earth. Mission LiFE makes the fi ght against launched the National Mission for Sustainable climate change democratic, because everyone Himalayan Ecosystem in 2010 to understand the can contribute within one’s capacity. implications of climate change on the Himalayan I.47 India has set itself a target to achieve net ecosystem in order to conserve and protect its zero by 2070. Toward achieving this target, India biodiversity. A separate Mission for Green India has released its LT-LEDS at the COP27 summit. was launched by the Ministry of Environment, With this, India has joined other so-called large Forests and Climate Change in 2014 to provide livelihoods to 3 million people through forest- emitters like China, the US, Russia and Japan based activities and carbon sequestration which have already submitted their strategies. capacity. While optimising the trade-offs between growth and low-carbon emissions, the broad features I.50 With the coming into force of the Energy of the strategy include: (a) rational utilisation of Conservation Act of 2001, the Ministry of Power national resources with due regard to energy launched a similar Mission in 2011 known as security; (b) increase the use of biofuels, green National Mission for Enhanced Energy Effi ciency hydrogen fuel and electric vehicle penetration; (NMEEE) to make energy savings. India has co- (c) development of an integrated, effi cient and founded the International Solar Alliance (ISA) low-carbon transport system; (d) promotion of with France in 2016 and announced a National adaptation measures in urban design; and (e) CO Hydrogen Mission to increase the dependency 2 removal through innovation, technology transfer, on green energy. Moreover, the Government of climate-specifi c fi nance and capacity building with India has established an adaptation fund and international support. provided initiatives under its National Action Plan for climate change. India’s progress in adaptation I.48 India has made progress towards meeting and mitigation of climate change is evident from the net zero target. The current set of actions on the rise in its Climate Change Performance Index climate change is the result of learning from its (CCPI) in recent years (Chart I.27). own experience and those of other countries, and the awareness of the risks and costs associated I.51 Currently, about 80 per cent of the with the adverse impact of climate change. India electricity generation in India is from fossil fuels is keen to form knowledge networks by facilitating (Chart I.28). Future energy transitions for India data sharing and information exchange at the can be estimated under two different scenarios 21REPORT ON CURRENCY AND FINANCE Chart I.27: Climate Change Performance Index, Chart I.28: Share of Electricity Production from Select Countries Fossil Fuels 80 70 60 50 40 30 20 10 0 Note: The methodology followed in each report may be different but is broadly based on 14 indicators divided into four categories: GHG emissions (weight: 40 per cent), Renewable energy (weight: 20 per cent), Energy use (weight: 20 per cent), and Climate policy (weight: 20 per cent). Source: Germanwatch CCPI Reports. Source: OWID. underlining the urgent need for a structured has, in fact, emerged as a leading voice from change in the energy sector (Box I.4). the emerging world. It is undertaking numerous policy actions as part of the global commitments I.52 In sum, India is using the challenge of while pushing outwards the boundaries of its climate change to propagate action globally and development priorities. Box I.4 Energy Transition Scenarios for India To reduce CO emissions, renewable energy needs renewable energy. Under different globally coordinated 2 to suffi ciently replace the carbon-emitting sources of policy scenarios, the amount of renewable energy capacity energy. The transition process could be induced by direct and generation would differ, calling for public investments or indirect taxes on carbon and subsidies to promote of differential magnitudes. Chart 1: Electricty Installed Capacity Chart 2: Electricity Generation Source: Renewable Energy Statistics, IRENA (2022). Source: IRENA (2022). 22 001-0 foelacsa noxednifoeulaV SU KU UE napaJ adanaC aeroK htuoS anihC aidnI lizarB ocixeM yekruT aissuR aibarA iduaS ailartsuA narI acirfA htuoS 100 30 90 25 80 20 70 60 15 50 10 40 30 5 5791357913579135791 8889999900000111112 9999999900000000000 2018 2023 1111111122222222222 tnecreP tnecreP China Germany India Japan Russia UK US Canada (RHS)THE CLIMATE STRIKES BACK Chart 3: Share of Renewables under the Stated Policies Chart 4: Share of Renewables under the Announced Pledges Scenario (STEPS) Scenario (APS) Note: The data points are actuals up to 2021 followed by projections Note: The data points are actuals up to 2021 followed by projections based on the global model of the International Energy Agency (IEA). based on the global model of the International Energy Agency (IEA). Sources: IEA (2022); World Economic Outlook (WEO); and Authors’ Sources: IEA (2022); World Economic Outlook (WEO); and Authors’ calculations. calculations. Even though fossil fuels dominate India’s energy production have to generate around 61 per cent of its energy supply at present, there has also been a steady rise in the from renewable sources. Thus, under APS, India may production of renewable energy over the years (Charts 1 observe a faster emergence of low-emission alternatives in and 2). The transition to renewables needs to pick up at a power, industry and transport sectors, and a sharper fall faster pace. in coal use and rise in renewables in line with its 2070 net zero goal. The share of renewables is going to rise signifi cantly under the Announced Pledges Scenario (APS) as compared to References: the Stated Policies Scenario (STEPS) for India (Charts 3 International Energy Agency (2022). World Energy Outlook and 4)25. 2022. License: CC BY 4.0 (report); CC BY NC SA 4.0. The rise in energy demand under STEPS for India is https://www.iea.org/reports/world-energy-outlook-2022. estimated at 3 per cent between 2021 and 2030, as fossil fuel use is likely to increase steeply, mainly led by coal IRENA (2022). Renewable Energy Statistics 2022. International during this period. Oil will remain a major source of energy Renewable Energy Agency, Abu Dhabi. https://www.irena. for the transport sector. Under APS, coal demand in India org/-/media/Files/IRENA/Agency/Publication/2022/Jul/ is expected to reduce by around one-third of its predicted IRENA_Renewable_energy_statistics_2022.pdf?rev=8e3c2 value by 2050 due to NDCs. Under this scenario, India will 2a36f964fa2ad8a50e0b4437870. 5. Climate Change and the Reserve Bank of of climate change to them has provoked an India animated debate. It is argued that central banks lack the necessary tools and domain knowledge I.53 Climate change has been appropriately to address climate change (Hansen, 2022; and assigned to the domain of fi scal policy. Central Rajan, 2023). banks, given their relatively narrow mandates of price and fi nancial stability, and fewer instruments I.54 It is also argued that climate change at their disposal, have hitherto adhered to their core may take central banks away from the pursuit of competence. As a result, the newer assignment price stability, which can affect their credibility in 25 As per the IEA, APS includes the latest NDCs and the long-term net zero goals of the countries, whereas STEPS follows only the current policy setting of countries. Thus, APS signifi es a stricter, globally coordinated transition. Renewables include bioenergy, geothermal, hydropower, solar photovoltaics (PV), concentrating solar power (CSP), and wind and marine (tide and wave) energy for electricity and heat generation. 23REPORT ON CURRENCY AND FINANCE meeting their primary mandate. In fact, undue Chart I.29: Impact of Climate Risk on Monetary expectations from central banks about addressing Transmission climate change, if unfulfi lled, can tarnish their reputation (Issing, 2021). Furthermore, central banks’ actions may not always complement governmental actions on climate matters. Hence, they may face (a) “calibration risk” with regard to their ability to adjust their instruments towards managing climate risks without an explicit need for additional mandates and tools; and (b) “capture risk” with respect to their independence from the government’s climate policy (Masciandaro and Russo, 2022). Moreover, introducing climate change as an explicit mandate may require complex and cumbersome amendments in the Source: NGFS (2020). existing institutional structures governing central banks (ibid). In sum, climate change in the context of central banks has come to be regarded as 2020). Demand shocks can arise due to the loss “mission creep” - a gradual broadening of their of wealth of fi rms and households on account of objectives beyond the original scope or focus. frequent natural disasters. Physical and transition risks can affect the balance sheets of fi nancial I.55 On the other hand, there is a growing institutions and banks, limiting the fl ow of credit recognition that even if governments are the to the real economy (Schnabel, 2021). Climate- most infl uential agency for climate change, all induced uncertainty can make households save institutions, including central banks and fi nancial more for precautionary purposes, bringing down sector regulators/supervisors, are stakeholders the real equilibrium interest rate (ibid)26. There are and especially so in view of the existential threat several channels through which climate change to their central mandates. Climate change can can affect monetary transmission (Chart I.29). affect price stability through supply shocks such as food and energy shortages and through a I.56 Central banks also face challenges to decline in productive capacity. Climate-related their fi nancial stability mandate from climate risk risk can also lead to infl ation volatility, which which can affect the valuation of fi nancial assets can effectively de-anchor infl ation expectations. by infl uencing investors’ risk perceptions (FSB, Furthermore, even if mitigation policies such as 2020). This can create volatility in traded assets. carbon pricing are forceful, they can affect price Uncertainty in asset prices can, in turn, reduce stability, potentially precipitating large and long- the effectiveness of hedging, further increasing lasting movements in relative prices (NGFS, the vulnerability of banks and fi nancial institutions. 26 However, it is also argued that green investments can result in a low infl ation, and hence, a low interest rate environment in the long run (ibid). 24THE CLIMATE STRIKES BACK been several global interventions to involve central Chart I.30: Average Carbon Footprint of Bank Loans in Select Countries banks and other fi nancial authorities into climate action (Annex I.2). The Network for Greening the Financial System (NGFS), comprising central banks and supervisors, was established in 2017 to (a) strengthen the global response for meeting the Paris Agreement goals; and (b) enhance the role of the fi nancial system in managing risks from climate change and mobilising green fi nance for environmentally sustainable development28. As of March 2023, NGFS consists of 125 members and 19 observers (NGFS, 2023)29. I.58 Climate change is a rapidly emerging Note: Carbon footprint of bank loans (CFBL) is the average CO emission intensities from the fuels burned in each sector, weighted by th2 e sectoral area of policy interest in the RBI. Back in 2007, share of outstanding domestic loans of banks. Sources: IMF; and Authors’ calculations. the RBI advised banks to put in place Board- approved plans of action towards helping the Depreciation pressures on currencies of countries cause of sustainable development. In 2015, the frequently affected by climate disasters can RBI included loans for generation of renewable cause fi nancial instability, higher import costs energy and public utilities run on non-conventional and negative terms of trade. Transition risks can energy as part of its priority sector lending (PSL) operate through multiple channels, exacerbating policy to incentivise the development of green traditional risks in all categories, including credit, energy sources. More recently, the RBI has taken market, liquidity, operational and reputational risks initiatives aimed at understanding the implications for banks and fi nancial institutions. The carbon of climate change for India’s fi nancial sector for an footprint or fi nancial exposure of banks to climate informed climate-related policy, and the fi nancing change has, in fact, gone up signifi cantly in recent of green projects. In April 2021, the RBI joined the years (Chart I.30). NGFS to benefi t from and contribute to the best I.57 The consensus is hence coalescing to the practices in climate risk management and green position that central banks are uniquely placed to fi nance. In its statement, the RBI highlighted three address climate change. They have a critical role in commitments while noting national commitments, the promotion of green/sustainable fi nance through priorities and complexity of the Indian fi nancial a mix of developmental and prudential regulatory system: (a) exploring how climate scenario policies27. With this growing recognition, there have exercises can be used to identify vulnerabilities in 27 The G20 Green Finance Study Group (GFSG) defi nes green fi nance as “fi nancing of investments that deliver environmental benefi ts in the broader context of environmentally sustainable development”, where environmental benefi ts include GHG reductions or improved energy effi ciency, among others (GFSG, 2016). 28 See https://www.ngfs.net/en/about-us/governance/origin-and-purpose 29 NGFS Observers are international or regional public fi nancial institutions/regulators/central banks/multilateral development banks who contribute to its work but are not consulted on items for decision; see https://www.ngfs.net/en/about-us/membership. 25REPORT ON CURRENCY AND FINANCE RBI-supervised entities’ balance sheets, business 6. Concluding Observations models and gaps in their capabilities for measuring I.61 Affi rmative action for greening the earth as and managing climate-related fi nancial risks; a global policy good is gaining traction. Despite its (b) integrating climate-related risks into fi nancial slow pace of implementation, the Paris Agreement stability monitoring; and (c) building awareness of 2016 has offered hope for the transition towards about climate-related risks among regulated a greener cleaner world. India has set itself a fi nancial institutions and spreading knowledge target to achieve net zero by 2070 and is making about issues relating to climate change and signifi cant progress in expanding its non-fossil- methods to deal with them accordingly. fuels-based energy capacity. The updated NDCs I.59 In July 2022, the RBI released its reaffi rm this commitment to work towards a low- seminal “Discussion Paper on Climate Risk and carbon emission pathway, while simultaneously Sustainable Finance”, providing broad guidance endeavouring to achieve sustainable development for RBI-regulated entities to develop good goals. India’s Mission LiFE seeks to empower practices on (a) appropriate governance; (b) people to fi ght against climate change. With the climate risk strategy; and (c) risk management growing recognition that climate change can affect structure. It also laid out guidance for voluntary price stability and fi nancial stability, central banks, initiatives by regulated entities on green fi nance, including the RBI, are assuming an important role setting up of green branches and green data in addressing climate change. This Report refl ects centres, encouraging greater use of electronic that new mission. means of communication instead of paper, I.62 Chapter II analyses the effects of climate and renewable energy sources. In January change on the Indian economy with an assessment 2023, the RBI issued sovereign green bonds to of the growth-infl ation-emission trade-offs under mobilise resources for the Government for green different scenarios linked to India’s NDCs. A infrastructural investments. This move was in highlight of the chapter is the documentation keeping with panchamrit, the fi ve-point strategy of the specifi c topographical and economic for climate action announced by the Government characteristics of the country that determine its during COP26. More recently, in April 2023, high vulnerability to climate risks while dealing the framework for mobilising green deposits by regulated entities has been released by the RBI with the challenge of balancing its growth and with a view to fostering and developing green environmental aspirations. fi nance ecosystem in the country. I.63 Chapter III discusses the risks to India’s I.60 There has also been a distinct focus on fi nancial sector from climate change, channels of climate-related issues in the RBI’s research risk transmission, the national potential to mitigate in recent times: this Report is a case in point. those risks and provide adequate fi nancing for Applying global learnings on climate change to green transition. This chapter employs a dynamic Indian data, each chapter of the Report uncovers stochastic general equilibrium (DSGE) model to the possible implications of climate change for assess the impact of climate shocks on capital the Indian economy and in preparing for the stock, consumption, income, infl ation and interest future. rates, as these variables can infl uence the fi nancial 26THE CLIMATE STRIKES BACK soundness of banks. It presents the fi ndings of a Desai N. (2022). Managing Climate Risk. India pilot survey of stakeholders in assessing the level 2021: A Symposium on the Year That Was. of awareness about the transition risk and the Seminar. January 2022. https://www.india- adoption of adequate risk mitigation strategies. seminar.com/2022/749/749-NITIN%20DESAI. The chapter also conducts climate stress tests to htm. assess the banking sector’s vulnerability to climate FSB (2020). The Implications of Climate Change risks. for Financial Stability. Financial Stability Board I.64 Chapter IV explores a range of feasible Report. November 23, 2020. policy options encompassing various domains Gütschow, J., Jeffery, M. L., Gieseke, R., Gebel, such as fi scal policy, technology, international R., Stevens, D., Krapp, M., and Rocha, M. (2016). trade, regulatory and monetary policy, markets- The PRIMAP-hist National Historical Emissions based and citizen-centric measures to achieve Time Series. Earth System Science Data, 8(2), India’s net zero target. 571-603. Green Finance Study Group. (2016). G20 Green References: Finance Synthesis Report. September. http:// Barker, T., and Ekins, P. (2001). How High are the unepinquiry.org/wp-content/uploads/2016/09/ Costs of Kyoto for the US Economy. Tyndall Centre Synthesis_Report_Full_EN. pdf. Working Paper No.4. 4 July 2001. Hansen, L. P. (2022). Central Banking Challenges Cheng, L., Abraham, J., Hausfather, Z., and Posed by Uncertain Climate Change and Natural Trenberth, K. E. (2019). 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Cowles Foundation Discussion Indian Region: A Report of the Ministry of Earth Papers. 1252. https://elischolar.library.yale.edu/ Sciences (MOES), Government of India (p. 226). cowles-discussion-paper-series/1252. Springer Nature. Nordhaus, W. D. (2007). The Challenge of Global Livingstone, D. N. (2011). Environmental Warming: Economic Models and Environmental Determinism. The SAGE Handbook of Policy (Vol. 4). New Haven: Yale University. Geographical Knowledge. SAGE, London, UK. https://doi. org/10.4135/9781446201091, (28), Parry, I. W., Black, S., and Zhunussova, K. (2022). 368-380. Carbon Taxes or Emissions Trading Systems?: Instrument Choice and Design. Staff Climate Marshall, A. (1895). Principles of Economics. Notes, 2022(006). International Monetary Fund, Macmillan and Co. Vol.1, Edition 3. Washington, DC. Masciandaro, D., and Russo, R. (2022). Central Banks and Climate Change Policies: It is not Pingali, P. L. (2012). Green Revolution: Impacts, Always a Positive Sum Game. SUERF Policy Brief Limits, and the Path Ahead. Proceedings of the No. 398, August 2022. National Academy of Sciences, 109(31), 12302- 12308. McKitrick, R. (1997). Double Dividend Environmental Taxation and Canadian Carbon Rajan, R. (2023). For Central Banks, Less is Emissions Control. Canadian Public Policy/ More. Finance and Development, IMF, March Analyse de Politiques, 417-434. 2023. 28THE CLIMATE STRIKES BACK Schnabel, I. (2021). Climate Change and Monetary Warming Externality? Journal of the Association of Policy. Finance and Development, 58(3), 53-55. Environmental and Resource Economists, 1(1/2), 29-49. Scott, M. and Lindsay, R. (2020). What’s the Hottest Earth’s Ever Been? www.climate.gov/ Weyant, J. (2017). Some Contributions of news features/climate-qu/what’s-hottest-earth’s- Integrated Assessment Models of Global Climate ever-been. Change. Review of Environmental Economics and Policy. Volume 11, Number 1, Winter 2017. Sejas, S. A., Cai, M., Hu, A., Meehl, G. A., Washington, W., and Taylor, P. C. (2014). Individual WMO (2021). WMO Atlas of Mortality and Feedback Contributions to the Seasonality of Economic Losses from Weather, Climate And Surface Warming. Journal of Climate, 27(14), Water Extremes.(1970–2019).(WMO-No.1267). 5653-5669. https://library.wmo.int/index.php?lvl=notice_ display&id=21930#.ZDTlvnZBy3C Steiner, J. L., and Fortuna, A. M. (2020). Climate Change, Greenhouse Gas Emissions, and WMO (2022). Eight Warmest Years on Record Carbon Sequestration: Challenges and Solutions Witness Upsurge in Climate Change Impacts. for Natural Resources Conservation Through WMO Press Release Number: 06112022. https:// Time. Soil and Water Conservation: A Celebration public.wmo.int/en/media/press-release/eight- of 75 Years. ISBN 978-0-9856923-2-2. warmest-years-record-witness-upsurge-climate- change-impacts. Stern, N. (2007). Stern Review: The Economics of Climate Change. Cambridge University Press. WMO (2023). WMO Annual Report Highlights https://doi.org/10.1017/CBO9780511817434. Continuous Advance of Climate Change. Press Release Number: 21042023. https://public.wmo. Subramanian, M. (2019). Anthropocene Now: int/en/media/press-release/wmo-annual-report- Infl uential Panel Votes to Recognize Earth’s New highlights-continuous-advance-of-climate-change Epoch. Nature. 21 May 2019, DOI: 10.1038/ d41586-019-01641-5. Youdon, C. and Bajaj, P. (2022). India’s Approach United Nations Environment Programme (UNEP). and Position on Climate Change Governance. (2022). Adaptation Gap Report 2022: Too Little, National Maritime Foundation. https:// Too Slow – Climate Adaptation Failure Puts World maritimeindia.org/indias-approach-and-position- at Risk. Nairobi. https://www.unep.org/adaptation- on-climate-change-governance/. gap-report-2022. Zillman, J. W. (2009). A History of Climate Weitzman, M. L. (2014). Can Negotiating a Uniform Activities. World Meteorological Organization Carbon Price Help to Internalize the Global (WMO) Bulletin, 58(3), 141. 29REPORT ON CURRENCY AND FINANCE Annex I.1: Major Global Interventions for Climate Change Year Global Intervention Issues Addressed/Initiatives 1972 Stockholm International Led to the creation of UNEP Summit 1979 World Climate Conference I Endorsed plans to establish a World Climate Programme (WCP) under WMO, UNEP, and the International Council of Scientifi c Unions (ICSU), focusing on climate data, climate applications, climate research and climate impact study programmes 1987 Montreal Protocol Focused on global reduction of production of substances damaging the ozone layer, such as CFCs 1988 Creation of IPCC Established for inter-governmental assessment of the science, impacts and response options for climate change 1992 UN Conference on Adoption of Environment and (a) A plan of action at the global, national and local levels to Development or the “Earth address human impact on the environment (UN, 1992) Summit” (b) Rio Declaration on Environment and Development aimed at working towards international agreements to “protect the integrity of the global environmental and developmental system” 1992 UN Framework Convention Establishment of Conference of the Parties (COP) on Climate Change for international discussions on stabilisation of GHG (UNFCCC) concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system 1995 First Meeting of UNFCCC Aimed at an annual review of the Convention and to take COP (COP1) decisions to promote its implementation 2005 Kyoto Protocol The fi rst legally binding climate treaty that required developed countries to reduce emissions by an average of 5 per cent below the 1990-levels over 2008-2012 2009 Copenhagen Accord Agreement to reduce global emissions to hold the increase in global temperature below 2 degrees Celsius (UN, 1992) 30THE CLIMATE STRIKES BACK Year Global Intervention Issues Addressed/Initiatives 2016 Paris Agreement The Agreement focussed on: a) Reduction of GHG emissions to limit the global temperature increase to 2 degrees Celsius and further to 1.5 degrees Celsius; b) Provision of fi nancing to developing countries for climate change mitigation and adaptation 2021 COP26 a) Phase down of coal power and phaseout of ineffi cient fossil fuel subsidies; b) Delivering on climate fi nance pledge of US$ 100 billion by developed countries; c) Launching “Glasgow dialogue” to address loss and damage associated with climate change 2022 COP27 Reaffi rming the commitments of global average temperature reduction, it a) Marked a breakthrough agreement on “Loss and Damage” fund including damage to crops, homes or infrastructure, human health, etc.; b) Urged countries to integrate water into their adaptation efforts Source: Authors’ compilation. 31REPORT ON CURRENCY AND FINANCE Annex I.2: Climate Policies Being Implemented in Select Countries Type of Illustration of the Policy Instrument Country Examples Policy National carbon taxes; Cap-and-Trade • 70 direct carbon pricing instruments (CaT) or Emissions trading systems (ETS); operating in 47 jurisdictions with 34 Emission or energy effi ciency standards30 ETS and 36 carbon tax regimes (World Bank, 2022) • EU and Japan have the most stringent energy effi ciency standards Feed-in tariffs (FIT); Renewable quotas31 • 69 countries have implemented some Fiscal form of FIT (OECD, 2019) Policy • China has implemented a quota system Public investment in infrastructure and EU (Infrastructure Investment Plan); social development; Partnership between China (Urban Development Investment private sector, government, development Corporation) bank, and long-term institutional investors Public guarantees as loan commitments; World Bank Multilateral Investment Credit or cash fl ow guarantees; Multi- Guarantee Agency (MIGA), European sovereign guarantees Investment Fund Guarantee Scheme Redressing underpricing by greater UK, France, Brazil, China transparency of climate risks; Climate- related fi nancial data; Climate-related risk disclosures; Taxonomy of green assets; Climate-related stress tests; Macro- prudential tools Green supporting and brown penalising Lebanon, Brazil, China factors in capital requirements; International requirements of minimum amount of green Regulatory assets on balance sheets; Notional carbon Policy prices; Corporate governance reforms Green credit; Green insurance; Green China (Green Bond Endorsed Project securities; Credit allocation policies or Catalogue), India, Bangladesh Directed lending policies for renewables Integrating climate risk analytics into UK, Japan, Bangladesh, Netherlands, collateral frameworks; Central bank portfolio Norway, ECB (Purchase of EIB bonds) management; Green QE; Developing own risk assessments; Ensuring climate risks are appropriately refl ected in central bank asset portfolios Source: Krogstrup et al. (2019). 30 Procedures/regulations prescribing energy performance of manufactured products, such as maximum energy consumption for an activity. 31 FIT is designed to support the development of renewable energy sources by providing a guaranteed, above-market price for renewable energy producers. In case of quota, the government sets the percentage or amount of energy that comes from renewable sources. 32MACROECONOMIC EFFECTS OF II CLIMATE CHANGE IN INDIA* India’s diverse topography makes it highly vulnerable to climate risks, manifested in the form of sustained rise in temperature, erratic monsoon patterns, and rising frequency and intensity of extreme weather events. India’s goal of becoming an advanced economy by 2047 and achieving the net zero target by 2070 would require accelerated efforts in terms of reducing the energy intensity of output as well as improving the energy-mix in favour of renewables. Scenario analysis suggests that delayed climate policy actions could be costlier, in terms of larger output losses and higher inflation. Sectoral analysis, for risk mitigation, suggests policy interventions to focus on high emission-intensive sectors to minimise trade-off costs. 1. Introduction has implications for growth and infl ation, with multiple channels of risk transmission. Sectoral II.1 Climate change has moved to the centre implications could include disruptions in cropping stage of global public policy debate today cycles and variations in agricultural yield/output. because of its devastating macroeconomic In the industrial sector, there could be an increase impact, being experienced in recent years and the in operational costs reducing profi tability, owing to potential for harsher consequences in the future. The research focus accordingly has advanced the imposition of new climate-friendly regulations, from initial ‘detection and attribution’1 to ‘impact reduced utilisation of old stock of capital assessment and mitigation policies’. While and diversion of investment towards greener growing scientifi c evidence has made it possible infrastructure/capital/technology coupled with to forge a consensus2 on the key aspects of relocation of production processes and activities climate change – i.e., global warming is real and due to climate-related losses. Adversities for the that human activities are a signifi cant cause – the services sector could be diverse, such as strains rising incidence of climate events across the globe on fi nancial services, say due to an increase in has raised public awareness about this risk. insurance claims, as well as disruptions in travel, transportation and business services. Climate II.2 Existing research work not only highlights events could also have implications for various the probable demand-side implications of climate change, but also supply shocks in the medium-to factors of production. At a broader level, there long-run with the potential to cause widespread could be implications for the labour market in disruptions to the overall macroeconomic and terms of labour productivity decline due to climate- fi nancial system. For example, the manifestation related health hazards, and climate migration, i.e., of climate change through changes in temperature out-migration from areas that are signifi cantly and precipitation patterns along with the rising prone to climate risks to lesser affected regions. frequency and intensity of extreme weather events Capital could also be impacted due to physical * This chapter has been prepared by a team comprising Binod B. Bhoi, G V Nadhanael, Sujata Kundu, Vimal Kishore, Chaitali Bhowmick, Madhuresh Kumar, Ranajoy Guha Neogi, Abhishek Ranjan and Debojyoti Mazumder. 1 Using knowledge of past climate events to quantify the nature of ongoing changes. 2 Oreskes, N. (2007). 33REPORT ON CURRENCY AND FINANCE loss of infrastructure that may depress return change, which are conditional upon not only on capital and regulatory charges differentiating the nature and magnitude of the climate shock, between green and other assets. Overall, costs but also on how economies adapt and mitigate are expected to rise for the economy owing to the impact through various policy actions. While rehabilitation measures and new investment for there is a broader consensus on green transition mitigation and adaptation, which if funded by the as a common goal, the path to its achievement government, could entail additional fi scal costs. is rugged involving not only balancing known and unknown macroeconomic trade-offs, in particular II.3 Therefore, while the risks from climate growth-infl ation-fi nancial stability, but also creating change have generally been classifi ed into two a global environment for cooperation to drive joint categories – physical risk and transition risk, actions to deal with the common challenge. the channels of risk transmission may be three: (i) direct impact or fi rst-order effects; (ii) indirect II.4 From the perspective of monetary policy, impact or second-order effects; and (iii) spillover an assessment of climate-related risks – the effects (intra-economy and cross-border impact likely persistence of the impact of the shock, or contagion risks) [BCBS, 2021; Ciccarelli and the extent of the impact on target variables and Marotta, 2021]. The direct transmission channels the transmission channels, and future risks – originate in sectors which are exposed to climate becomes important to insulate the economy events more than others, whereas the indirect from adverse consequences as monetary policy seeks to stabilise the economy after it is hit by transmission channels involve the effects arising unanticipated shocks. It has also been argued from sectoral value chains at various levels. It is that climate change is not merely another market through the indirect transmission channels that failure but presumably “the greatest market failure the impact of the climate event may spread to the world has ever seen” (Stern, 2006). The other the whole economy. The third channel involves side to the debate is the paradox that “success spillovers of impact arising from the interactions is failure” (Carney, 2016), implying that rapid and between the real economy and the fi nancial sector. ambitious policy measures over a short-term It would also involve implications for international horizon may not be desirable from the perspective trade and capital fl ows and through them for cross- of larger macroeconomic and fi nancial stability. border contagion risks. While the consensus as Therefore, from the standpoint of monetary policy, of now seems to suggest that the direct effects this calls for a careful monitoring and assessment are likely to increase gradually over time across of the visible patterns of climate-related risks and the globe as global temperature rises, what is still their associated implications for the economy, lurking in the shadow is the extent of the impact; such that appropriate and timely policy measures the underlying non-linearities; and the timeline may be calibrated. over which the impact may materialise (BCBS, 2021). This is more so because it is extremely II.5 Against this backdrop, India is at the cusp diffi cult to obtain precise and reliable estimates of a unique development challenge. With India’s of the overall macroeconomic impact of climate greenhouse gas (GHG) emissions3 increasing over 3 Include emissions of carbon dioxide (CO), methane (CH), nitrous oxide (NO), and industrial gases such as hydrofl urocarbons (HFCs), 2 4 2 perfl urocarbons (PFCs), sulphur hexafl uoride (SF) and nitrogen trifl uoride (NF). As per the Centre for Climate and Energy Solutions 6 3 (C2ES), globally CO accounts for about 76 per cent of total GHG emissions, followed by CH (16 per cent) and NO (6 per cent). 2 4 2 34MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA four-fold during 1970 to 20214, a green transition Section 2 provides the geographical and path calls for a careful long-term planning and structural characteristics of the Indian economy. It well-defi ned implementable strategies. More analyses why climate change presents India with so because India is ranked seventh in the list of a unique and daunting challenge in terms of its most affected countries in terms of exposure and emission targets vis-à-vis the aspiration for higher vulnerability to climate risk events in 2019 as per economic growth. Section 3 discusses the various the Global Climate Risk Index 2021 (Eckstein, et forms in which climate change risks manifest al., 2021). Hearteningly, India is also the highest in India. Section 4 provides a macroeconomic ranked G-20 country as per the Climate Change impact assessment of climate change in India, Performance Index 2023 (Burck, et al., 2022; PIB, especially with regard to the physical risks. 2022). Both high climate risk exposure of the Section 5 analyses various scenarios of green country and lead performance in mitigating risks transition consistent with the country’s potential to pose challenges for estimating the macroeconomic become an advanced economy by 2047 alongside impact of climate change in India. achieving the net zero emissions target by 2070, while highlighting the underlying growth-infl ation II.6 Accordingly, the key motivations of this trade-offs that may emerge from pursuing bo th chapter are to: (i) assess the impact of climate economic and environmental goals. Sector specifi c change on the Indian economy, and (ii) explore green transition challenges are elucidated in the future macroeconomic implications through Section 6. Section 7 presents concluding remarks scenarios linked to India’s Nationally Determined with some policy suggestions. Contribution (NDC) commitments. In comparison to a baseline scenario (business as usual [BAU]), 2. India’s Exposure to Climate Risks a modest green transition scenario (characterised by continuation of remarkable achievements of the Geographical Features past decade) and an ambitious green transition II.8 India’s high vulnerability to climate events scenario (with the required rate of reduction in is on account of its unique geographical features emissions consistent with achieving the net zero and economic structure. The Indian sub-continent target by 2070) bring to the fore the often discussed has a diverse topography ranging from the snow- temporal trade-offs between environmental and clad Himalayas in the north, fertile plains and the macroeconomic objectives. These assessments deltaic region in the east, long coastline of more are done taking into account available facts and than 7500 kilometres covering 9 states from India-specifi c peculiarities of the climate-economy the east to the west in the mainland forming the nexus. For instance, India’s monsoon-dependent southern peninsula, and the Thar desert in the agriculture, economically signifi cant long coastline north-west (Chart II.1). This diverse topography and energy-intensive industrial sector highlight is not only exposed to different temperature and the challenges posed by climate risks. precipitation patterns, but also makes it vulnerable II.7 Set against these key motivations, this to extreme weather events posing wide-ranging chapter is organised under seven sections: spatial and temporal implications for the economy. 4 Calculated from Our World in Data based on emissions data from Jones et al., (2023). 35REPORT ON CURRENCY AND FINANCE loss of land and receding coastlines due to Chart II.1: Risks Emanating from Climate Change across Geographical Regions in India coastal erosion, impacting coastal infrastructure, human settlement, and industrial and farm activities. Coastal cities are prone to cyclones and also face acute dangers of frequent fl ooding and salinisation of farmlands and freshwater supplies (Krishnan, et al., 2020). Economic Structure II.10 India’s sectoral composition of GDP is skewed towards services sector, which is globally considered to be emission-light with relatively lower energy intensity of output. Share of services sector in GVA increased from 43.2 per cent during 1980s to 60.9 per cent during 2010s (Chart II.2a). Thar Desert Great Himalayas Indo-Gangetic Plains Heatwaves Landslides River floods Cloudbursts Heatwaves In contrast, the share of agriculture in overall GDP Melting of glaciers Thunderstorms fell from 38.5 per cent to 16.3 per cent over the Coastal Plains and Ghats Central Peninsular Plateau same period, while that of the industrial sector Heavy precipitation Heatwaves Urban floods Forest fires remained broadly unchanged at a little over one- Cyclones Droughts Landslides fi fth of overall GVA. The services-led growth path Note: Map not to scale. since 1980s was associated with a declining Sources: Mani et al., (2018); Krishnan, et al., (2020). trajectory in overall CO emissions growth for 2 about twenty years till early 2000s (Chart II.2b). II.9 For instance, India’s long coastline, There was a brief episode of acceleration in CO also referred to as the coastal plains, features 2 emissions growth which took place between among the most densely populated regions of 2004-05 to 2009-10, which could be attributed the world, primarily owing to its fertile soil and to the spurt in manufacturing activity observed accessibility to ports. The coastal plains provide during that period. CO emissions growth started important hinterlands to some of the major ports 2 decelerating around 2011-12 and followed a of the country. Therefore, from a macroeconomic declining trajectory again during the decade of standpoint, India’s long coastline assumes 2010s. signifi cant importance. On the other hand, global warming leaves the coastal plains susceptible to II.11 A deep-dive into India’s sectoral break fl ooding owing to rising intensity and frequency up shows that metal industries, electricity and of extreme sea level events, in the form of tides, transports, owing to their dependency, both waves, storm surges and rise in mean sea level. direct and indirect, on fossil fuels, are the highest Moreover, risks from global warming also include emission-intensive5 sectors, together accounting 5 CO emission intensities represent the amount of CO released into the atmosphere as a result of direct fuel combustion per unit of 2 2 output. 36MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Chart II.2: Sectoral Composition in GVA and CO Emissions in India 2 a. Decadal Growth and Sectoral Shares b. Annual CO Emissions (5-Year Moving Average) 2 Sources: National Statistical Office (NSO); and Our World in Data. for around 9 per cent of India’s total GVA in renewables to renewables – is critical. In terms 2018-196 (Table II.1). In contrast, wholesale and of the overall energy-mix, fossil fuel-based retail trade, fi nancial and professional services, energy sources, viz., coal, oil and natural gas, including information and computer related continue to dominate energy consumption in services, professional, scientifi c and technical India (Chart II.3). At a disaggregated level, within services, comprising more than 27 per cent of India’s overall GVA, are among the relatively low emission-intensive sectors. Although industrial Chart II.3: Share of Fossil Fuel and Non-Fossil Fuel based sector emissions are higher as compared with Energy Sources in India’s Primary Energy Consumption agriculture and services sectors, emission intensity of agriculture sector, which involves both energy related emissions and non-energy related emissions (such as N O and CH ) is, in fact, 2 4 higher than certain industries such as textiles, machinery and equipment as well as construction activity. Thus, the sectoral composition of the Indian economy – smaller share of the industrial sector and prevalence of low energy-intensive services – helps contain India’s emissions. II.12 With energy production driving around three-quarters of global GHG emissions, Note: Data may not add up to 100 due to rounding off. Source: Energy Statistics 2023, Ministry of Statistics and Programme Implementation (MoSPI). changing the energy-mix – away from non- 6 Table II.1 corresponds to data for 2018-19 as the latest data on emission intensity for India as per the IMF Climate Change Indicators Dashboard are available till the year 2018. 37REPORT ON CURRENCY AND FINANCE Table II.1: Sector-wise Share in GVA and CO Emission Intensity (2018-19) in India7 2 Sector Share in GVA CO Emission 2 Intensity (Metric Tons of CO 2 Emissions per US$ 1 Million of Output) Agriculture, forestry and fi shing 14.8 - Agriculture, hunting, forestry 13.8 84.7 Fishing and aquaculture 1.0 4.1 Mining 2.6 - Mining and quarrying, energy producing products - 382.1 Mining and quarrying, non-energy producing products - 185.2 Manufacturing 18.3 - Food products, beverages and tobacco 2.0 11.9 Textiles, apparel and leather products 2.4 37.8 Metal products 2.6 2796.6 Machinery and equipment 4.6 67.0 Electricity, gas, water supply and other utility services 2.3 - Electricity, gas, steam and air conditioning supply - 7263.8 Water supply; sewerage, waste management and remediation activities - 110.4 Construction 8.1 26.1 Wholesale and retail trade; repair of motor vehicles 12.3 67.8 Accommodation and food services 1.1 22.0 Transport 3.9 - Air transport 0.07 1210.4 Land transport 4.0 378.8 Water transport 0.1 1587.7 Financial, real estate, ownership of dwelling and professional services 22.5 - Financial services 6.0 27.4 Real estate and ownership of dwellings 6.5 48.6 Professional services 8.9 127.9 Public administration and defence 5.7 16.1 Other services 7.1 - Education 3.7 23.2 Arts, entertainment and recreation 0.3 31.8 Human health and social work activities 1.5 17.5 Other service activities 1.6 77.4 -: denotes categories for which data are not reported. Sources: NSO; and IMF Climate Change Dashboard. fossil fuels, coal is the major source followed electricity production is around 60 per cent by oil (Chart II.4a). The share of coal in India’s (Chart II.4b). 7 Sectoral GVA share and sectoral emission intensity are compiled from two different sources which differ in their respective sectoral classifi cations and aggregation. Therefore, in case of some sectors, exact mapping of both the indicators could not be done. 38MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Chart II.4: India’s Energy-Mix at a Disaggregated Level a. Energy Consumption b. Electricity Production Source: Our World in Data. 3. Manifestation of Climate Change in India (Chart II.5). In terms of minimum and maximum temperatures, during 1901-2021 the annual mean II.13 Major indicators that signal about climate- temperature showed an increasing trend of 0.63 related stress are distinct temperature and degree Celsius per 100 years with a rise in the precipitation anomalies. India has witnessed maximum temperature of 0.99 degree Celsius these anomalies quite frequently in recent years. per 100 years. The rising trend in the minimum While annual average temperature in India has temperature was relatively lower than that in the been increasing gradually, the rise has been maximum temperature, with minimum temperature signifi cantly sharp during the last vicennial than increasing by 0.26 degree Celsius per 100 years during any other 20-year time interval since 1901 (IMD, 2021) [Chart II.6]. Chart II.5: Average Annual Temperature in India Chart II.6: Minimum and Maximum Temperature in India Sources: Data.gov.in; and India Meteorological Department (IMD). Sources: Data.gov.in; and IMD. 39REPORT ON CURRENCY AND FINANCE II.16 In 2022, with the onset of summer, Chart II.7: Global and Indian Temperature Anomaly (From 1961-1990 Average Temperature) temperature shot up above the normal across several regions in the country, especially in the northern states of Punjab, Haryana, Delhi, Rajasthan and Uttar Pradesh, with the range being 3 degree Celsius to 8 degree Celsius. March 2022 recorded the highest average maximum temperature with an anomaly of 1.9 degree Celsius above the normal10 and second highest mean temperature with an anomaly of 1.6 degree Celsius since 1901 for the month of March (Chart II.8). Additionally, April 2022 also recorded the second highest mean temperature for the month of April since 1901 (highest occurred in 2010). Sources: Our World in Data; data.gov.in; and IMD. II.17 Such high temperature with the onset of summer led to severe heatwave conditions in the II.14 Such rapid changes in India’s temperature country with implications for agricultural output. profi le have led to the rising temperature anomaly8, For instance, the wheat crop in the rabi season as is also observed globally (Chart II.7). II.15 The past decade (2011-2021) has been an Chart II.8: Mean Temperature and Anomaly from outlier in terms of major temperature irregularities Normal Temperature from the normal trend. The decade has been the warmest on record with temperatures shooting up in the range of 0.34-0.37 degree Celsius above the long period average (LPA). Further, 11 out of the 15 warmest years in India since 1901 have occurred during 2007-2021. Moreover, 2022 and 2021 have been the fi fth and the sixth warmest years on record since 19019, with the annual mean temperature up by 0.51 degree Celsius and 0.44 degree Celsius, respectively, above the 1981- 2010 average level. 2016 has been the warmest year on record so far for India since 1901, with a temperature anomaly of 0.71 degree Celsius Source: IMD. above the 1981-2010 average. 8 Temperature anomaly is defi ned as the difference between the observed temperature and normal temperature (LPA) for that period. 9 As per the IMD, nation-wide record-keeping on temperature commenced from 1901. 10 March 2022 also recorded the third highest average minimum temperature since 1901 with an anomaly of 1.4 degree Celsius for the month of March. 40MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA of 2022 was adversely impacted, leading to II.19 Over the years, the pattern of SWM season lower production. Moreover, heatwaves also led appears to have undergone subtle changes.12 to increased number of forest fi res. By the end Notably, while the average annual rainfall at the of April 2022, almost 70 per cent of India was all-India level during the last vicennial (2000- affected by its spread (IMD, 2022). Moreover, 2020) saw a rise over that during 1960-1999, during May 2022, the heatwave extended into the over a longer time horizon since 1901, annual coastal and the eastern regions of the country. average rainfall in India has gradually declined. High temperatures recorded during the summer Importantly, the average rainfall received during months adversely affected grain fi lling and caused the SWM season has declined by around 8 per early senescence, thus reducing foodgrain yields cent during 2001-2020 as compared with that during the year. In 2023, India experienced the during 1941-1960. Moreover, evidence suggests hottest February on record (in terms of maximum that while dry spells have become more frequent during the last several years, intense wet spells temperature), with the IMD predicting an enhanced have also increased. During 2019-2022, the probability of heatwaves occurring in the central overall rainfall in the country has been higher than and northwest regions of India during the summer the LPA but its distribution, including the pre- and of 2023. the post-monsoon seasons, has been skewed. For II.18 The precipitation pattern in a region instance, in 2019, the post-monsoon rainfall turned is heavily conditional on its geographical out to be 30 per cent higher than the LPA, whereas characteristics.11 In this regard, a dominant in 2020 the pre-monsoon rainfall surpassed the feature of the Indian sub-continent is the south- LPA by 21 per cent (Chart II.9). In 2021, both the west monsoon (SWM) season (June-September), pre-monsoon and the post-monsoon seasons also referred to as the Indian summer monsoon. recorded rainfall higher than the LPA, at 18 per Around 75 per cent of India’s annual rainfall is cent and 44 per cent, respectively. Further, in concentrated during the four months of the SWM 2022, although the annual rainfall was 108 per season, which is vital for the agricultural output cent of its LPA, there were signifi cant spatial during the kharif cropping season, as almost half dispersion in rainfall during the SWM season. For of the country’s net sown area is still unirrigated. instance, the south peninsular and central regions Further, rainfall during this season is important to of India received above normal rainfall (122 per fi ll up the reservoirs in the country which helps cent and 119 per cent higher than their LPA, in the much-needed irrigation during the rabi respectively). In contrast, the north-western parts cropping season. Even though India has become of India received just normal rainfall (101 per cent self-suffi cient in foodgrains, anomalies in SWM, of its LPA), whereas the north-eastern parts of whether temporal or spatial, impact food price the country received below normal rainfall (82 per dynamics and the infl ation outlook. cent of its LPA). 11 Therefore, analysis on changes in precipitation pattern in a region is usually done on the basis of the LPA of rainfall in that particular region. LPA is the average rainfall recorded in a region for a given interval (month or season) over a long period (30 years or 50 years), which acts as a benchmark while studying temporal changes in the precipitation pattern in a region. 12 As per the IMD, the normal dates for the onset and withdrawal of SWM are June 1 and October 15, respectively. 41REPORT ON CURRENCY AND FINANCE Chart II.9: Total Rainfall and Rainfall Departure from LPA a. Total Rainfall b. Rainfall Departure from LPA Source: IMD. II.20 Over the years, the SWM season has also ended with a 10 per cent above normal rainfall, seen onset and withdrawal dates shifting, with which was the highest recorded rainfall in the past the withdrawal being generally delayed and often 25 years (the highest during the period 1990-2019 coinciding with the north-east monsoon or the being 12.5 per cent in 1994). winter monsoon season (Table II.2). For instance, II.21 Climate change is also being manifested during 2019, despite a delayed onset (June 8, in the form of rising intensity and frequency of 2019) and a highly defi cient phase during June extreme weather events such as excessive/ (33 per cent below LPA), the monsoon season unseasonal rainfall (often leading to fl oods), severe temperature fl uctuations (e.g., heat Table II.2: Onset and Withdrawal of waves and cold waves) and high wind speeds Monsoon in India (e.g., cyclones). Since the early 2000s, extreme Year Date of Delay in Date of Delay in weather events have been very frequent in India. Arrival Arrival Withdrawal Withdrawal from India For instance, unseasonal rainfall and heatwaves 2012 5 June 4 days 18 October 3 days have become a regular phenomenon (Chart II.10). 2013 1 June 0 days 21 October 6 days While Maharashtra, Karnataka, Uttar Pradesh 2014 6 June 5 days 27 October 12 days and Madhya Pradesh have witnessed frequent 2015 5 June 4 days 19 October 4 days unseasonal rains over the years, states such as 2016 8 June 7 days 28 October 13 days 2017 30 May (-)2 days 25 October 10 days Rajasthan, Haryana, Punjab, Delhi, Uttar Pradesh 2018 29 May (-)3 days 21 October 6 days and Jharkhand have been the most impacted by 2019 8 June 7 days 16 October 1 days heatwaves with the onset of summer and in the 2020 1 June 0 days 28 October 13 days pre-monsoon months. 2021 3 June 3 days 25 October 10 days 2022 29 May (-) 2 days 23 October 8 days II.22 Moreover, the frequency of cyclonic Source: IMD Annual Reports. storms has increased in India over the years 42MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Chart II.10: Frequency of Unseasonal Rains and Heatwaves in India a. Spatial Distribution of Unseasonal Rainfall in b. Average Number of Heatwave Days during 2010-2022 India during 1998-2022 Sources: Down to Earth (Assisted by the Centre for Science and Environment); and Environment Statistics, MoSPI. (Chart II.11a).13 For instance, as compared and extremely severe cyclonic storms (ESCS) with the normal of 11-12 cyclonic disturbances as compared with severe cyclonic storms (SCS) and 4.8 cyclonic storms observed in the North (Chart II.11b). In 2021, out of the fi ve cyclonic Indian Ocean (NIO) during 1960-2020, there storms that occurred, one was ESCS (Tauktae) were 8 cyclonic storms during 2019. Importantly, and another was VSCS (Yaas) in May (pre- their intensity has also increased with a greater monsoon season) over the Arabian Sea and the number of very severe cyclonic storms (VSCS) Bay of Bengal, respectively. Chart II.11: Frequency and Intensity of Cyclonic Storms in India during 1901-2022 a. Frequency of Cyclonic Storms in India during 1901-2022 b. Frequency and Intensity of Severe Cyclones over the North Indian Ocean (1965-2022) Source: IMD. 13 As per the IMD, the maximum sustained surface wind speed in a cyclonic disturbance is in the range of 17 knots (31 km per hour) to 33 knots (61 km per hour). In the case of a cyclonic storm, the maximum average surface wind speed is in the range of 34 knots (62 km per hour) to 47 knots (88 km per hour). With regard to the intensity of severe cyclonic storms (SCS), the IMD classifi es severe cyclones into the following four categories: severe cyclonic storms (SCS: 48-63 knots), very severe cyclonic storms (VSCS: 64-89 knots), extremely severe cyclonic storms (ESCS: 90-119 knots) and super cyclonic storms (SuCS  120 knots). 43REPORT ON CURRENCY AND FINANCE II.23 The distribution of cyclones between the II.24 Additionally, the incidence of droughts and east coast and the west coast has also changed fl oods has also seen a rise in the recent years. over the years with increased frequency of Floods and droughts are generally classifi ed as cyclonic storms over the Arabian Sea (Ghosh et hydroclimatic extremes. In India, the number of al., 2021). Historically, cyclones in the Arabian droughts has seen a spike, with their severity Sea were fewer as compared with that in the Bay being higher during 1961-2021 as compared of Bengal. During 2019, out of the 20 cyclonic with the period 1901-1960 (Ghosh et al., 2021). disturbances/storms that occurred, a majority of In particular, central India and southern peninsula them were in the Arabian Sea (west coast) [IMD regions are more prone to droughts. Among 2019].14 A spatial distribution of severe cyclones the coastal states, Karnataka and Maharashtra reveals that the number of cyclones that occurred are the major states that have witnessed a in the states of Odisha, Andhra Pradesh and Tamil higher frequency of droughts during 1951-2021 Nadu in the eastern coast of India during 1961- (Chart II.13). Further, as per the UN Offi ce for 2022 was much higher than that during 1901-1960 Disaster Risk Reduction, the number of fl oods (Chart II.12). Additionally, in the west coast, the in India shot up to 90 during the decade of incidence of SCS in Gujarat increased signifi cantly 2006-2015 as compared with 67 during 1996 to during 1961-2022 as compared with Maharashtra 2005. Frequent fl oods are one of the signifi cant and Goa. An increase in the frequency of ESCS contributors to the average annual losses in India over the Arabian Sea and the NIO has been in economic terms from climate related disasters attributed to anthropogenic warming (Murakami et (World Bank, 2021). Studies have indicated that al., 2017). anthropogenic geographical alterations, including Chart II.12: Spatial Distribution and Frequency of Chart II.13: Frequency of Drought/Flood Years in the Severe Cyclones Indian Coastal States during 1951-2021 Source: IMD. Sources: IMD; Nandargi and Aman (2017); and Krishnan et al., (2020). 14 Some of the severe cyclones during 2019 were ESCS Fani and Maha and VSCS Vayu, Hikaa and Bulbul. 44MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA change event also adds to the volatility in both Chart II.14: Number of Natural Disasters in India output and prices. Changing weather patterns may also impact consumer behaviour and preferences, thus infl uencing demand conditions (Andersson et al., 2020; Ciccarelli and Marotta, 2021). II.27 Fighting climate change could also cause a global infl ation shock (Morison, 2021), exacerbating the output-infl ation trade-offs faced by central banks and increasing risks to medium- term price stability (Schnabel, 2021). The potential impact of climate change mitigation policies on energy production and prices could be adverse (Volz, 2017). Note: Storms include events such as tropical cyclones, hailstorms, II.28 The impact of physical and transition thunderstorms and dust storms; extreme temperature includes events such as heatwaves and cold waves. risks on the economy could be direct, indirect Source: Emergency Events – Database (EM-DAT). and through spill-over effects (Illustration II.1). incessant unplanned urbanisation, to be one of Physical risk drivers are often categorised into the prime reasons behind the rising number of city two types: acute risks – related to the occurrence fl oods in India (Yang et al., 2015; Liu and Niyogi, of extreme weather events, and chronic risks – 2019; Krishnan, et al., 2020). associated with gradual shifts in temperature and II.25 Overall, India is relatively more exposed to precipitation patterns (McKinsey Global Institute, fl oods and storms (i.e., cyclones and hailstorms) 2020; NGFS, 2022b), though acute risks can than droughts and heatwaves (Chart II.14). Such also arise due to chronic risks. For example, incidences pose signifi cant risks to agricultural a rise in global temperature may lead to acute production (Krishnan, et al., 2020) and food price changes in the climate by causing heatwaves volatility (Dilip and Kundu, 2020; Ghosh et al., and wildfi res (Jones et al., 2020; Abatzoglou et 2021; and Kishore and Shekhar, 2022). al., 2019). Further, a warmer atmosphere can hold more moisture, leading to an increase in 4. Macroeconomic Impact of Climate Change heavy and concentrated rainfall in several regions in India (IPCC, 2018). These could impact overall output as acute climate events such as destructive fl ash II.26 The impact of climate change on the fl oods cause physical damages to properties, economy could manifest through its adverse infrastructure and crops. impact on the supply potential of the economy as well as by altering demand conditions. Climate II.29 Transition risk drivers, on the other hand, change events are often characterised as adverse are the economy-wide changes arising from supply shocks, which reduce the economy’s the transition towards a low-carbon economy. aggregate output and raise prices, thus posing These may relate to the public-sector policies; adverse implications for the potential growth of the innovation and technologies; or investor and economy. Further, uncertainty following a climate consumer sentiments/preferences facilitating 45REPORT ON CURRENCY AND FINANCE Illustration II.1: Risks from Climate Change and Their Impact on the Economy Impact on the Economy Mitigation/ Supervision Depletion of Transmission Economy(and Resources/Infrastructure Corporates Type of Risks Channels interactions with social sphere) Sectoral Impact/Factor Government Acute Risks (occurrence Market Impact Central of extreme weather Direct Microeconomic Bank events) Impact Fiscal Consequences Supervisors / Regulators Physical Risks Macroeconomic Growth-Inflation InternationalTrade and Indirect Trade-offs Capital Flows Fiscal- Monetary Chronic Risks (gradual Impact Balance Risks from Climate shifts in temperature and Change precipitation) Financial Sector Financial Spill-over Banks Investment Insurance Stability Transition Impact Risks CreditRisk Liquidity Risk Growth with Market Risk Operational Risk Sustainability Sources: Andersson et al., (2020); BCBS (2021); and NGFS (2022b). a greener economy. Therefore, the impact of a years have often been accompanied by signifi cant climate-related transition risk would be conditional temporal and spatial dispersions causing crop upon a host of factors and would involve multiple damages, thereby leading to higher food infl ation underlying dependencies relating to the climate- and its volatility (Dilip and Kundu, 2020; Ghosh et economy nexus. The impact is also more indirect al., 2021). than physical risk. II.31 The IPCC Working Group (WG)-II (IPCC, II.30 Multiple channels through which climate 2022b) report states that India is one of the change impacts the Indian economy has been most vulnerable countries globally in terms of documented in the literature, which is still evolving. the population that would be affected by the sea India, being among the top 10 economies in terms level rise. By the middle of the present century, of vulnerability to climate risk events, is already around 35 million people in India could face witnessing the adverse impact of climate change annual coastal fl ooding, with 45-50 million at risk on its people’s lives and livelihood. For instance, by the end of the century (World Bank, 2021). in 2019, India lost nearly US$ 69 billion due to Further, the agriculture sector and fi sheries would climate related events, which is in sharp contrast face signifi cant adverse consequences due to to US$ 79.5 billion lost over 1998-2017 (UNISDR, the rising sea level and ground water scarcity. 2018). Floods in India during 2019 affected nearly Literature indicates that most of India has been 14 states causing displacement of around 1.8 experiencing adverse effects of temperature on million people and 1800 deaths. Overall, around living standards, as the households most affected 12 million people were impacted by the intense are dependent primarily on the agriculture sector rainfall during the monsoon season in 2019 with for their livelihood (Mani et al., 2018). Further, the the economic loss estimated to be around US$ incidence of fl ash fl ooding is expected to increase, 10 billion. Additionally, the SWM rains in recent if global temperature soars to 2 degree Celsius 46MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA above the pre-industrial levels (Ali and Mishra, Chart II.15: Total Foodgrains Production in India 2018). In terms of ecosystem services, around 600 million of India’s population are facing severe water stress, with 8 million children below 14 years in the urban India at risk due to poor water supply (Niti Aayog, 2019). II.32 India, along with countries such as Brazil and Mexico, face high risk of reduction in economic growth, if global warming raises temperature by 2 degree Celsius as against 1.5 degree Celsius (IPCC, 2018). Climate change manifested through rising temperature and changing patterns of monsoon rainfall in India could cost the economy 2.8 per cent of its GDP and depress the living standards of nearly half of Note: AE stands for Advance Estimates. Source: Ministry of Agriculture, GoI. its population by 2050 (Mani et al., 2018). India could lose anywhere around 3 per cent to 10 per production of foodgrains and horticulture in cent of its GDP annually by 2100 due to climate recent years, refl ecting a faster growth in rabi change (Kompas et al., 2018; Picciariello et al., production (Chart II.15). As most of the excess 2021) in the absence of adequate mitigation and unseasonal rainfall events and cyclones policies. Furthermore, Indian agriculture (along take place during the monsoon or post-monsoon with construction activity) as well as industry seasons, their impact on kharif crop is more than are particularly vulnerable to labour productivity on rabi crop in terms of crop loss. Consequently, losses caused by heat related stress (Somnathan the impact of climate change on infl ation through et al., 2021). India could account for 34 million of the projected 80 million global job losses the production channel appears to be mild at from heat stress associated productivity decline the aggregate level due to geographically well- by 2030 (World Bank, 2022). Further, up to 4.5 distributed foodgrains production as well as the per cent of India’s GDP could be at risk by 2030 localised nature of climate events. owing to lost labour hours from extreme heat and II.34 In contrast, horticulture crops, especially humidity conditions. Moreover, heatwaves could perishables like vegetables, are more exposed to also last 25 times longer, i.e., rise in severity, by extreme weather events, such as cyclones and 2036-2065 if current rate of carbon emissions is unseasonal rainfall during the post monsoon not contained (CMCC, 2021). These estimates, period, thereby temporarily impacting their prices thus, underscore the importance of timely (Kishore and Shekhar, 2022). For example, adoption and faster implementation of climate infl ation in onion prices shot up to 327 per cent in mitigation policies to reduce the adverse impact December 2019 led by unseasonal rains; potato on the Indian economy. prices by 107 per cent in November 2020 due to II.33 Despite the rising frequency of extreme unseasonal rains; and tomato prices by 158 per weather events, India has been reporting record cent in June 2022 due to heatwave and cyclone 47REPORT ON CURRENCY AND FINANCE Chart II.16: Contribution of TOP to Headline and Food Inflation Volatility15 a. Headline Inflation b. Food Inflation Note: TOP is an acronym for Tomato, Onion and Potato. Figures in parentheses represents weight in CPI basket in per cent. Sources: NSO; and Authors’ estimates. led crop damages. In fact, even with a low share usual (in the bottom 20 percentile of the rainfall of these three vegetables (Tomato, Onion, Potato distribution), there is a 12.8 per cent decrease – TOP) in CPI (2.2 per cent), they contribute a in kharif yield and a smaller, yet noticeable large part of the volatility in food and headline decrease of 6.7 per cent in rabi yield. With the infl ation (Chart II.16). Of late, farmers are also rising anthropogenic emissions, the frequency of adapting to such climate events by adjusting their such extreme events could increase even further, sowing and harvesting schedules, while R&D in with implications for agriculture yield, farmers’ agriculture has focused on developing climate income and food infl ation. resilient crops to minimise the adverse impact on II.36 Set against this backdrop, the food production, prices and farmers’ income. macroeconomic impact of some of the key extreme II.35 Overall, the impact of changing weather events, such as fl oods, cyclones and temperature and precipitation patterns on the droughts has been analysed in the context of India agricultural sector is highly non-linear and during the last 10 years, i.e., 2012-13 to 2021-22. manifests with a greater intensity for non-irrigated Similar to Ghosh et al., (2021), 5 states along the regions in extreme circumstances. Estimates western coastline (Gujarat, Maharashtra, Goa, indicate that when a district experiences unusually Karnataka and Kerala) and four states along high temperature (in the top 20 percentile of the the eastern coastline (West Bengal, Odisha, temperature distribution), there is a 4 per cent Andhra Pradesh and Tamil Nadu) together with reduction in agricultural yield during the kharif their eight neighbouring inland states have been season and a 4.7 per cent reduction during considered. Difference-in-difference (D-i-D) panel the rabi season (GoI, 2018). Similarly, when a data regression results indicate that natural district receives signifi cantly less rainfall than disasters adversely impact economic activity, 15 Contribution of subgroup (say, A) to variance in total (A+B) is calculated using the following formula: Contribution (A) = W(A) W(A) Var(A) + W(A) W(B) Cov (A, B) where W is the weight of the sub-group, Var is variance and Cov is covariance. 48MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Table II.3: Difference-in-Difference Panel Data Results D-i-D Infl ation GSDP NSDP Per GSVA NSVA GSVA NSVA GSVA NSVA CAPEX Coeffi cients Capita Agriculture Agriculture Manufacturing Manufacturing Services Services (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 7.34*** 5.01*** 3.24*** 10.69*** 11.72*** 2.58 1.97 6.08*** 4.09*** 20.94*** (1.93) (0.87) (0.80) (2.30) (2.58) (1.88) (2.06) (0.79) (0.63) (4.53) -0.29 1.99* 2.85** -7.89*** -9.06*** 8.17*** 10.40*** 1.03*** 1.99* -4.34 (0.35) (1.12) (1.11) (2.42) (2.72) (2.51) (2.99) (0.30) (0.99) (5.22) -2.19 1.19 1.27 -9.60*** -11.26*** 6.03 7.13*** 1.36 2.20*** -9.03* (1.93) (1.05) (0.98) (2.77) (3.04) (2.17) (2.71) (0.81) (0.80) (4.63) 1.04** -2.71** -2.73** 8.32*** 10.06*** -11.43*** -14.03*** -1.31** -2.80** 4.63 (0.44) (1.24) (1.23) (2.93) (3.21) (2.71) (3.40) (0.56) (1.06) (5.75) Note: ***, **, * represent signifi cance at 1 per cent, 5 per cent and 10 per cent levels, respectively. Figures in parentheses indicate robust standard errors. i.e., lower output growth, while raising infl ation stress (NICRA, 2016). With regard to infl ation, (Table II.3).16 The result contrasts with some literature indicates that the impact of extreme of the earlier studies that suggest an increase weather events is generally short-lived (Freeman in the GDP due to the post disaster investment et al., 2003; NGFS, 2020; Dilip and Kundu, 2020; and multiplier effects (Caballero and Hammour, Ghosh et al., 2021), although heterogenous with 1994). Further, the results do not indicate a respect to the type of the hazard, and varies negative impact on agricultural GVA.17 While India between advanced and developing economies has attained a degree of self-suffi ciency with (Parker, 2018). Nonetheless, the fact that infl ation respect to food production, Government policy and its volatility are driven by such shocks that interventions towards developing climate-resilient make predicting the short-term infl ation path crops and changing cropping pattern - such as diffi cult, pose major challenge for the conduct introducing drought/fl ood/temperature tolerant of forward-looking monetary policy. The results varieties in paddy and pulses especially in the do not indicate a statistically signifi cant rise in coastal states; water-saving paddy cultivation capital expenditure in the coastal states during the methods, advancement of rabi planting dates in calamity year, instead there is an indication that the areas with heat stress; and community nurseries overall capital expenditure falls18 when a calamity as solutions for delayed monsoon arrival - have hits, thus substantiating the fall in economic played a major role in increasing the resilience of growth. Further, a need would also arise for relief India’s agriculture sector against climate related and rehabilitation/reconstruction measures in the 16 The impact of extreme weather events (fl oods, droughts and cyclones) was examined on economic activity (proxied by growth in gross state domestic product (GSDP), net state domestic product (NSDP) per capita, capital expenditure (CAPEX), gross value added (GVA) and net value added (NVA) for agricultural, manufacturing and services sectors) and infl ation by estimating the following equation: , where, represents the dependent variable, s and t represent state and time, respectively. The coeffi cients could be interpreted as follows: Mean of non-coastal states in normal times: ; Mean of coastal states in normal times: ; Mean of non-coastal states in calamity times: ; Mean of coastal states in calamity times: . 17 Similar results have also been noted in the literature (Albala-Bertrand, 1993; Loayza et al., 2012; Ghosh et al., 2021). 18 CAPEX in the year of calamity and not in the subsequent years is analysed. Furthermore, the calamity relief funds such as State/National Disaster Relief Funds are part of the revenue expenditure and not CAPEX. 49REPORT ON CURRENCY AND FINANCE period following a natural disaster, which would on consumption, with the median household require diversion of budgeted funds, thus having experiencing a fall in consumption by 16 per cent implications for the Government’s fi scal defi cit. (Aggarwal, 2019). The rising incidences of cyclones in India are of signifi cant concern of late as they II.37 While the above analysis helps in assessing are infl icting massive loss to infrastructure, life and the extent of the impact of extreme weather events property in and around the coastal states. While on some of the key macroeconomic indicators at the all-India level, it would also be interesting to the loss of life from cyclones has come down over examine the impact of one particular climate event the years19 due to better disaster management, on household-level indicators of economic well- early warning systems, and resilient infrastructure being. An analysis using household-level data such as cyclone shelters, the economic loss has from the National Sample Survey Organisation often been unavoidable as was evident in the case (NSSO) reveals evidence of adverse effects of cyclone Amphan (Box II.1). Box II.1 Economic Impact of Cyclone Amphan on the Coastal Districts of West Bengal and Odisha The super cyclonic storm Amphan was a natural disaster available from the Consumer Pyramids Household Surveys that originated in the Bay of Bengal and affected the (CPHS) database maintained by the Centre for Monitoring coastal districts of West Bengal and Odisha in India and the Indian Economy (CMIE), and monthly data on the number adjoining Bangladesh in May 2020. The economic impact of of households that worked and those that demanded work cyclone Amphan on the coastal districts of West Bengal and under the MGNREGA20 during January-December 2020 Odisha is compared vis-à-vis their non-coastal neighbouring from the MGNREGA Public Data Portal maintained by the districts. While the coastal districts of West Bengal and Ministry of Rural Development, GoI, are used. Odisha have been used for estimating the treatment effect The following equation is estimated to study the impact: (economic impact) of the cyclone, their adjoining non- In constant + coastal districts that lie within 100 kilometres from the ...(1) eastern coast of India are used for the comparison purpose. In order to examine the impact of the cyclone on economic where, In ( ) represents the log of the dependent variables, activity, following Bayer et al., (2022) the difference-in- where d and t denote district and time, respectively. The difference (D-i-D) panel data regression method is used. above equation is also run with district level and month/ Further, economic activity has been represented by an quarter level fi xed effects instead of the and array of measures, such as household consumption, district variables, while keeping the variable ( * level deposit and credit, and employment demand under the ) unchanged. Results of the regression analysis are Mahatma Gandhi National Rural Employment Guarantee presented in Table 1. Act (MGNREGA). The results indicate an increase in credit in districts affected For empirical estimation, RBI’s district-level credit and deposit by the cyclone, implying that fi rms and households need to data available at quarterly frequency during Q3:2019-20 to fi nance disaster related rehabilitation/restoration expenses. Q4:2020-21, monthly data on household-level expenditure This can come either from their own savings or by borrowing and its sub-categories during January-December 2020 (Contd...) 19 As per the Guideline on Management of Cyclones (April 2008), 9893 people died and more than 15 million people were affected during BOB 06 (1999) in Odisha, whereas during cyclone Amphan (2020) in Odisha and West Bengal, 129 people lost their lives, and 4.9 million people were displaced (IFRC 2021; WMO 2021). 20 Under MGNREGA, which is a demand-driven wage employment programme of the GoI, at least 100 days of guaranteed employment in a fi nancial year is provided to every household residing in a rural area. The programme covers all adult members of rural households who volunteer to do unskilled manual work. 50MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Table 1: Difference-in-Difference Regression Results D-I-D Coeffi cients Credit Deposit Total Food MGNREGA (` crore) (` crore) Consumption Consumption Employment (`) (`) (Person days) with Post and Treated 0.037** 0.004 0.012* -0.007 -0.346 (0.077) (0.007) (0.009) (0.006) (0.318) with Time and District fi xed effects 0.037** 0.004 -0.006* -0.022*** -0.346*** (0.018) (0.440) (0.008) (0.007) (0.078) Note: ***, **, * represent signifi cance at 1 per cent, 5 per cent and 10 per cent levels, respectively. Figures in parentheses indicate robust standard errors. from the fi nancial institutions, but the results show no To sum up, the results indicate that natural disasters or signifi cant change in savings. Moreover, a signifi cant decline one-off extreme weather events such as Amphan could in food consumption is observed, especially when district lead to a rise in district-level credit offtake following the and time fi xed effects are accounted for. This may be due occurrence of the event, which may be used for rebuilding and rehabilitation. Therefore, an increased frequency of to the need for reconstruction following cyclone-induced such natural disasters could increase debt levels of both damages, with the reconstruction dependent on bank credit fi rms and households in the high-risk regions. and/or the fund received under post-cyclone rehabilitation schemes of the Government. On rural employment side, Reference: a decline is observed in the employment demand under Beyer, R., Narayanan, A. and Thakur, G. (2022). Natural MGNREGA. This decline could be because of temporary Disasters and Economic Dynamics: Evidence from the migration post cyclone, as Amphan displaced approximately Kerala Floods. Policy Research Working Paper No. 10084, 5 million people. World Bank. II.38 Moreover, for a holistic understanding of signifi cant impact on bilateral migration across the economic impact of climate change, it is also states (Dallmann and Millock, 2017). For instance, imperative to look beyond average macroeconomic drought frequency and severity in the origin state impact and understand various dimensions of increases out-migration, especially for states with distributional consequences. Impact on different relatively higher share of agriculture in total output. sectors could be distinct depending on the nature Further, inter-state migration is also infl uenced by of activity. Irrigated areas may be wealthier both agricultural income and total income in the and, at the same time, less vulnerable to rising destination state relative to the state affected by temperatures. Ownership structure of agricultural the climate event. assets, not only land but also human capital, could infl uence return on assets and thus, condition 5. India’s Transition Towards Net Zero21 households’ response to climate events. II.40 The IPCC has recognised that the II.39 Another dimension of climate change challenges faced due to global warming are could be individuals’ response to climate events mainly on account of the cumulative historical by way of geographical relocation. Evidence based on the all-India Census at the inter-state and current GHG emissions of the developed level reveals that climate related shocks have a countries. However, the cumulative impact has 21 The estimates and the growth-infl ation-emissions trade-offs presented in this section based on the various scenario analyses are indicative in nature and sensitive to assumptions. The relationship could be more complex and non-linear. 51REPORT ON CURRENCY AND FINANCE been assessed to be iniquitous with the developing Chart II.17: Existing Path of the Kaya Factors countries bearing the brunt of climate change [Cumulative Percentage Change over Initial Period (1965)] even as they may be constrained by their limited capacity to respond to its challenges (IPCC- Working Group III, [IPCC, 2022a]). Given the cataclysmic consequences of global warming, it is imperative, however, to reduce GHG emissions by both developed and developing countries alike. Emerging market and developing countries, including India, face the additional trade-off that they must continue to prioritise their own growth and developmental aspirations, while pursuing their climate related nationally determined goals. Against this backdrop, scenarios have been developed in this section on India’s roadmap Sources: Authors’ estimates; and Our World in Data. to net zero by 2070 conditional on different assumptions for real GDP growth on the one the technology factor, India was able to reduce hand, and changes in the share of green energy its energy intensity of GDP steadily overtime by in total energy demand as well as changes in the bringing both structural changes in the economy energy intensity of the GDP on the other to explain and technological effi ciency. The pace of decline the nature of policy trade-offs involved. in energy intensity took a leap in early 2000s. The decline has continued in the recent years as well. II.41 Overall, carbon emission is a product of In contrast, the emission intensity of energy has population and CO emissions per person. This 2 increased, especially in the last decade (2011 can be decomposed into four factors following onwards). Although overall emission intensity of the ‘Kaya Identity’22 (Kaya, 1997). These include GDP (product of energy intensity of GDP and (i) Population; (ii) Income (GDP per capita); (iii) carbon intensity of energy) has declined, further Energy intensity of GDP and (iv) Carbon intensity improvement is required to ensure a declining of energy; wherein (iii) and (iv) are determined by path of emissions in alignment with India’s technology.23 The Kaya Identity is expressed as: NDC. As maximum feasible expansion of GDP = ∗ ∗ ∗ 2 is necessary, technology would have to play a key role in India’s net zero transition. This would (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:3)(cid:10)(cid:4)(cid:3)(cid:11)(cid:12)(cid:10)(cid:7)(cid:8)(cid:13)(cid:14)(cid:8)(cid:15)(cid:16)(cid:17) (cid:18)(cid:19)(cid:5)(cid:20)(cid:13)(cid:3)(cid:8)(cid:9)(cid:3)(cid:10)(cid:4)(cid:3)(cid:11)(cid:12)(cid:10)(cid:7)(cid:8)(cid:13)(cid:14)(cid:8)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7) involve a combination of more effi cient energy- II.42 In India, like most other countries, a mix and technological advances in the industrial large-scale increase in GDP stood out to be the sector leading to lower emission intensity of GDP. key driver of emissions – a stronger driver than Empirical evidence based on cross-country studies the increase in population (Chart II.17). Within broadly suggests that an increase in the share of 22 The “Kaya identity” is a simple mathematical framework to assess the main factors governing global CO emissions. 2 23 (ii), (iii) and (iv) are determinants of per capita emission. 52MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA renewable energy in total energy consumption Table II.4: Scenario Assumptions can have a signifi cant impact in reducing GHG Variables Baseline Alternate Alternate Alternate emissions provided the share of renewables in Scenario 1 Scenario 2 Scenario 3 total energy consumption is suffi ciently high (Chen Real GDP CAGR 6.6 per 9.6 per 9.6 per Growth of 6.6 cent cent during cent during et al., 2022; Hao, 2022). In the Indian context, per cent 2023-24 to 2023-24 to based on the emission factors of different sources (realised 2047-48 2047-48 during and 5.8 and 5.8 of energy obtained from the IPCC Emission Factor 2011-20) per cent per cent thereafter thereafter Database, it has been estimated that a one per Decline CAGR 2.3 Gradually CAGR 2.3 Gradually cent increase in the share of renewable energy in in Energy per cent raised per cent raised the energy-mix reduces CO emissions by around Intensity of (realised 2 GDP during 0.63 per cent. This contributes positively towards 2011-20) achieving the NDC target. Alternative scenarios Carbon 0.3 Raised 0.3 Raised Absorption gigatonne to 3.3 gigatonne to 3.3 relating to the future path of GHG emissions Capacity in (realised in gigatonnes (realised in gigatonnes have been developed to measure the viability the Economy 2016) 2016) of achieving net zero emissions by 2070, while Notes: 1. The required rate of decline in energy intensity increases gradually to 5.9 per cent during 2031-32 to 2040-41 and balancing the dual objectives of achieving high tapers off to around 5.3 per cent by 2070 in alternate scenarios 1 and 3. growth and mitigating climate risks. 2. The decadal share of green energy in alternate scenario 1 (alternate scenario 3) increases from around 5.5 II.43 The baseline scenario assumes that the per cent in 2021-22 to 9.1 in 2030-31 and thereafter increases rapidly to around 70 per cent (82 per cent) by Indian economy will continue to grow at its past 2070-71. trend rate, i.e., compound annual growth rate 3. Emission factors for green and non-green energy sources have been assumed to be 0.0 gigatonnes per tera- (CAGR) of real GDP achieved during the past watt hour and 0.00029 gigatonnes per tera-watt hour, respectively, based on data available for total emissions decade (2011-12 to 2019-20) of 6.6 per cent, and energy-mix from Our World in Data. without any action taken towards meeting the commitments under its NDC (Table II.4). Moreover, these baseline assumptions, net emissions would UN’s population projections for India are used and continue to rise over time, widening the gap from it is also assumed that the energy intensity of GDP net zero target, which underscores the need for defi ned as total primary energy consumption per active policy interventions to close the gap and unit of GDP24 would continue to decline by 2.3 move to the target (Table II.5). per cent annually (the annual average rate of II.44 The fi rst alternate scenario (scenario 1) decline as observed during 2011-12 to 2019-20). assumes that India will maintain its past trend Furthermore, total carbon sequestration from GDP growth (6.6 per cent), while adhering to its various types, such as biological, which refers immediate objectives under the NDCs – reducing to storage of carbon in grasslands, forests, soil emission intensity and expanding the share of and oceans; and technological, such as creating renewable sources in electrical energy to 50 per carbon capture, usage and storage (CCUS), cent by 2030, as well as the long-run objective of is assumed to remain at the 2016 level of 0.3 the net zero emission by 2070. Achieving net zero gigatonne, with no further enhancements. Under by 2070, however, would require even higher levels 24 Energy intensity is calculated as the ratio of total primary energy consumption to real GDP in ` Crore. 53REPORT ON CURRENCY AND FINANCE Table II.5: Energy Transition and GHG Emissions Towards Net Zero by 2070 vis-à-vis 2021-22 Scenarios Gross GHG Rate of Change in Emissions Rate of Reduction in Emission Rate of Reduction in Energy Emissions (Per cent) Intensity (Per cent) Intensity (Per cent) Level by 2070 Cumulative CAGR Cumulative CAGR Cumulative CAGR (Gigatonnes) Baseline 19.2 469.4 3.6 -73.0 -2.7 -67.6 -2.3 Scenario 1 3.3 -1.0 -0.02 -95.7 -6.2 -91.9 -5.0 Scenario 2 32.4 859.6 4.7 -75.2 -2.8 -67.6 -2.3 Scenario 3 3.3 -1.5 -0.03 -97.5 -7.2 -92.1 -5.1 Note: Gross GHG emissions for India at 2021-22 was 3.4 gigatonnes. Source: Authors’ Estimates. of energy effi ciency which could be achieved only 22 level as against 7.2 times higher under the through a sharper decline in energy intensity of baseline (BAU) scenario. GDP over the decades, besides a more effi cient II.45 A second alternate scenario (scenario energy-mix. This would require the annual rate of 2) assumes that India would achieve a higher decline in energy intensity to increase gradually growth trajectory to become an AE by 2047. The from its current level of 2.3 per cent to 5.0 per cent per capita income threshold defi ned by the IMF by 2070. At the same time, the share of green for country-group classifi cation of ‘Advanced energy in total energy consumption would need to Economies’(AEs), ‘Emerging Market Economies’ reach to about 70 per cent by 2070 from around 5.5 (EMEs) and Low-Income Developing Countries’ per cent25 in 2021-22.26 Furthermore, this scenario (LIDCs) has been used to estimate the required remains compliant with the declared NDC target of level of GDP by 2047-48. As per this classifi cation, enhancing natural carbon sink capacity by about India currently belongs to the group of EMEs (per 3 gigatonnes by 2030 along with efforts towards capita GDP at US$ 2,450 in 2022-23) and its per expanding forest and tree cover. Achievement of capita GDP would have to cross the estimated net zero under this scenario would lead gross threshold27 of US$ 33,632 in 2047-48 for it to GHG emissions to peak by 2032-33 and decline become an AE. This translates into a required thereafter to deliver net zero GHG emissions by annual real GDP growth of 9.6 per cent between 2070. The level of energy consumption by 2070 2023-24 to 2047-48. With respect to climate goals, would be 1.8 times higher than that of 2021- however, the BAU assumption is maintained as 25 Based on the data available from Our World in Data, the share of green energy in total primary energy consumption turns out to be around 9 per cent for 2021-22, which is different from the share obtained at around 5.5 per cent from the Energy Statistics India, 2023, GoI. The difference is likely on account of fuel-group composition and adjustments owing to production effi ciencies of fossil fuels. However, broad conclusions from the scenario analyses remain robust to this difference in green energy share. 26 This share is achieved by a remarkable growth in renewable energy generation during 2011-12 to 2021-22 when the CAGR was 12.4 per cent. 27 Within the AEs classifi ed by the IMF, the Slovak Republic has the lowest per capita income of US$ 20,565 in 2022. Accordingly, US$ 20,500 is used as the threshold per capita income for AEs as a broad approximation. It is assumed that real GDP in AEs would grow at an average annual rate of 2 per cent (nominal rate of 4 per cent) up to 2047-48, because of which the per capita income target for India would be rising every year. If the average annual growth in AEs turns out to be higher, then correspondingly the 2047-48 per capita income target would be higher for India. To arrive at the required annual real GDP growth for India, it is assumed that the infl ation differential of 2 per cent vis-à-vis AEs will continue till 2047-48, and accordingly the INR would depreciate by 2 per cent every year with the remaining 2 per cent of the 4 per cent infl ation target being explained by productivity differential (The Economic Times, 2014). The pre-COVID period, 2011-12 to 2019-20, was considered for computing decadal average growth rate. 54MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA in the baseline. Higher growth together with no 2070 would be 3.1 times higher as compared with environmental commitments would translate into 2021-22 level. even higher trajectory of energy requirement and II.47 According to the Climate Action Tracker emissions leading to deviation further away from (CAT), an independent scientifi c project that net zero target by 2070. Under this scenario, tracks government climate action plans across total primary energy requirement and net GHG countries,28 India’s updated NDCs, which include emissions are estimated to be 12.5 times and 10.5 reducing emission intensity of its GDP by 45 per times higher, respectively, as compared with their cent by 2030; achieving 50 per cent cumulative levels in 2021-22. electric power installed capacity from non-fossil II.46 The third alternate scenario (scenario 3) fuel-based energy resources by 2030; and accommodates the twin-objectives of becoming creating an additional carbon sink of 2.5 to 3 billion tonnes of CO equivalent through additional an AE by 2047 and achieving the net zero target 2 forest and tree cover by 2030, will not be suffi cient by 2070. This requires an even more aggressive to meet the level of reductions needed for limiting effort as compared with the targets stated under global warming to 1.5°C. With its updated NDCs, its current NDCs in terms of both energy intensity India’s fair share rating nevertheless improved and energy-mix. Under this scenario, the annual from “highly insuffi cient” to “insuffi cient” (CAT, rate of decline in energy intensity would need to November 15, 2022) [Chart II.19]. increase to 5.4 per cent and the share of green energy in total energy consumption would have II.48 There is also an alternate view that the to increase to about 82 per cent by 2070 (Chart effective way to combat climate change is not II.18). The implied level of energy consumption by by sacrifi cing growth rather to let nations grow Chart II.18: Estimated GHG Emissions - Scenarios Chart II.19: GHG Emissions Modelled Pathways for India as per the Climate Action Tracker Note: The difference in GHG emissions represented in Chart II.18 and Chart II.19 could be primarily attributed to differences in GDP growth assumption. CAT estimates 2030 GDP using IMF GDP growth estimates for 2022-2027 and trend estimates for the rest of the decade, based on World Bank GDP data for 1990-2021. Sources: Authors’ estimates; Energy Statistics India 2023, MoSPI; and Source: CAT. Our World in Data. 28 CAT quantifi es and evaluates climate change mitigation targets, policies and actions of 39 countries. It models emissions required by countries to meet the Paris Agreement of limiting long term temperature increase to 1.5°C. 55REPORT ON CURRENCY AND FINANCE so that they would have more resources for Such growth strategies, however, may confl ict abatement and shifting to greener technology with environmental objectives in the medium- to (Schelling, 1992). The Economic Survey 2023, long-run. Therefore, a more balanced approach, GoI also recognised that continued development wherein the trade-off of maximising growth without may be the best defence against climate change compromising on the environmental commitments, as securing external funding could be diffi cult. is called for (Box II.2). Box II.2 Economic Growth, Energy Consumption and Emissions: The Trade-offs Given the debate on growth and GHG emissions trade-off, Table 1: Parameter Specifi cation of the Model a simple environmental Solow-type growth model (Solow, Parameters Observed Sources 1999; Xepapadeas, 2005) is presented here to simulate the Value per capita real GDP scenarios for the Indian context under Capital income share ( ) 0.67 KLEMS different levels of energy usage and their corresponding GHG Labour income share ( ) 0.3 KLEMS emissions. Higher per-capita GDP should normally require Energy cost share ( ) 0.03 KLEMS higher energy. But, using this framework, it is identifi ed and Labour augmenting 7.1% KLEMS technology growth ( ) showed that suitable changes in technology and energy-mix Population growth ( ) 1.01% World Bank can achieve the dual objective in a less costly manner. A Depreciation rate ( ) 0.1 Banerjee and Basu (2019) standard production function as follows is considered: Savings rate ( ) 0.31 NSO Energy augmenting 2.6% Estimated using World ...(1) technology growth ( ) Bank Data where, is capital, represents the labour, is the Note: Labour income share, energy cost share and labour productivity energy input, energy augmenting technology is B and are used from KLEMS data for manufacturing sector for the period labour augmenting technology is A. The total energy input 2011-12 to 2017-18. The capital income share is obtained as the residual. The savings rate is the average from 2011-12 to 2020-21. contains both brown energy (Ec) and green energy (Eg). Energy augmenting technology growth represents the observed growth Output elasticities of capital, labour and energy are , in the inverse of energy intensity of GDP during 2011-12 to 2019-20. and , respectively. In this set up, apart from the factors (Table 1), the growth rate of the economy is estimated as of production, the effi ciency in their usage determined by 6.6 per cent. This growth rate, however, does not enable technology also contributes to growth. Such improvements India to attain the per capita income level of an AE by 2047. are refl ected in energy augmenting technology growth Therefore, an alternate scenario wherein India’s objective of and labour augmenting technology growth becoming an AE by 2047 is considered. A scenario where (Xepapadeas, 2005)29. The production function follows all the labour augmenting and energy augmenting technology the standard properties of constant returns to scale. Per growth rates are 10 per cent and 6 per cent, respectively, capita capital (k) dynamics is represented as: the output elasticity of energy at 0.06 and the labour income ...(2) share at 0.64 (which resembles that of AEs)30 results in a growth rate of 9.4 per cent which meets the target of India where, is the savings rate, is the per capita output, is becoming an AE by 2047 (Chart 1). In this scenario, the the population growth , and is the rate of depreciation. energy usage works out to be 1.9 times of the present level. Using this framework, the steady-state is solved for a To understand the effect of growth on GHG emissions under given and then various scenarios are simulated under different combinations of energy-mix, the model further different levels of energy input (E) and energy-mix for the explores the contours of emission paths (Chart 2).31 Indian context. Given the baseline parameter specifi cations (Contd...) 29 Dot on top of any variable denotes derivative with respect to time. 30 Source: Average of the US, the UK, Sweden, the Netherlands, Germany, Switzerland, Canada based on data available from Penn World Table. 31 The pollution dynamics is assumed as, . Required parameters for the emission/pollution dynamics are estimated using data from World Bank on per capita CO emission and Power System Operation Corporation Limited. The parameters for emission/ 2 pollution dynamics have been estimated from the available data. 56MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Chart 1: Per capita GDP Trend Chart 2: Emission Dynamics Source: Authors’ estimates. Source: Authors’ estimates. By increasing the share of green energy, it would be possible the per capita income level of AEs. Table 2 summarises to achieve both the objectives of reducing emissions without the model results in terms of emission and compares that compromising on the growth target. In this context, it is with the results of the linear model presented earlier in this worthwhile to note that the commitment of NDC mandates section. The growth model shows that the dual objective of that 50 per cent of the electrical energy must come from net zero emission target and becoming an AE is possible renewables by 2030. The estimates suggest that it is with a lesser energy consumption as compared with the possible for India to become an AE by 2047-48 by having linear model. This is enabled by the assumed improvement only 1.65 times GHG emissions as compared with the in labour productivity and energy effi ciency. current level if 60 per cent of total energy usage is covered by greener sources. Going further ahead, if the economy Overall, the analysis suggests that coordinated policy actions continues to move in the direction of improving the energy- together with technological improvements and structural mix by having 85 per cent of energy from greener sources, changes may be necessary for India to simultaneously meet it is also possible to reach net zero by 2070 while attaining its dual goals of becoming an AE with net zero emissions. Table 2: Summary of the Emission Possibilities Key Results 2021-22 2029-30 2047-48 2070-71 Linear Growth Linear Growth Linear Growth Linear Growth Model Model Model Model Model Model Model Model Total energy consumption (Terrawatt/hour) 9070.1 9070.1 14689.6 11060.1 27238.6 17904.0 27699.6 19047.0 Net emissions (Gigatonnes) 1.7 1.7 1.8 1.1 3.6 1.8 0.0 0.0 Note: Net emissions are derived as total emissions less projected carbon absorptions as part of NDC: 1.5 gigatonnes in 2021-22; 3.1 gigatonnes by 2029-30 and 3.3 gigatonnes by 2047-48 which continues thereafter. Net emissions are also determined by the energy-mix, the path of which could be different across models. References: Banerjee, S. and Basu, P. (2019). Technology shocks and business cycles in India. Macroeconomic Dynamics, Vol. 23(5), 1721- 1756. Solow, R. M. (1999). Neoclassical Growth Theory. Handbook of Macroeconomics, 1, 637-667. Xepapadeas, A. (2005). Economic Growth and the Environment. Handbook of Environmental Economics, 3, 1219-1271. II.49 The Network of Central Banks and National Institute Global Econometric Model Supervisors for Greening the Financial System (NIGEM) – to produce policy insights over the (NGFS) has linked the standard integrated short-run, wherein the framework considers assessment models (IAMs) with a global both physical and transition risks from macroeconomic model – referred to as the climate change. The NIGEM analyses the 57REPORT ON CURRENCY AND FINANCE Chart II.20: Impact on India’s GDP a. Chronic Physical Risk b. Transition Risk Sources: NGFS; NIGEM; and Authors’ estimates. macroeconomic impact under six standard II.51 Since the economy is impacted by both global scenarios (Annex II.1). types of risks, the combined effect needs to be visualised for policy insights (Chart II.21). Global II.50 Taking into account the global NGFS scenarios of ‘current policies’ and ‘NDCs’ have the scenarios, overall macroeconomic implications for highest negative impact on output, mainly due to India are illustrated through the NIGEM model. The dominance of physical risk impact in the case of model reveals that more the ambitious mitigation India. The reason for ‘NDCs’ having a more negative goals are at a global level, lesser would be the impact than ‘Net Zero 2050’ and ‘Below 2°C’ is that, negative impact of physical risks on GDP vis-à- vis the baseline of no impact of climate change (best case scenario) [Chart II.20a]. However, the Chart II.21: Combined Impact of Physical and Transition Risks on India’s GDP dynamics are different when transition risks are considered (Chart II.20b). The divergent net zero and delayed transition scenarios cause larger negative impact on GDP on account of temporal and sectoral imbalances in impact realisation and transmission. The other scenarios, i.e., ‘below 2°C’, ‘Net Zero 2050’ and ‘NDCs’ have broadly similar dynamics and lead to lower sacrifi ce of growth. Thus, in these scenarios, higher physical risk can cause a decline in GDP, by around 1 to 3 per cent from the baseline level in 2030. However, by 2047, the impact can be far more negative at around 3 to 9 per cent depending on the extent of Sources: NGFS; NIGEM; and Authors’ estimates. risk mitigation. 58MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Chart II.22: Impact on India’s Inflation a. Chronic Physical Risk b. Transition Risk Sources: NGFS; NIGEM; and Authors’ estimates. whereas NDCs act as constraints on the individual initial years owing to the imposition of carbon tax countries, the other scenarios are comparatively and other mitigation policies which raise the cost of more restrictive at the global level and thus, entail production initially, but the impact gradually wanes lower physical risk across countries over time. In towards the baseline, i.e., the deviation tends to essence, global commitments and coordination zero (except for the delayed transition scenario) towards climate risk mitigation remains crucial, [Chart II.22b]. This could possibly be due to the without which individual economies, including falling cost of green transition over time on account India, may be signifi cantly impacted due to the of wider availability and adoption of technology32 possibility of globally inconsistent mitigation efforts as well as economic agents’ expectations getting and insuffi ciency of individual NDCs. progressively aligned with the nation’s transition path. II.52 Physical and transition risks also impact infl ation through macroeconomic linkages. In the II.53 Overall, the effect of climate risks on infl ation is dominated initially by the impact of case of physical risks, both infl ation and its volatility green transition before getting overwhelmed increase over time, but the extent of increase is by physical risks (Chart II.23). This is because maximum under the scenarios of “current policies” physical risks are expected to rise over time with and “NDCs” (Chart II.22a) [these scenarios also climate change, whereas transition risks would involve higher growth sacrifi ces as discussed take effect from the time when a risk mitigating earlier]. Since physical risks are expected to policy is implemented. rise over time impacting aggregate supply, in the absence of suffi cient risk mitigating measures, II.54 A comparative picture of the impact of the impact on infl ation is assessed to be more physical risks and transition risks for EMEs like under lesser ambitious mitigation goals. In case of India with that of an AE like the US suggests that transition risks, however, infl ation increases in the the adverse impact of climate change in India is 32 In other words, the relative price of renewable energy falls over time acting as a downward pull to aggregate infl ation. 59REPORT ON CURRENCY AND FINANCE impact on growth and infl ation. Therefore, while Chart II.23: Combined Impact of Physical and Transition Risks on India’s Inflation in the short-run, sticking to the ‘NDC scenario’ produces a minimal impact on India’s infl ation, a delayed response can shoot up infl ation over the medium-term. In terms of the impact on GDP, although the NDC commitments come with a greater negative impact for India due to its high sensitivity to physical risk, concerted efforts globally towards climate risk mitigation would signifi cantly help smoothen green transitioning over time. II.56 Overall, how India’s carbon emission trajectory may evolve in future would depend on GDP growth and policy actions (in line with NDC Sources: NGFS; NIGEM; and Authors’ estimates. or otherwise), and the trade-offs in the short- run versus medium-to long-run. First, as per the signifi cantly higher due to greater susceptibility to baseline – GDP growth of 6.6 per cent and no physical risks (Box II.3). policy actions – GHG emission level will rise from II.55 Thus, in terms of the NGFS scenarios 3.4 gigatonnes in 2021-22 to 4.5 gigatonnes in factoring in India’s NDC commitments, a transition 2030-31 and further to 8.2 gigatonnes by 2047-48. towards a less carbon economy has a limited Second, the current level of actions as per NDC Box II.3 Climate Change Impact on GDP – A Comparative Assessment Since the NGFS sets out differential targets for countries Table 1: Impact on GDP across the globe, with stricter restrictions especially for the Scenarios (Deviations Impact on Impact on Impact on AEs, the transition risk impact could be higher for them in from Baseline in GDP GDP GDP the short-term. On the other hand, as the Indian economy Per cent) (USA) (World) (India) is more vulnerable to physical risks from climate change (as Below 2 ̊C in 2030 -1.93 -1.67 -1.91 elaborated in section 2) the impact may be more for India. Below 2 ̊C in 2050 -2.29 -3.02 -3.80 Due to the higher sensitivity to physical risks as refl ected NDC in 2030 -2.59 -2.14 -3.16 in India’s high vulnerability ranking as discussed earlier, NDC in 2050 -5.56 -5.74 -9.08 t he Indian economy gets deeply impacted in the long-term Current Policies in 2030 -1.55 -1.63 -2.86 Current Policies in 2050 -5.09 -6.05 -9.87 under a lenient risk mitigation plan, i.e., under the scenarios of “current policies” and “NDCs”. Additionally, the impact on Source: NGFS, NIGEM. India is not too different from the global average, except under these two scenarios (Table 1). Moreover, India is different Reference: from most of the AEs in terms of the composition of energy basket, with the dominance of coal under fossil fuel, which NGFS. (2022a). NGFS Scenarios for Central Banks and could partly explain the differential impact. For example, in Supervisors. the case of the US, the energy-mix and electricity production structure are signifi cantly different from India, with relatively higher use of renewables and non-coal based sources. 60MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA commitments, will still be insuffi cient to achieve may be lower by 3.2 per cent from the baseline in net zero by 2070. Net zero by 2070 calls for 2030 and by 8.1 per cent by 2047, suggesting not accelerated actions on top of NDC commitments much gain. However, a net zero by 2050 strategy such as (i) further reduction in energy intensity instead of by 2070 results in lower loss of output – progressively by 2.8 per cent annually until 2030- by 2.2 per cent from the baseline in 2030 and 3.2 31 and by around 5.5 per cent thereafter and (ii) per cent by 2047 – implying this may be a better increase in the share of green energy in primary policy option globally. As per current policies/ energy consumption to 9 per cent by 2030-31, 27 NDCs, the impact on infl ation is expected to be per cent by 2047-48 and 70 per cent by 2070. This minimal, even though its volatility is expected will result in rise in GHG emissions at a slower to increase. Overall, delayed and lenient policy pace from the current level of 3.4 gigatonnes actions generate adverse impact on both growth in 2021-22 to 4.2 gigatonnes in 2030-31 before and infl ation outlook in the medium-to long-run. declining modestly to 4.1 gigatonnes by 2047-48. 6. Sectoral Green Transition Challenges II.57 Second, the objective of becoming an AE by 2047 implies a higher annual GDP growth II.59 The impact of climate change could be of 9.6 per cent, which would pose additional different across sectors. Further, as sectors have challenges for achieving the net zero target. different technology pathways for decarbonisation, With GDP growth of 9.6 per cent and no policy a uniform approach may not be the best strategy. actions as above, GHG emission level may rise In view of the diffi cult policy trade-off between from 3.4 gigatonnes in 2021-22 to 5.5 gigatonnes containing near-term adverse output impact in 2030-31 and further to 15.5 gigatonnes by by delaying policy actions versus larger output 2047-48 and 32.4 gigatonnes by 2070-71. Under losses in the medium-run due to delayed policy this scenario, achieving net zero by 2070 calls for actions, a sector-specifi c approach to climate risk even further accelerated actions than what was mitigation can help in minimising the trade-off needed under 6.6 per cent growth rate. Over and costs. A pragmatic approach would be to target above the NDC commitments, it would require those sectors i) which have higher contributions (i) a sharper decline in energy intensity at the to the current levels of emissions, and ii) which rate of 5.6 per cent per annum from 2031-32 (ii) are more amenable to mitigation strategies - both increase in the share of green energy in primary in terms of costs as well as marginal gains. energy consumption from around 5.5 per cent in II.60 In this context, four key sectors – electricity, 2021-22 to 9.1 per cent by 2030-31, 28.7 per cent mobility, industry and agriculture – have been by 2047-48 and around 82 per cent by 2070-71. identifi ed which are responsible for the bulk of II.58 An assessment of physical and transition the GHG emissions in India. Within the industrial risks using the global NIGEM-NGFS model sector, the policy options and implications of suggests that under current policies, India’s GDP decarbonisation in select hard-to-abate sectors may be lower by 2.9 per cent from the baseline such as steel, cement and chemical industries are in 2030, and 8.7 per cent by 2047. With each specifi cally examined. The objective is to assess country following their own NDCs, India’s GDP the current production structure and technology 61REPORT ON CURRENCY AND FINANCE as well as the emerging trends in consumption Table II.6: Electricity Tariff in India in 2021-22 so as to provide insights on how the envisaged Source Tariff (`/kwh) transition path at the macro level can be realised. Conventional (APPC)* 3.85 Electricity Sector Nuclear 3.42 NHPC Ltd. 3.36 II.61 For addressing climate change concerns Solar 1.99 Wind 2.44 on a sustainable basis, transforming the electricity *Average Power Purchase Cost (APPC). sector will be crucial given that around 70 per cent Note: The tariffs for solar and wind are the lowest tariffs discovered of electricity in India is produced from thermal in various auctions conducted by Solar Energy Corporation of India (SECI). power plants. This makes the Indian electricity Sources: Central Electricity Authority (CEA); NHPC; and SECI. grids highly carbon-intensive among major economies (Chart II.24). cent and 70 per cent, respectively, during 2009- 19 (UNDP, 2022). In India too, electricity tariffs II.62 India has embarked upon an ambitious are lower for solar and wind (Table II.6). plan of achieving 500 GW of total renewable energy capacity by 2030 and raising the share of II.63 Globally, not a single fossil fuel plant renewable electricity generation to 50 per cent. features among the 20 cheapest power plants One of the key factors that may help in facilitating (Table II.7). Furthermore, the levelised cost of this transition without a major increase in the electricity (LCOE) generated from solar power cost to the overall macroeconomy will be the and wind, including integration costs, is expected advancement in technology, which has led to to fall further by around 40-55 per cent and 20-25 notable fall in the prices of renewable energy in per cent, respectively, by 2030 (BP, 2022). This recent years. Globally, the price of electricity from could propel the transition to a cleaner energy- solar and onshore wind has declined by 89 per mix. India has one of the largest synchronous inter-connected grids in the world which operates on one frequency to balance electricity demand Chart II.24: CO Intensity of Electricity Grids (2019) 2 and supply over a huge geographical area, making the task of adapting to variable renewable energy (VRE) sources relatively easier. However, massive investments are required in inter-state transmission systems (ISTS) to avoid congestion during peak hours. India plans to invest `2.8 lakh crore in ISTS for renewable energy evacuation by 2030 (The Economic Times, 2022b). Mobility Sector II.64 Mobility sector, with a share of around 14 per cent in India’s overall CO emissions, is 2 the fastest growing source of emissions in India. A breakup of energy consumption and CO 2 Source: Our World in Data. emission in this sector indicates that road mobility 62MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA Table II.7: Plant Level Levelised Cost of Electricity (LCOE) Calculation Country Plant Category Total Capital Operations and Fuel Costs LCOE (US$/MWh) Costs (US$/MWh) Maintenance (US$/MWh) Costs (US$/MWh) Sweden Nuclear 5.9 12.9 9.3 28.2 Denmark Wind 22.9 6.3 0.0 29.2 Switzerland Nuclear 7.4 12.9 9.3 29.6 France Nuclear 8.4 12.9 9.3 30.7 Norway Wind 20.9 9.8 0.0 30.8 USA Nuclear 5.2 18.7 9.3 33.3 Brazil Wind 27.6 6.0 0.0 33.6 France Solar 30.4 3.5 0.0 33.9 USA Solar 30.4 4.2 0.0 34.6 USA Wind 26.5 8.7 0.0 35.2 India Solar 31.9 3.7 0.0 35.6 India Wind 32.2 3.7 0.0 35.9 Note: There is no fuel cost for wind and solar energy. The fuel cost for nuclear energy is assumed to be same across countries. Source: International Energy Agency (IEA). contributes the maximum to CO emission develop a multi-modal transportation system 2 (Table II.8). aims to integrate various modes of transport such as roads, railways, airways, and waterways II.65 In terms of transport infrastructure, to reduce logistics costs and improve effi ciency. passenger kilometers (kms) and freight ton-kms By improving the effi ciency of the transportation in roadways have grown by 10 times and 5 times, system, the scheme will help reduce respectively, during 2000-2017, whereas in the vehicular emissions and promote sustainable railways they have grown by 2.5 times and 2 transportation. times, respectively (Chart II.25). The Gati Shakti scheme launched by the Indian government to II.66 In order to reduce overall emissions arising from the transport sector, there is a need for a greater focus on developing railway infrastructure, Table II.8: Transport Sector - Energy metro network in cities apart from increasing the Consumption and Emission (2019) share of electric vehicles (EVs) in both passenger Energy CO Emission 2 and commercial vehicles segments. The Union Consumption (Twh) (Million tons) Government has taken several initiatives in this Road 1144.0 292.9 direction. Petrol 337.8 87.5 Diesel 691.4 184.5 II.67 India has 742 kms of metro rail lines Gas 114.0 20.9 Aviation 120.0 24.8 operational in 19 cities and about 1037 kms is Railways 43.7 22.7 under construction in 27 cities across the country Electricity 20.0 16.4 (The Economic Times, 2022a). With India’s rapid Diesel 23.7 6.3 Total 1307.7 340.4 pace of urbanisation and the completion of under construction metro lines, the annual ridership is Sources: Energy Statistics of India; Indian Railways; PIB; and Authors’ estimates. expected to increase substantially. 63REPORT ON CURRENCY AND FINANCE Chart II.25: Passenger and Freight Movements by Modes of Transport a. Passenger KMs - Road and Railways (in trillions) b. Freight Tons Kms Note: PKM stands for passenger kms. Source: OECD. II.68 Further, mass electrifi cation of the road April 27, 2023, India had 7010 public EV charging transport system aided by a range of policy stations, which is low by global standards. The initiatives and technology trends, especially via Government over the last ten years has undertaken the EVs, would help curtail emissions signifi cantly. a series of measures to incentivise adoption of Globally, the sales of EV cars have crossed 10 EVs in the country, through tax incentives for EV million mark in 2022 with a y-o-y growth of 55 owners and development of public EV charging per cent. The share of EVs in total new sales is infrastructure. rising rapidly in India and the sales have crossed 1 million in 2022 (Chart II.26). Currently the two Chart II.26: EV Registrations in India and three wheelers, which are mostly used for passenger transport and comprise around 76 per cent share of vehicles in India, dominate the EV sales (up to March 2023, Vahan). Moreover, 64 per cent of petrol consumption in India is by two/ three wheelers (MoPNG, 2015). In recent years, the three-wheeler e-rickshaw has become the fi rst mile and last mile connectivity option in all the cities displacing the traditional petrol/diesel run three wheelers for short run commute. II.69 EV penetration, however, faces challenges of high upfront cost of EV vis-à-vis their internal combustion engine (ICE) counterparts and the * Up to February 2023. lack of adequate EV charging infrastructure. As of Source: Vahan Registration. 64MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA II.70 Within the mobility sector, shipping and Chart II.27: Decomposition of Energy Use Transition aviation are hard-to-abate due to the lack of cost-effective low-carbon alternatives. Bio-fuels, although expensive, is the most mature technology available today which could decarbonise aviation and shipping. Industrial Sector II.71 The industrial sector may be the most diffi cult to decarbonise as it is highly energy- intensive in nature and also has large fi xed investment. Decarbonisation in this sector would require major changes in production processes, expensive retrofi ts, development and deployment Note: The red bar shows the overall change in CO emissions while the blue of new technologies, as well as changes in 2 bar indicate the decomposition of emission from the manufacturing sector. Source: Authors’ estimates. business practices and policies. Despite these challenges, India has managed to contain the in energy consumption, but the actual increase extent of emissions with a fall in energy intensity of was contained at 315 billion kwh mainly because output (Table II.9). With this, the energy elasticity of the improvement in the energy intensity and of growth, measured as ( ΔE/E ), stood at 0.53 ΔGVA/GVA the structural effect refl ecting the shift in the in registered manufacturing sector during 2009- composition of industries towards less energy- 2020. intensive industries (Chart II.27). Improvements II.72 Decomposition analysis of industrial in energy effi ciency can be attributed to the energy usage following Kant et al., (2022) continuous techno-economic improvements in indicates that ceteris paribus, the output effect the industries. The favourable structural effect alone would have led to a rise of 530 billion kWh is indicative of the rising share of less energy- intensive industries in industrial GVA. This Table II.9: Manufacturing Firms in India: structural effect is expected to play a much bigger Energy Intensity, Output and Emissions role going forward as high-end manufacturing like Year Energy CO GVA (at Energy Carbon 2 electronics is more knowledge intensive rather (billion (million 2011-12 Intensity Intensity kWh) tonnes) prices, (kWh per (gram of than material and energy intensive. ` trillion) rupee CO per 2 II.73 Overall, Indian industries largely depend GVA) rupee GVA at on coal for their energy requirements (Table II.10). 2011-12 Within industry, metals, non-metallic minerals prices) and chemicals together account for 78 per cent 2009-10 921 320.1 7.49 0.12 43.0 of the total industrial coal usage, while others 2019-20 1237 491.8 12.32 0.10 39.9 primarily use electricity (Table II.11). However, Source: Authors’ estimates; For methodology see Kant et al., a gradual shift is underway within these energy- (2022). 65REPORT ON CURRENCY AND FINANCE Table II.10: Share of Fuels in Indian Steel Manufacturing Sector II.74 Globally, India is the second largest Fuel (as per cent of energy-mix) 2009-10 2013-14 2019-20 producer of steel with 124.4 million tons of crude Coal 40.8 47.2 45.5 steel production even though the per capita Gas (LPG, Biogas, Natural Gas, 17.9 9.3 11.2 consumption at 74.7 kg is signifi cantly lower Coal Gas) than the world average of 229 kg (World Steel Diesel 3.8 2.6 5.5 Furnace Oil 9.8 6.4 8.5 Association, 2019-20). The industry is expected Kerosene 0.2 0.4 0.3 to grow rapidly, with steel production increasing Electricity 16.3 21.5 22.9 three-fold by 2040 (IEA, 2021). Currently, around Other (Wood, Solar, Fuel Oil) 11.3 12.6 6.0 56 per cent of India’s steel production is based Source: Authors’ estimates. on the less polluting and less-energy intensive intensive manufacturing industries, with the share electric arc furnace (EAF) method as compared of electricity rising from 12.6 per cent to 18.0 per with the more energy-intensive and coal- cent during 2009-2019. dependent integrated blast furnace and basic Table II.11: Fuel Usage in Indian Manufacturing Sector (2019-20) Industrial Sector Total Energy Share in Total Consumption (Per cent) Consumption (Gwh) Coal Petroleum Gas Electricity Other Metals 409200 61.8 9.8 5.1 20.7 2.5 Non-Metallic Minerals 202902 62.0 8.2 13.8 12.1 3.9 Chemicals 166697 33.7 9.5 29.8 18.4 8.5 Textiles 83219 45.2 10.4 2.0 35.6 6.8 Food 78085 23.6 23.0 5.3 29.3 18.8 Refi nery 49917 1.3 27.9 52.7 6.7 11.4 Paper 45151 66.3 9.7 0.3 15.3 8.3 Electricity, Gas, Steam, AC 30529 83.7 3.1 2.7 8.3 2.2 Electric Equipment 29261 0.1 55.4 1.6 41.7 1.1 Rubber 28534 15.9 22.5 2.4 54.9 4.3 Pharma 24478 20.2 24.2 3.9 40.7 11.0 Motor Vehicles 20002 0.2 28.5 16.4 52.9 2.1 Fabricated Metals 12561 5.9 35.1 8.1 45.9 5.0 Machinery 11523 2.8 34.0 3.4 53.1 6.8 Beverages 10607 31.4 20.3 0.4 21.0 26.8 Apparel 5890 7.2 41.1 1.1 40.1 10.5 Transport Equipment 5539 0.9 40.4 6.9 47.7 4.1 Motor Vehicle Repair 4604 0.0 77.8 5.9 15.5 0.7 Wood 2909 16.8 21.0 0.2 44.9 17.1 Other 2745 0.2 34.5 3.3 58.2 3.9 Leather 2698 7.9 29.8 1.1 53.6 7.6 Electronics 2292 0.0 25.5 1.9 72.2 0.4 Warehousing 1972 0.0 40.8 1.6 56.8 0.7 Media 1683 0.3 31.6 0.8 59.6 7.7 Tobacco 1096 29.3 28.8 1.9 29.5 10.5 Farming 1073 3.9 20.0 3.9 70.4 1.8 Waste Disposal 924 3.6 34.3 13.2 30.5 18.5 Source: Authors’ estimates. 66MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA oxygen furnace (BF/BOF). Nonetheless, with be replaced by bio-based feedstock like bio- India’s demand for steel expected to rise in the naptha. India’s plans to achieve a 20 per cent33 coming years, there is a need to diversify towards blending rate for ethanol by 2025 and further low carbon-intensive production processes, such ramping up of biodiesel production could act as as harnessing VRE and its integration with EAF, in a catalyst as bio-naphtha is generated as a by- order to decarbonise steel sector. product in the process and could be used as a feedstock. Bulk of the biofuel production is based Cement on the fi rst-generation technology that converts II.75 India is the second largest consumer of edible biomass such as sugarcane, rice, maize cement globally, after China. World-wide, the for ethanol and jatropha for biodiesel which is cement industry is one of the major hard-to-abate land and water intensive. Further, upgrading industries owing to the extremely high temperature production technology by switching to the second- required in the kiln (around 1600 degree Celsius) generation bioconversion technology, which and the chemical process of breaking down uses cellulose-based, non-edible biomass and limestone into calcium oxide and CO . Near-term 2 agricultural waste, could also lead to an overall emission reductions may be achieved through reduction in emissions. Efforts to better utilise alternative cement constituents, such as calcined biomass from agri-residues34 and re-cycling of clays, which would reduce the clinker-to-cement plastics are effective ways to reduce emissions ratio in blended cements. in this industry.35 Chemical Industries Manufacture of Ammonia Ethylene II.77 Ammonia has multiple industrial II.76 Ethylene, which is used as a raw material applications, however, around three-quarters of its in the manufacture of plastics, requires oil-based production is primarily utilised for manufacturing feedstock for its production. In India, nearly 67 fertilisers. Ammonia production, which operates at per cent of the production is naphtha-based a very high temperature and is diffi cult to electrify, and the rest is gas-based. There are no process uses fossil fuel as a feedstock. While the hydrogen emissions as the carbon gets captured in the used in this process is currently derived from natural products, even though the captured carbon is gas, it is possible to use renewable hydrogen as a ultimately released in the atmosphere through feedstock instead. However, renewable hydrogen the incineration of plastics over the lifetime of the is more expensive to produce than hydrogen from product. Furthermore, ethylene production uses natural gas. Going forward, as electricity prices very high temperature which is diffi cult to electrify moderate with the use of cheaper renewable using current technologies. To decarbonise sources, hydrogen sourced from electrolysis could ethylene production, oil-based feedstock may become cheaper than natural gas. 33 India achieved the target to blend 10 per cent ethanol in petrol in 2022 well ahead of schedule. 34 The current availability of biomass in India is estimated at about 750 million metric tonnes per year (MNRE, 2022). Further, the surplus biomass availability is estimated at about 230 million metric tonnes per annum covering agricultural residues. 35 Around 34.7 lakh tonnes per annum of plastic wastes were generated by India during 2019-20, of which 50 per cent is recycled in India (Central Pollution Control Board, 2019). 67REPORT ON CURRENCY AND FINANCE II.78 Initiatives are already underway in this used in energising 20 million water pumps across direction. Greenfi eld investments in setting up the country. The dedicated agricultural feeder ammonia plants at the site of wind-solar hybrid systems in many states could be exclusively run projects would ensure economic viability. For on renewables when the generation is high and example, the Government of Rajasthan is in the may be switched off at low variable renewable process of setting up a green ammonia facility generation period. and a renewable energy power plant, which is II.81 In sum, a national sector-specifi c approach expected to produce one million tonnes of green to green transition can succeed only if reasonable ammonia per annum. Also, from the demand-side, and sustained progress is achieved across all rationalising the overall use as well as using nano key carbon emitting sectors, which would require urea could potentially reduce the consumption of active participation by all stakeholders, ranging urea. from state and local governments to private Agricultural Sector corporates and NGOs. Alongside signifi cant technological breakthroughs required to achieve II.79 Apart from being affected by climate change, agriculture itself is a major source of GHGs. green transitioning in the hard-to-abate industrial Around 14 per cent of GHGs are emitted by the sectors, policy focus on sectors with low emission agriculture sector in India. The agriculture sector intensity such as textiles, fi sheries, land transport is the main source of CH and N O emissions. CH and services could play a complementary role 4 2 4 emissions occur mainly due to livestock rearing by supporting India’s growth and employment (enteric fermentation and manure management) objectives. India has demonstrated its capacity and rice cultivation. N O is principally emitted due to achieve transformational changes in some 2 to the application of fertilisers to agricultural soils. sectors, such as renewables and agriculture Within agriculture, 54.6 per cent of GHG emissions (developing climate-resilient cropping patterns are due to enteric fermentation, followed by 17.5 and seeds), and with sustained policy focus per cent from rice cultivation, 19.1 per cent from high and sustainable growth objective could be fertiliser applied to agricultural soils, 6.7 per cent achieved notwithstanding unavoidable trade-offs from manure management, and 2.2 per cent in the short and medium-run. due to fi eld burning of agricultural residues. The CH emitted from enteric fermentation and rice 7. Concluding Observations 4 cultivation is re-converted to CO in the upper II.82 Research on climate change has gradually 2 atmosphere and is re-captured by plants which evolved to assume prominence in public policy goes as feed to livestock. Nevertheless, due to debate. Fuelled by the changing temperature and high global warming potential of CH , it is not precipitation patterns, and a rising incidence of 4 considered as climate neutral in the short-run. extreme weather events globally, public awareness Demand side interventions like judicious use of about the consequences of climate change has fertilisers can reduce N O emissions. 2 gained ground, so much so that climate policies II.80 Further, the agriculture sector accounts have increasingly become target-oriented with for about 17 per cent of total electricity consumed economies aiming to achieve net zero emissions along with 5.9 lakh tonnes of diesel which is mainly within a defi ned timeline. 68MACROECONOMIC EFFECTS OF CLIMATE CHANGE IN INDIA II.83 India’s diverse topography makes it on an annual average basis as compared with the vulnerable to signifi cant risks from climate change, current rate of decline of 2.3 per cent in 2021-22. evidences of which are increasingly visible in rapid In such a scenario, the implied level of energy changes in temperature; variations in SWM rains; consumption by 2070 would be 3.1 times higher rising frequency and intensity of extreme weather as compared with the 2021-22 level. events such as unseasonal rainfall, heatwaves, II.86 Aiming to achieve an overall cyclones and fl oods. Further, the aspiration of macroeconomic policy balance would help provide becoming an AE by 2047 could pose a unique the much-needed resilience and sustainability to development challenge for India, wherein it has the economy, given the enormous scale and wide- to balance between economic and environmental ranging nature of the policy measures needed goals. In this regard, India’s climate action policy for climate action. Moreover, the implications of has embraced climate targets defi ned in terms of policy actions could be widespread ranging from its NDCs, while paving a step towards achieving sector-specifi c imbalances in the short-run to net zero emissions by 2070 by declaring low economy-wide frictions and adjustments in the carbon transition pathways in key economic medium to long run. Empirical estimates using a sectors. standard environmental Solow-type growth model II.84 While the manifestation of climate change to analyse the relationship between economic has become evident, its impact on the Indian growth, energy usage and emissions indicate that economy could be manifold, by denting the supply the economy may optimise on output and GHG potential of the economy as well as by altering emissions by having the right energy-mix – a shift demand conditions. Empirical analysis indicates to green energy from brown energy. Further, the that natural disasters adversely impact economic twin objectives of becoming an AE by 2047 and activity, i.e., lower output growth, while raising achieving the net zero target by 2070 could still be infl ation. Moreover, disaster-affected regions could possible if factors of production other than energy also witness a decline in their consumption of – labour and capital – witness productivity gains on essential commodities owing to the diversifi cation the back of government policies and technological of funds for post-disaster reconstruction/ breakthroughs. rehabilitation needs. II.87 Additionally, India’s susceptibility to II.85 Further, scenario analyses to chalk out physical risks emanating from climate change India’s transition to the net zero target by 2070, raises signifi cant concerns on policy trade-offs while attaining the status of an AE by 2047 suggest surrounding growth-infl ation. Scenario analysis that India would require aggressive efforts in terms of reducing its energy intensity of output as well indicates that the Indian economy may be deeply as improving the energy-mix as compared with impacted, with infl ation rising and output falling the current NDC commitments. While the share in the medium-term under a lenient mitigation of green energy in overall energy consumption plan. Risk mitigating domestic policies and has to reach to about 82 per cent from its current global concerted efforts could, however, help level of around 5.5 per cent in 2021-22, the energy in containing the adverse impact on growth and intensity of output has to decline by 5.1 per cent infl ation. 69REPORT ON CURRENCY AND FINANCE II.88 Finally, in view of the diffi cult policy trade- Ali, H., and Mishra, V. (2018). Increase in subdaily offs between containing near-term adverse precipitation extremes in India under 1.5 and 2.0 output impact due to NDC commitments vis-à- C warming worlds. Geophysical Research Letters, vis larger output losses in the medium-run due 45(14), 6972-6982. to no policy action, a sector-specifi c approach to Andersson, M., Morgan, J., and Baccianti, C. climate risk mitigation is called for. Further, since (2020). Climate change and the macro economy. different sectors of the economy have different ECB Occasional Paper No. 243, 1-50. emission intensities, it is advisable to not have Basel Committee on Banking Supervision (BCBS). a uniform climate mitigation strategy across (2021). Climate-Related Risk Drivers and Their sectors. In this regard, alongside signifi cant Transmission Channels. technological breakthroughs required to achieve green transitioning in the hard-to-abate industrial British Petroleum. (2022). Energy Outlook 2022. sectors, policy focus on sectors with low emission Retrieved from: https://www.bp.com/content/ intensities such as textiles, fi sheries, land dam/bp/business-sites/en/global/corporate/pdfs/ transport and services could support India’s energy-economics/ energy-outlook/bp-energy- growth and employment objectives. India has outlook-2022.pdf already demonstrated its capacity to achieve Burck, J., Uhlich, T., Bals. 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The costs of climate change in India. Overseas Development Institute. Retrieved The Economic Times. (2022b). India plans https://odi.org/en/publications/the-costs-of- to invest Rs 2.8 lakh crore in ISTS for RE climate-change-in-india-a-review-of-the-climate- evacuation. Retrieved from: https://energy. related-risks-facing-india-and-their-economic- economictimes.indiatimes.com/news/renewable/ and-social-costs/. india-plans-to-invest-rs-2-8-lakh-crore-in-ists-for- re-evacuation/95457753 Press Information Bureau (PIB). (2015). All India Study Report to PPAC on sale of Diesel and Petrol. United Nations Development Programme. (2022). Ministry of Petroleum and Natural Gas, GoI. Energy Progress Report 2022. Retrieved from https://www.undp.org/publications/energy- Press Information Bureau (PIB). (2022). Climate progress-report-2022 Change Performance Index. Ministry of Environment, Forest and Climate Change, GoI. United Nations International Strategy for Disaster. Reduction. (2018). Economic Losses, Poverty Schelling, T. C. (1992). Some economics of global and Disasters 1998-2017. Université Catholique warming. The American Economic Review, 82(1), de Louvain (UCL), Brussels, Belgium, 33. 1-14. Volz, U. (2017). On the role of central banks in Schnabel, I. (2021). Climate change and monetary enhancing green fi nance. Inquiry Working Paper policy. Finance and Development, 58(3), 53-55. No. 01. Solow, R. M. (1999). Neoclassical growth theory. World Bank. (2021). Climate Risk Country Profi le: Handbook of macroeconomics, 1, 637-667. India. Somanathan, E., Somanathan, R., Sudarshan, A., World Bank. (2022). Climate Investment and Tewari, M. (2021). The impact of temperature Opportunities in India’s Cooling Sector. on productivity and labor supply: Evidence from Indian manufacturing. Journal of Political World Meteorological Organization. (2021). State Economy, 129(6), 1797-1827. of the Global Climate 2020. MO-No. 1264. World Meteorological Organization. Stern, N. (2006). Stern Review: The economics of climate change. Cambridge University Press, UK. World Steel Association, 2019-20. World Steel in Figures 2019. The Economic Times (2014). We’ll gain confi dence in our models over time, says RBI Yang, L., Tian, F., and Niyogi, D. (2015). A need Governor Raghuram Rajan. Retrieved from: to revisit hydrologic responses to urbanization https://economictimes.indiatimes.com/opinion/ by incorporating the feedback on spatial rainfall interviews/well-gain-confidence-in-our-models- patterns. Urban Climate, 12, 128-140. 73REPORT ON CURRENCY AND FINANCE Annex II.1: The NIGEM Model – Key Features The NIGEM approach takes into account the standard NGFS scenarios as the benchmark (Annex Table 1). The deviations of various macroeconomic variables under different possible transition scenarios are then examined. The standard scenarios of NGFS are defi ned in terms of global GHG emissions, which are considered as the global baseline scenarios for macroeconomic impact assessment (NGFS, 2022a). Annex Table 1: Standard NGFS Scenarios Setting the Global Benchmark This scenario assumes that optimal carbon prices as per the long-term path Below 2 degree Celsius are set immediately after 2020 and keeps the 67th percentile of warming below 2 degree Celsius throughout the 21st century. Existing climate policies remain in place without any change in policy Current Policies ambitions. This scenario assumes that the next 10 years see a "fossil recovery” and thus, follow the trajectory of the current policy scenario until 2030. This is Delayed Transition related to Below 2 degree Celsius scenario but follows a very skewed path due to late start. This scenario assumes that optimal carbon prices, in line with the long-term targets, are implemented immediately after 2020 after a limited temporary overshoot before reaching net zero. This is related to net zero 2050 but Divergent Net Zero follows a divergent path - mitigation efforts are unevenly distributed across sectors, with stronger mitigation action taking place in the Transport and Buildings sectors-refl ecting lack of coordination. This scenario foresees that currently pledged unconditional NDCs are Nationally Determined implemented fully and respective targets on energy and emissions in 2025 Contributions (NDCs) and 2030 are reached in all countries. This scenario also factors in the net zero 2070 goal of India as per its NDC. This scenario foresees global CO emissions to be at net zero in 2050. It 2 limits the temperature rise to 1.5 degree Celsius. Furthermore, countries Net Zero 2050 with a clear commitment to a specifi c net-zero policy target at the end of 2020 are assumed to meet this target. 74CLIMATE CHANGE AND III FINANCIAL SECTOR* The financial sector faces the dual challenge of recalibrating its operations and business strategies to support the green transition process while also strengthening resilience to rising vulnerability to adverse climate events so as to safeguard financial stability. On the first challenge, estimates suggest that the green financing requirement in India could be at least 2.5 per cent of GDP annually to address the infrastructure gap caused by climate events, and the financial system may have to mobilise adequate resources and also reallocate current resources to contribute effectively to the country’s net-zero target. On the second challenge, results of a climate stress-test reveal that public sector banks (PSBs) may be more vulnerable than private sector banks (PVBs) in India. Globally, however, measurement of climate related financial risks remains a work in progress. A pilot survey of key stakeholders in the financial system in India suggests that notwithstanding rising awareness about climate risks and their potential impact on the financial health of entities, risk mitigation plans are largely at the discussion stage and yet to be widely implemented. 1. Introduction III.2 The impact of these risks may materialise with uncertain time lags; their frequency and III.1 There is a broad consensus in the literature severity may vary considerably over geographies that fi nancial systems are exposed to both and over time; and they may become increasingly physical and transition risks from climate change, diffi cult to predict. As the frequency of tail events which propagate through both macroeconomic increases, estimation of default probabilities would and microeconomic channels (Basel Committee become more diffi cult and uncertain, resulting on Banking Supervision, 2021). Physical risks in higher interest rates and insurance premiums arise from extreme/acute weather events such (Basel Committee on Banking Supervision, 2021). as fl oods, storms, rising sea levels or increasing In view of higher expected credit loss, lending temperatures which may damage properties and impact lives and livelihoods. On the other hand, institutions may turn risk averse, with higher transition risks ensue due to economic and societal provisions and risk capital, which may adversely costs associated with the process of transitioning impact credit growth, although the economy may to a low-carbon economy. Such risks arise due to need higher, not lower, credit to support successful public policy changes aimed at containing green green transition. The amplifi cation of fi nancial transition costs, innovation that results in new risks, i.e., ‘credit risk’, ‘market risk’, ‘liquidity risk’, technology, trade policy restrictions impacting and ‘operational risk’ – through macroeconomic the availability and affordability of existing as well and microeconomic channels may pose a as new technologies, and changes in investor serious threat to fi nancial stability, via losses to and consumer sentiment impacting the demand levered fi nancial intermediaries, disruptions in pattern of the economy. the functioning of fi nancial markets, sudden and * This chapter has been prepared by a team comprising Saurabh Ghosh, Snehal Herwadkar, Siddhartha Nath, Pawan Gopalakrishnan, Satadru Das, Vidya Kamate, Sambhavi Dhingra, Rajnish Kumar Chandra and Mayank Gupta. Data support provided by Shashank D. Bhujade is gratefully acknowledged. 75REPORT ON CURRENCY AND FINANCE large repricing of assets, and distorting policy to evaluate both these dimensions to design transmission channels. policies that could enhance the contribution of the sector to green transition while preserving III.3 The IMF’s INFORM climate risk index1 fi nancial stability. In this vein, the remainder of indicates that among BRICS countries and the chapter is organised as follows: in order to major advanced economies (AEs), India is most vulnerable to climate-induced physical risks better understand the channels through which (Chart III.1.a). In terms of preparedness and environmental shocks are transmitted to the resilience to transition risks, the indicator developed fi nancial sector, Section 2 provides a brief by Peszko et al. (2020)2 suggests that while most summary of the major risks. In Section 3, a AEs have high resilience and low exposure, BRICS dynamic stochastic general equilibrium (DSGE) countries are less resilient and highly exposed. India model is developed to estimate the likely impact of is the least resilient among BRICS countries but is climate shocks on the Indian fi nancial system. The also less exposed than many in the same group fi ndings of a pilot stakeholder survey conducted to (Chart III.1.b). gauge participants’ awareness of the challenges III.4 While the fi nancial sector would be at associated with climate change and their level of the receiving end of the climate risk on the one preparedness are summarised in Section 4. The hand, it also has the potential to catalyse risk fi ndings of a climate stress test applied to the mitigation on the other. It is, therefore, important current asset portfolio of Indian banks are covered Chart III.1: Physical and Transition Risk Indicators a. INFORM Risk Indicator for Physical Risk b. Preparedness and Resilience for Transition Risk Note: The resilience index ranges from 0 to 1, with 0 being high resilience and 1 being low resilience. The exposure index also ranges between 0 and 1 but in this case, 0 indicates low exposure while 1 indicates high exposure. Sources: 1. INFORM Risk; IMF staff calculations (Chart III.1.a). 2. Peszko et al. 2020, Chapter 5 (Chart III.1.b). 1 The Index for Risk Management (INFORM) was developed jointly by the Inter-Agency Standing Committee Reference Group (on Risk, Early Warning and Preparedness) and the European Commission, and was later adopted by the IMF to measure climate-risks. Three dimensions captured by the Climate Risk index are climate-driven hazard and exposure, vulnerability, and lack of coping capacity. The index ranges between 0 and 10, with higher values indicating greater physical risk. 2 The index captures preparedness of countries based on their exposure and resilience to transition risks. The exposure index is constructed using indicators such as carbon intensity of manufacturing exports and share of fossil fuel exports in GDP, among others. The resilience index is derived from 11 key macroeconomic variables, such as GDP, institutional quality, fi nancial and human capital development. 76CLIMATE CHANGE AND FINANCIAL SECTOR in Section 5. Section 6 is devoted to estimation lender’s ability to fully recover losses if the pledged of green fi nance requirements for India. Section 7 collateral values are insuffi cient. Banks, that are brings out the debates surrounding effectiveness highly exposed to sectors more dependent on of some of the risk mitigation techniques in the fossil fuels, or sectors which contribute highly to fi nancial sector that are used internationally, with emissions due to the nature of their products, an analysis of India’s progress in this regard. such as automobile and thermal power, are more Section 8 concludes by offering some future exposed to transition risks. directions. III.7 In the absence of a full-fl edged taxonomy, an appropriate approach could be adopted to 2. Financial Risks due to Climate Change classify industries into green and brown for the III.5 Attempts to understand, measure and purpose of analysis. This may be done on the model fi nancial risks associated with climate basis of a sector’s energy intensity, measured by change are of recent origin. Although the the ratio of energy input cost to the value of the conventional risk management tools may serve as sector’s gross output. A higher ratio indicates that a springboard, climate risk drivers contain unique the sector is more energy intensive and thus less features that could challenge the incorporation of green3. A granular analysis of data suggests that these risks into existing processes (BCBS, 2021). Indian banks’ exposure to high energy intensive This section is devoted to a granular analysis of sectors like generation and distribution of energy these risks with a special focus on India. (utility sector4) and metals is relatively high Credit Risk (Box III.1). III.6 Both physical and transition risk drivers III.8 Another metric for classifi cation of from climate events can reduce a borrower’s industries into green and brown is the ratio of capacity to service or repay debt and erode a sectoral energy consumption to its gross value Box III.1 Measuring Indian Banks’ Transition Risk using Energy Intensity Metrics The energy use intensity of the utility sector, transport that banks’ exposure is relatively higher in utilities, metal and storage operations, metal and metal products, industries, and transport and storage operators (Charts 1 manufacturing of non-metallic mineral products, paper a and b). products and production of automobiles, as estimated from Although at the aggregate level, the exposure of the the KLEMS5 data for India, are higher than other activities banking sector to climate change risks appears moderate, in the economy. Mapping of energy intensities with sectoral a spatial analysis highlights sharp contrasts in exposures deployment of bank credit (at end March 2022) suggests (Contd...) 3 The energy sector includes both fossil fuels and electricity, of which the latter comprises both non-conventional and conventional sources. The India KLEMS database 2019-20 is used to extract data on energy intensity. Non-availability of separate data on non-conventional electricity is acknowledged as a limitation of this analysis. 4 Includes generation and distribution of electricity, gas and water supply. 5 KLEMS refers to Capital, Labour, Energy, Material and Services. This database provides historical estimates of income shares for each of these factors of productions, along with the Total Factor Productivity. 77REPORT ON CURRENCY AND FINANCE Chart 1: Sectoral Energy Use Intensity and Deployment of Bank Credit a. Public Sector Banks b. Private Sector Banks Source: Authors’ calculations based on India KLEMS database 2019-20 and Basic Statistical Returns March 2022, Reserve Bank of India. across bank groups and across states. While the transition Maharashtra and Tamil Nadu, the aggregate exposure of risk for the PSBs stems largely from their exposure to the banking sector to the automobile production is limited. conventional energy sector, especially in West Bengal and Basic metals and utilities are sectors with low interest- NCT of Delhi, their private sector counterparts are exposed more to the transport operators’ sector, most notably in coverage ratio as well as comparatively high GNPA ratio Jharkhand and Odisha (Chart 2.a and b). Both the bank (Ghosh et al., 2022). Their higher transition risk suggests groups are exposed to the metal industries. Except for that, going forward, these sectors may pose higher climate PVBs’ exposure to automobile sector in Haryana, Punjab, credit risk for the Indian banking system. Chart 2: Spatial Distribution of Sectoral Bank Credit a. Public Sector Banks b. Private Sector Banks Source: Authors’ calculations based on Basic Statistical Returns, March 2022, Reserve Bank of India. Reference: Ghosh, S., S. Nath, A. Narayanan, and S. Das (2022). Green Transition Risks to Indian Banks. Reserve Bank of India Bulletin, March. 78CLIMATE CHANGE AND FINANCIAL SECTOR Chart III.2: Bank Credit to Green vis-à-vis Brown Industries a. Growth in Credit b. Share in Industry Advances Source: Off-site returns (domestic), RBI. added (GVA), which is gross output minus the III.9 The Non-Banking Financial Companies cost of intermediate inputs. An analysis employing (NBFCs) complement and supplement the this classifi cation suggests that hearteningly, in banking sector in India through their grassroot the recent years, bank credit to green industries level presence and ability to deliver tailor-made has accelerated at a pace faster than that to brown products to meet varied needs of the customers. industries, which is a sign of improved recognition On the liabilities side, while NBFCs have been the of climate risks. The acceleration has primarily largest net borrowers of funds from the fi nancial been driven by PVBs (Chart III.2.a and b). The system, on the asset side, the highest chunk of GNPA ratio of green industrial loans, however, has their lending is directed to the industrial sector been higher during the same period, especially for (Chart III.4). PSBs (Chart III.3.a and b). Chart III.3: GNPAs of Green vis-à-vis Brown Industries a. Share in Industry GNPAs b. GNPA Ratio Source: Off-site returns (domestic), RBI. 79REPORT ON CURRENCY AND FINANCE III.10 NBFCs extend about half of their gross Chart III.4: Sectoral Distribution of NBFC Credit credit to the power and vehicle/auto segments, which have high carbon footprints. Moreover, around six per cent of NBFC credit is directed to micro, small and medium enterprises (MSMEs), which typically depend on conventional fuel to operate. Given that NBFCs have strong backward and forward linkages with rest of the fi nancial system and the real sector, any large-scale default arising on account of physical or transition risk in any of these segments might translate into macro- fi nancial instability. Therefore, in addition to the banking sector, there is a need to closely monitor NBFCs for their transition risks, both direct and Source: Database on the Indian Economy, authors’ calculations. indirect (Box III.2). Box III.2 Role of NBFCs in Propagating Climate Change Impact A stylised partial equilibrium model to analyse real sector lending to large borrowers. In addition, the indirect channel outcomes in response to a climate shock to NBFCs is works through climate change impact on small fi rms, which developed in line with Ghosh and Mazumder (2023). produce intermediate goods. Some of these fi rms may turn The interrelationship between banks and NBFCs is the bankrupt, and default on their NBFC obligations. Although backbone of this model. While NBFCs are assumed to be NBFCs by themselves are considered relatively small, non-deposit taking, scheduled commercial banks (SCBs) the simulation results of the model show that the impact are deposit-taking fi nancial institutions that extend loans to of a climate event could propagate to other sectors of the NBFCs. By assumption, SCBs lend to the large fi rms, and economy, given the NBFC-SCB borrowing interlinkages. NBFCs fi ll-in the funding gap for small borrowers albeit by When a climate shock fi rst increases the riskiness of a small charging higher interest rates than SCBs (Chart 1). fi rm and then gets transmitted to a large fi rm, economy wide In the model, climate change impacts large as well as small delinquency increases. Model simulation results indicate fi rms. The direct impact on SCBs is due to their stressed that faced with an adverse weather event and increase in Chart 1: Model Framework—Climate Shock to NBFCs Chart 2: Impact of climate shock on capital formation Climate Shock Risk Lending Lending Lending MSMEs NBFCs Banks Large Borrowers Risk Risk Risk Increase in Risk Mean Capital Premium/Interest Rate Formation Decreases (Contd...) 80 yctpurknaB /tluafeD sesaercnI smriF ni Risk Source: Authors’ calculations.CLIMATE CHANGE AND FINANCIAL SECTOR risk, the distribution of capital stock shifts to the left (shift channels could increase the severity of a climate shock. from blue distribution to orange in Chart 2) indicating its Therefore, a careful vigil on NBFC sector is necessary adverse effects on capital formation. during the process of transitioning towards a greener economy. To sum up, notwithstanding a low share in total credit, any Reference: large-scale default in loans extended by NBFCs on account of weather events amplify delinquencies, given NBFCs’ Ghosh, S., and D. Mazumder (2023). Do NBFCs propagate backward and forward linkages. Multiple propagation real shocks?. Journal of Asian Economics: 101590. Market Risk considered as liquidity insurance. In times of crisis, competing claims on liquidity from fi rms and III.11 Market risk captures the change in value of the lenders may give rise to a tension between the fi nancial assets due to changes in interest rates, two. Such tensions generally manifest as higher exchange rates, asset prices, and their volatility. spreads on credit, higher charges for covenant Climate transition risks can reduce fi nancial asset violations, and barriers to drawdown of credit lines values, leading to a breakdown in correlations and (Acharya et al. 2020, 2021). Such situations may resultant dilution in the effectiveness of hedges. A follow severe climate events in which fi rms may study on the relationship between climate change ask for signifi cant liquidity support while banks and Asian stock markets suggests that the former may be constrained to provide that support due has a statistically signifi cant negative impact on to a degradation of their asset quality (Schu¨wer long term return volatility of about 20 per cent of et al., 2019 and Rauf, 2023). Rauf further fi nds stocks (Oloko et al., 2022). that affected banks are expected to face liquidity III.12 In addition, transition risk may result shortage and may restrict drawdowns of credit in higher risk premiums for carbon-intensive lines in the future. borrowers, thereby lowering valuations of fi nancial Operational Risk assets that are used as collateral. Some studies argue that the securities accepted as a guarantee III.14 Operational risk arises mainly from under the Euro system collateral framework inadequate controls within a bank, employee mistakes, and breakdowns in internal processes are not “aligned” with the climate targets of the and systems, which in turn impact a bank’s Paris Agreement, and are, therefore, exposed to reputation. Climate events may exacerbate transition risks (Weber et al., 2021). operational and reputational risks as corporations Liquidity Risk and banks could be subject to legal and regulatory III.13 Climate risks can raise the liquidity risk of compliance risk, especially from climate-related banks by impacting their capacity to raise funds lawsuits. Further, extreme weather events may and their ability to liquidate assets to meet their impact the fi nancial sector by forcing offi ce obligations. One of the main routes through closures or damaging crucial resources such as which liquidity risk can transmit is through the data centres. Stronger enforcement of regulatory credit channel. Credit lines, such as cash credit and disclosure requirements by the regulator and overdrafts offered by banks to fi rms, are coupled with a competitive market structure may 81REPORT ON CURRENCY AND FINANCE help mitigate the adverse impact of climate developed by the ‘MIT Joint Program on the change. For instance, a natural disaster could Science and Policy of Global Change’ and the have a greater impact on the fi nancial stability if quarterly National Institute Global Econometric the market for insurance of a particular vulnerable Model (NiGEM) (NGFS 2021). These models sector is concentrated. If, however, the market has can help analyse the transition risks to fi nancial many strong and active participants, the resulting stability arising from adopting a net-zero strategy, higher shock-absorbing capacity of the insurance and the dual role of central banks, who, on the one market may support smoother adjustments to hand, contribute to the net-zero goal and on the adverse climate events (Alvarez et al., 2020). other, strive to preserve fi nancial stability. 3. Modelling the Macro-Financial Transmission III.16 A workhorse DSGE model which is of Climate Risk calibrated for India, where climate risks percolate through the stock of capital, shows that natural III.15 To understand how physical shocks or a disasters impact consumption more than income transition towards a greener economy may impact capital formation, interest rates and real output, (Box III.3). The results highlight the role of economic central banks widely use the ‘Environment-DSGE and fi nancial policies to smoothen consumption Models’. Specifi c examples include the ‘Economic and thereby help the economy to converge to its Projection and Policy Analysis (EPPA) Model’ steady-state. Box III.3 Climate Risk Impact Assessment in a DSGE Model for India A parsimonious DSGE model is constructed where the with a massive one-time adverse climate shock to capital, economy consists of a high risk-averse representative contractionary effects are large and persistent (Chart 1). household, a fi nal good sector, a continuum of intermediate Output contracts instantaneously by more than 0.5 per goods producers, and a policy authority. The policy cent and continues to fall by more than 1 per cent up to authority meets the requirement of its spending through lump-sum tax revenues and bond issuances. The policy Chart 1: Impact of One-Period Adverse Climate Shock to Capital authority is also guided by a standard Taylor Rule where Output Consumption Capital the monetary policy rate (and also by assumption, the 0 0 0 bond yield) is a function of the output gap and infl ation -0.005 -0.05 -0.02 gap. This model closely follows Christiano et al. (2005) and -0.01 -0.1 Smets and Wouters (2007). -0.015 -0.04 -0.15 0 10 20 0 10 20 0 10 20 Investment Labour Wages In this model, climate risks percolate into the real sector 0.15 0.04 0.05 via physical damage to capital. The main objective of this 0.1 0.02 0 exercise is to evaluate whether the damaged capital stock 0.05 0 -0.05 replenishes itself through forces in the capital markets in 0 0 10 20 0 10 20 0 10 20 a short horizon or if there is a need for policy intervention. Policy Rate Price of Capital Inflation 0.03 0.2 0.04 This is modelled based on the following capital law of motion 0.02 0.1 faced by the representative jth intermediate fi rm: 0.02 0.01 0 0 0 0 10 20 0 10 20 0 10 20 where, I is an adverse shock to the capital accumulation. Note: Red line in each chart represents the steady state whereas the blue t line indicates the short run impact of a one period adverse shock to capital. Simulation of the model shows that when the economy is hit (Contd...) 82CLIMATE CHANGE AND FINANCIAL SECTOR 5 quarters. This instantaneous fall in output translates into affect bank profi tability. Increase in interest rates and lower incomes, thereby resulting in a fall in consumption. pressures on market and funding liquidity may exacerbate The impact on consumption is more pronounced than the fi nancial stability risks. output as the household is highly risk averse. Reference: These developments are likely to get translated into an Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005). increase in the fi nancial sector vulnerability. A deterioration Nominal rigidities and the dynamic effects of a shock to of capital, due to an adverse climate shock, results in a monetary policy. Journal of political Economy, 113(1), 1-45. lagged increase in the price of capital and a contraction in output. To recover from the damage to the capital stock Gertler, M., and P. Karadi (2011). A model of unconventional due to the climate shock, investment demand expands monetary policy. Journal of monetary Economics, 58(1), signifi cantly. On the whole, this pushes up the aggregate 17-34. demand, which, along with the increase in the price of Ghosh, S., S. Nath, and P. Gopalakrishnan (2022). capital, pushes up infl ation. Moreover, given the infl ation Distributional Impact of Cyclones on Indian Households’ targeting framework and resultant higher weight to infl ation Income and Consumption. Forthcoming, RBI Working in the Taylor rule, the policy authority tightens the interest Paper. rates, increasing losses for fi rms. A contraction in capital stock due to the climate shock also deteriorates the Smets, F., and R. Wouters (2007). Shocks and frictions in value of borrowers’ collateral (Gertler and Karadi, 2011). US business cycles: A Bayesian DSGE approach. American Consequently, delinquencies may increase, and this may economic review, 97(3), 586-606. Measurement of Climate Risk economic risk factors to exposures; and measuring fi nancial risk from climate-adjusted III.17 Measurement of fi nancial risks economic risk (BCBS, 2021). associated with climate change invariably involves strong assumptions, given the high III.18 By their very nature, forward-looking uncertainty about physical and transition risk climate risk estimation methods are required drivers, data gaps, and model uncertainty. The to span a longer time frame as compared with unique features of climate-related fi nancial traditional macroeconomic exercises. This risks necessitate granular and forward-looking requires conditioning assumptions about balance measurement methodologies to account for sheet adjustment options. As a result, banks and these uncertainties. While the need for such supervisors often base their scenario analyses, methodologies and multiple scenarios for stress or stress tests, on scenarios developed by third parties. testing is increasingly recognised by banks and supervisors, frameworks to systematically III.19 To date, progress in capturing banks’ translate climate change scenarios into standard exposures to physical risks empirically has been fi nancial risk analysis are still a work in progress less tangible, and the focus has been on mapping (NGFS, 2019). Due to sectoral, jurisdictional the near-term transition risk drivers to counterparty and geographical heterogeneities, granular data and portfolio exposures. Further, supervisors and on exposure to climate change are needed to banks have laid more emphasis on credit risk incorporate these risks in analysis spanning modelling, with relatively lesser focus on market three areas: translating climate risk drivers into risk, and very limited attention to operational and economic risk factors; linking climate-adjusted liquidity risk, while reputational risk assessment 83REPORT ON CURRENCY AND FINANCE has remained predominantly qualitative (BCBS, Chart III.6: Source of Climate Threat 2021). Although work related to translating What is/are the sources of climate related risks? Rank between – i) Physical Risk ii) Transition Risk and iii) Liability Risk climate risks into robustly quantifi able fi nancial risk is currently at a nascent stage, it is gathering momentum. 4. Stakeholders’ Survey on Climate Risks III.20 A major factor that infl uences the effectiveness of policies and their transmission is market perception. An anonymous survey of various fi nancial institutions in India was undertaken in December 2022 to assess the market perception of climate risks, their awareness about the same and policies implemented/ being contemplated by these Source: Authors’ calculations based on survey responses. institutions to hedge against them. The informal survey was conducted among major banks, Perception of Exposures NBFCs, brokerage institutions and other fi nancial III.21 Almost 90 per cent of the respondents fi rms. The analysis in this section pertains to considered climate risk as a material threat to twenty responses received and is, thus, indicative the institution’s business. When asked to rank the in nature (Chart III.5). climate risks, about half of them identifi ed transition risk as the prime concern for their business. Another 26 per cent respondents identifi ed it as Chart III.5: Respondents’ Affiliation the second biggest risk (Chart III.6). III.22 According to the respondents, energy and mining sector was identifi ed as the most exposed to climate risk, followed by automobiles, agriculture, infrastructure, and construction. Sectors like textiles and engineering were not expected to have signifi cant exposure (Chart III.7). Interconnected exposures and risks III.23 Sixty per cent of the institutions surveyed claimed to have incorporated climate risk in their risk management framework and 80 per cent respondents confi rmed that their board has discussed climate related risks in the recent Source: Authors’ calculations based on survey responses. fi nancial year. However, most of these institutions 84CLIMATE CHANGE AND FINANCIAL SECTOR risk under the ICAAP Pillar –II risk category. One Chart III.7: Sectoral Exposure to Climate Risk of them further elaborated that it has allocated What are the main economic sectors on which a significant impact is expected? Multiple options may be selected additional capital under Pillar-II category for loans made to high emission sectors. Challenges III.25 The lack of capacity and data seem to be the biggest impediments to assess climate risk and implementing policies to mitigate them. Almost 95 per cent of the respondents said that they lack appropriate data to robustly assess climate risks. Consequently, only 25 per cent of respondents use scenario analysis to assess climate change risks. Source: Authors’ calculations based on survey responses. III.26 Regarding expectation of policy support, many respondents suggested implementing are yet to develop specifi c mechanisms to identify mandatory disclosures from borrowers under and deal with such risks. Among those surveyed, Scopes 1, 2, and 3 emission categories. Some 65 per cent responded that there is no existing respondents also asked for a national database on division which specifi cally deals with climate climate scenarios at a disaggregated geographic related assessment. In the absence of an offi cial level to assess physical risks from climate events. taxonomy, only 45 per cent respondents had Respondents also opined that a well-defi ned developed their own norms to explicitly classify taxonomy will help in clearly assessing and counterparties into ‘green’ and ‘brown’ and a preparing for transition risks. similar percentage of respondents considered climate sustainability while selecting projects for 5. Climate Stress Test for Indian Banks fi nancing. The defi ciency in the assessment of III.27 While it is important to quantify the impact climate risks is also refl ected in the lack of hedging of climate change risks on fi nancial system and its against such risks. Only 40 per cent of those constituents, it is diffi cult to rely on traditional risk surveyed had mobilised new capital for scaling quantifi cation techniques. This is because these up green lending or have set any target for such methods rely on past data, but extant data may lending. Forty-fi ve per cent have introduced new no longer be suffi ciently representative of extreme fi nancial products which can take advantage of climate events that may occur in the future. Climate the new opportunities arising out of green fi nance. stress tests are scenario-based exercises that III.24 Some of the respondents confi rmed having assess the loss to the fi nancial system/entities developed certain mechanisms to assess and due to climate related risks by adapting the hedge against risks pertaining to climate change. methodology of traditional stress tests to climate- Two respondents said that they categorise climate related exigencies. 85REPORT ON CURRENCY AND FINANCE Chart III.8: Comparison of Climate and Non-Climate Stress Test Methodologies T Tr ra ad di it ti io on na al l S St tr re es ss s T Te es st ts s Climate Stress Tests: Climate Stress Tests: Physical Risks Transition Risks Analyse financial risks Analyse financial risks Analyse financial risks Definition under stressed economic caused by materialisation caused by transition to a and financial conditions of physical climate risks low carbon economy Both top-down/bottom- Both top-down/bottom- Both top-down/bottom- Framework up approaches coexist up approaches coexist up approaches coexist Baseline is usually Short-term baseline Short-term baseline Baseline vs. Adverse is BAU scenario, long- is BAU scenario, long- “business-as-usual” Scenarios term baseline is orderly term baseline is orderly (BAU) scenario transition scenario transition scenario Mostly 2-3 years, Horizon From 30 to 80 years Overnight to 30 years maximum 5 years Risk Transmission Credit, market and Underwriting risk and Credit and market risk Channels liquidity risk market risk Source: Cartellier (2022) and edits by authors. III.28 The key differences between climate and internal assessment of climate related risks have non-climate stress tests lie in scenario horizons, not resulted in additional capital requirements, so as the former are usually for longer periods (30 to far. 80 years) (Chart III.8). III.30 Transition risk associated with climate III.29 Climate stress tests have been change remains a major concern of most fi nancial implemented by central banks and regulators for market stakeholders, all over the world. One testing system-wide and entity-specifi c resilience approach to measure the risk involves estimating to climate-related risks. A signifi cant amount a climate risk factor based on ‘stranded’ assets of recent academic research has also been portfolio returns (Jung et al., 2021). The approach devoted to developing climate stress testing relies on the idea that a transition to a less carbon- methodologies. Exercises have been carried out intensive environment may result in underutilisation by the French supervisor (ACPR) in conjunction of existing fossil fuel reserves, which could be with Banque de France (ACPR, 2020) and Bank viewed as stranded assets. A lower return on a of England (BOE) using a bottom-up framework stranded asset portfolio as compared to market- with a direct participation of banks and insurance wide benchmark indices, thus, could be indicative companies. Other top-down exercises have been of a higher transition risk. A stranded assets undertaken by the European Central Bank (ECB) portfolio similar to the one in Jung et al. (2021) (Alogoskoufi s et al., 2021) among others. So far, is constructed for India, with 30 per cent weight these methodologies are applied to measure to NIFTY Energy Index and 70 per cent weight to physical risks (Chart III.9) and transition risks Coal India Limited. In other words, the returns on (Chart III.10) and signifi cant differences exist the stranded assets portfolio calculated below are across them. Macro stress tests and banks’ used as a climate risk factor; it rises when fossil 86CLIMATE CHANGE AND FINANCIAL SECTOR Chart III.9: Studies on Climate Stress Tests for Physical Risks Source: Cartellier (2022) and edits by authors. fuel stock prices rise relative to the market and III.31 The second step involves estimating time- vice versa. varying climate betas of fi nancial institutions by regressing fi nancial institutions’ stock returns (r ) it on the climate risk factor: Chart III.10: Studies on Climate Stress Tests for Transition Risks Source: Cartellier (2022) and edits by authors. 87REPORT ON CURRENCY AND FINANCE The climate betas for the Indian banking institutions Where represents the capital shortfall were estimated on a daily frequency by running of bank i at time t, represents the prudential 252-day rolling regressions to capture the dynamic ratio of equity to assets, represents the book time-varying nature of the exposure. Daily climate value of debt and represents the market betas were estimated separately for NIFTY Public value of equity and is the climate stress level. Sector Banks Index and NIFTY Private Banks In terms of the above equation, a negative capital Index starting from November 2011 up to February shortfall (CRISK) represents no stress, while a 2023. Climate betas for public sector banks are positive CRISK represents stress in the bank’s mostly positive and have been rising consistently balance sheet, as it may not be able to meet since 2018, with a slight moderation beginning its regulatory obligations. Several alternatives 2022 (Chart III.11.a). Climate betas for private were evaluated for the above equation. For banks largely remained in the negative territory instance, when only borrowings of the bank were and were much lower than those for public sector included in ‘D’, there was no shortfall for any bank banks (Chart III.11.b). This alludes to the greater (Chart III.12.a). However, when total deposits and sensitivity, and therefore higher risk of public borrowings were used, many banks were found sector banks to climate related risks as compared to face shortfalls (Chart III.12.b). Thus, when the repayment obligations of the bank cover only its to private sector banks. borrowings, banks remain solvent and can meet III.32 The third step involves estimation of regulatory capital requirements even in the face expected capital shortfall on account of aggregate of sudden adverse climate shock. However, if climate related stress using a CRISK framework the banks are obliged to repay their borrowings following Jung et. al. (2021) which defi nes the as well as deposits, larger capital shortfalls may bank’s capital shortfall as the amount of capital be expected. In the second case, the amount of reserves a bank needs to hold minus its equity as capital shortfall as well as their density is higher estimated by for PSBs than PVBs, highlighting greater risks faced by the former. Chart III.11: Climate Beta a. Climate Beta for Public Sector Bank Index b. Climate Beta for Private Sector Bank Index Sources: Bloomberg and authors’ calculations. 88CLIMATE CHANGE AND FINANCIAL SECTOR Chart III.12: Climate Stress Test: PSBs vis-à-vis PVBs a. CRISK incorporating only bank borrowing b. CRISK incorporating bank borrowing and deposits Source: Authors’ calculations. III.33 The stress test results depend crucially 6. Green Financing Requirement on the assumptions relating to the severity of III.34 Apart from the requirements of higher climate events and banks’ short-term credit and banking capital, a successful green transition deposit compositions and as such, are indicative plan would also entail a large new investment in nature. Further, the CRISK framework in an array of socio-economic infrastructures. A projections are not baseline forecasts but shed large number of estimates by various institutions light on low probability extreme climate events suggest that the total fi nancing requirements by and serve as a useful tool for monitoring risks to India could be approximately 5 to 6 per cent of fi nancial stability. the annual GDP at the lower end6 (Table III.1). Table III.1: Projected Estimates of Green Finance Requirements Organisation Target India Climate Policy Initiative, 2022 Till 2030 for NDC USD 170 billion per year till 2030 International Energy Agency, 2022 To reach net zero emissions by 2070 on average USD 160 billion between now and 2030 per year Council on Energy, Environment, and Water-Center To achieve net-zero carbon USD 202 billion for Energy Finance, 2021 emission by 2070 per year McCollum et al., 2018 Below 1.5 degree Celsius from USD 288 billion 2016-2050 per year McKinsey, 2022 Net zero emissions by 2070 USD 44 billion per year increased by 3.5 times by 2030 and by 10 times by 2040 Note: Most of the reports mentioned above do not specify the methodology used in their estimation. Given the possibility of differences in their underlying assumptions, scenarios and coverage, estimates may not be strictly comparable across the board. Source: Reports of respective organisations/ authors as specifi ed in the reference list. 6 Based on World Bank, India’s annual GDP for 2021 was USD 3.18 lakh crores. 89REPORT ON CURRENCY AND FINANCE The required investment amount would rise under three pillars: 1) capital adequacy if the horizon to achieve the net zero target is requirements; 2) supervisory review; and 3) shortened. market discipline (including rules on public disclosures). Which of these three pillars is most III.35 An innovative estimate of climate fi nance suitable to ensure that banks have adequate requirement is developed following Hughes et al., 2010. This framework estimates a gap between capital to manage climate risk and uses better available infrastructure and what would have been risk management techniques in monitoring and achieved in the absence of climate change. Under managing these risks, is a subject of intense this framework, regressions are estimated for more policy debate. Advocates of Pillar 1 suggest that than 10 indicators separately using cross-country it cannot be completely ignored as many of the data since early 1960’s. Details of the model and Pillar 2 measures that are already available to underlying assumptions for India are presented in supervisors are not being utilised optimally. Also, Annex III.1. Pillar 3 measures on disclosures and reporting are necessary but insuffi cient to drive the policy III.36 The estimates suggest that, in India, the and behavioural changes required (Climate Safe gap between current infrastructure and the level of Lending Network, 2022). infrastructure which could have been achieved in the absence of climate events would be about 5.2 III.39 On the other hand, the focus of supervisors per cent. This, in turn, suggests that an additional world over, has increasingly shifted to Pillar 2 annual investment of about 2.5 per cent of GDP measures as the time horizon of climate-related would be required to replenish this infrastructure fi nancial risks is usually considered long, with gap by 2030. As these estimates do not explicitly a high degree of uncertainty. Standard Pillar take into account any investment required for 1 instruments of regulating minimum capital mitigation and adaptation due to climate change, requirements might be suboptimal in addressing the actual funding requirements are likely to be such risks as these measures are not developed higher. for longer time periods. For climate-related fi nancial risks, the historical loss data is not 7. Mitigation of Financial Risks available, and a more forward-looking approach III.37 To mitigate climate change risks and their is required (FSB, 2022). As uncertainty increases macro-fi nancial consequences, it is necessary to with accumulated assumptions and longer time have a fi nancial system in place that can support span, it is diffi cult to do capital planning for 20-30 sustainable initiatives and ringfence the fi nancial years (EBF Staff, 2022). Moreover, as climate risks sector from climate risks. The options for mitigation become evident, banks may change their lending are plenty but each has its own pros and cons. The strategies proactively. Requiring banks to set aside debate about best strategies remains complex, capital today to cover losses for risks that may multi-layered, and not yet settled. only materialise long after the maturity of most of Ringfencing Financial Sector from Climate Risks their current exposures may be inconsistent with under Basel Norms the construction of the prudential framework in a III.38 Basel III, the third set of international scenario where the investment strategy changes banking regulations defi ned by BCBS operates substantially (FSB, 2022). 90CLIMATE CHANGE AND FINANCIAL SECTOR III.40 In contrast, the intrinsic fl exibility of the 2020) while the households are eligible for loans supervisory review is a better fi t for ensuring that upto `10 lakh for investing in renewable energy. banks effectively manage such risks and have A preliminary data analysis suggests that this suffi cient loss-absorbing capacity. For instance, approach was successful in channelising more supervisors may require banks to submit a resources to the renewable energy sector. As timeline to mitigate their exposures to climate risk a result of the fi rst policy intervention in 2015, and improve their risk management framework. share of non-conventional energy sector in credit, In case of persistent and unjustifi ed deviations, especially by PVBs, increased during 2015- the fi ndings may be factored into regular Pillar 2 2018. The subsequent decline in share was assessments for capital. Additionally, improved arrested by the second policy intervention in 2020 Pillar 3 disclosures may aid in attaining the (Chart III.13.a and b). transparency required for market incentives to III.42 There is a signifi cant regional and bank- operate effectively (Coelho and Restoy, 2022). group wise variation in the deployment of credit Green Credit and Priority Sector Norms in India to the non-conventional energy sector. Both PSBs III.41 The early efforts of the Reserve Bank—for and PVBs extended higher than national average example its December 2007 notifi cation—were credit to the sector in Goa, Telangana, Tamil Nadu directed at creating awareness and nudging the and Gujarat. On the other hand, states like Kerala, banks towards climate sensitive policies. In the Haryana, Chhattisgarh and West Bengal received recent decade, however, the Reserve Bank has lower than national average credit to the sector, by initiated a more direct approach. The inclusion both PSBs and PVBs (Chart III.14). of renewable energy sector under priority sector Green Taxonomy and Disclosures lending (PSL) scheme in 2015 was one such direct measure. Under this scheme, fi rms in renewable III.43 Reliable and standardised information energy sector are eligible for loans upto ` 30 crore dissemination and disclosure is the backbone (increased from `15 crore since September 4, of effi cient fi nancial intermediation. A uniformly Chart III.13: Bank Credit to Non-Conventional Energy Sector (at end-March) a. Share of Credit to Non-Conventional Energy in Total Bank b. Share of Credit to Non-Conventaional Energy in Credit to Credit (excl. personal loans) Electricity, Water and Gas Source: Basic Statistical Return-I, RBI. 91REPORT ON CURRENCY AND FINANCE and broad criteria for policy, regulatory, or statistical Chart III.14: Spatial Distribution of Bank Credit to Non- Conventional Energy purposes, a globally accepted single defi nition for green or sustainable fi nance is largely missing. III.44 As a principle, any fi nancial instrument whose proceeds are used for environmentally sustainable projects, initiatives, and policies under the single goal of promoting a green economic transformation could be referred to as green fi nance. A good taxonomy provides a strong signal to investors and other stakeholders and assists in their decision-making by identifying the non- fi nancial benefi ts of a given asset. Taxonomies can be classifi ed depending on four key Note: Bank credit to non-conventional energy as a per cent of total power characteristics: a) objective: which sustainability sector credit at end-March 2022. Source: Basic Statistical Return, RBI. goals are supported? b) scope: which activities/ industries/entities are included? c) target: how is accepted ‘green taxonomy’, therefore, plays a the purpose translated into a measurable target? major role in the identifi cation, standardisation, d) output: what type of information is provided? disclosure and awareness regarding climate (Ehler et al., 2021). While countries like China, change (Chart III.15). While available defi nitions Russia, Japan, South Africa, Sri Lanka, Indonesia include general statements, market-led standards, and Bangladesh already have their taxonomies Chart III.15: Taxonomy as a policy instrument to achieve high-level sustainability goals Taxonomies Source: Ehler et. al (2021). 92 Ratified and/or internationally accepted sustainability goals (e.g., Paris Agreement, Sustainable Development Goals) Taxes and Public investment Legal restrictions Channeling private financial flows charges; pricing of and subsidies for on damaging to investments with sustainability externalities (e.g., activities with activities benefits (e.g., to support climate) carbon pricing) positive impact Improve the (cid:68)ssessment and Enable investors to identify (cid:80)arket price of (cid:68)ssets with sustainability sustainability risks benefits Financial sector regulation: Increase awareness of risk management sustainability risks, communicate requirements; stress tests; supervisory expectations through capital requirements etc. public statements, reports and research. Sustainability Disclosure and accounting standards hgiH level hgiH leveL ycilop yramirP yciloP ycilop snoitpo esoprup stnemurtsnI slaogCLIMATE CHANGE AND FINANCIAL SECTOR approved or in use, most of the countries are still Blended Finance developing their taxonomies (IPSF, 2022). III.46 The term ‘blended fi nance’ refers to the III.45 India is yet to publish a formal taxonomy, strategic use of public and philanthropic resources although SEBI and the Central Government have to mobilise private capital for development issued some guidelines which are covered in detail purposes. In addition to facilitating the fl ow of new in Chapter IV of the Report. ESG stock indices, capital into high-impact sectors, blended fi nance which were adopted across the globe as part of can be used to effectively leverage the expertise the Sustainable Stock Exchange initiative, are of the private sector in identifying and executing effective instruments for quantifi cation of exposure developmental investment opportunities and and management of sustainability risks. Available strategies. Typically, grant funding is blended with cross-country data suggest that companies other sources of capital such as debt or equity to which adopted ESG related disclosures reported maximise funding and social impact capacity. excess market adjusted stock returns during the pandemic period for many countries (Ghosh and III.47 Blended fi nance initiatives are usually Nath et al., 2023). A similar trend was observed oriented towards developing economies through in the case of India as well during the COVID-19 different forms of intervention. These include, inter period (Box III.4). The fi ndings may also hint that alia, concessional debt or equity, guarantees for companies that reported to have undertaken credit enhancement to particular initiatives, and ESG initiatives are possibly among the fi nancially technical assistance funds (TAFs). A report that stronger companies, that weathered the pandemic captured around 600 blended fi nance transactions crisis better than other players. till 2020, representing an aggregate fi nancing of Box III.4 Performance of ESG Indices vis-à-vis Broad Market Indices ESG Leaders’ index, published by Morgar Stanley Capital Chart 1: Estimated and Actual Returns on ESG Leaders’ International (MSCI), consists of market capitalisation Index for India (COVID Period) weighted stock prices of corporates that make greater environment, social and governance related disclosures as compared to their peers. Using a methodology suggested by MacKinlay (1997), the monthly returns in MSCI ESG leaders’ price index (ESG) is t regressed on MSCI broad market index ( ) between September 2010 and December 2019. The estimation equation is as follows: Source: Authors’ calculations based on MSCI. Where represents the error term of the regression. The estimated coeffi cient captures the sensitivity of ESG Reference returns to the broad market movements. The difference Ghosh, S., and S. Nath (2023). ESG Disclosures and between actual and estimated returns on ESG Leader’s Performances: Cross-Country Evidence. Reserve Bank of index is an indicator of their excess returns. Out-of-sample India Bulletin, February. estimates for India suggest that average excess returns were positive during the COVID-shock (Ghosh and Nath, MacKinlay, A. C. (1997). Event Studies in Economics and 2023) (Chart 1). Finance. Journal of Economic Literature, 35(1), 13–39. 93REPORT ON CURRENCY AND FINANCE nearly USD 144 billion, found that funds such as to enable additional investment in social and TAFs have consistently accounted for the largest developmental sectors. The recently launched share of blended fi nance transactions, while there healthcare blended fi nance facility, for instance, was a notable uptick in the prevalence of bonds was supported by USAID and addressed from 2017-2019 (Convergence, 2020). Further, the COVID-19 pandemic response in India there has been a decrease in the concurrent use (Chakraborty and Rao, 2022). The case study of of multiple blending approaches indicating less a climate-smart agriculture project, the Integrated complexity as structures become streamlined. Fish Farming in Odisha, however, demonstrated Sub-Saharan Africa remains the most targeted that actors have some reservations regarding region for blended fi nance with a gradual shift blended fi nance implementation. While local towards Asia. banks were hesitant to embrace blended fi nance due to procedural restrictions, the implementing III.48 Due to the potentially higher impact of agency found the incentive structure unappealing climate change and lesser per-capita consumption and overloaded due to frequent monitoring (Dey of energy in Sub-Saharan Africa and South Asia, and Mishra, 2022). investment in renewable energy through blended Green Bonds fi nance has a greater opportunity in these regions. Within these, India represents 80 per cent of III.49 Green bonds are instruments that can total renewable energy investment potential, help fi nance long-term investments into projects followed by Kenya and South Africa (Tonkonogy which can mitigate climate change. China has the et al., 2018). There have been several successful highest amount of green bond issuances till date examples of blended fi nance being used in India (since 2007) (Chart III.16). Chart III.16: Corporate and Government Green Bonds by Country Notes: 1. Government green bonds do not include municipal green bonds. 2. A Supra-national organisation relates to more than one country. Source: Bloomberg data as on April 28, 2023. 94CLIMATE CHANGE AND FINANCIAL SECTOR III.50 As on April 28, 2023, 63 green bonds Chart III.17: Issuer-wise Breakup of Green Bonds Issued were issued in India. Issuer-wise break up shows in India (Per cent) that corporates and PSUs have issued the highest number of these bonds (Chart III.17). (A detailed discussion on green bonds is covered in Chapter IV). Non-Life Insurance III.51 Insurance can help households and fi rms hedge against climate risks and consequently, can reduce risks for banks which are lenders to such households and fi rms. However, non-life insurance penetration remains low in India with total premium being just around 1 per cent of GDP in 2021 while the global average was about 4 per Note: Government green bonds include municipal green bonds. Source: Bloomberg data as on April 28, 2023. cent. Non-life insurance density measured as per- capita insurance premium was just USD 22 in India in 2021 while global average was USD 492 III.52 One of the challenges to increasing (IRDA, 2021). IMF ranked India at 131st place in a insurance penetration, especially as a climate risk list of 168 countries in terms of non-life insurance management tool, may be the low claim-settlement coverage. On the positive side, both insurance ratio in case of climate catastrophes. The ratio for penetration and insurance density have been climate events in 2019-20 and 2020-21 was 28 per rising fast in India and their growth trajectories cent and 29 per cent, respectively. Even though have been much higher than global growth rate for IRDA has issued guidelines to ensure that claims the past 15 years (Chart III.18.a and b). related to natural disasters are attended promptly, Chart III.18: Non-life Insurance in India vis-à-vis World a. Non-Life Insurance Penetration: Gross Premium as per cent b. Non-Life Insurance Density: Premium per capita of GDP Note: The charts show growth trajectories of insurance premium and insurance density. The values are indexed at 100 at the starting year (2006). Source: IRDA. 95REPORT ON CURRENCY AND FINANCE many claims remained unresolved several months Commodity Futures after the incidents (IRDA, 2021 and 2022). This can III.55 Environmental futures are the latest potentially discourage households and businesses innovation in the fi nancial market for commodities. from buying insurance protection against climate Beginning 1995, a programme in the United risks. States established tradable allowances for the Insurance underwriting risk emission of sulphur dioxide. Efforts are on to develop comparable tradable permits for other air III.53 In the case of large and concentrated pollutants, particularly carbon dioxide, in several insured losses, insurance companies face the risk other countries. In order to establish a carbon of insolvency. More frequent and severe weather market, a nation must fi rst set an upper limit on events have resulted, and could continue to result, its emissions and then distribute an equivalent in underwriting risks: that is, higher-than-expected number of tradable permits or credits to emitters. claims against insurance for physical risks. Claims A corporation has the option to increase its faced by non-life insurers with respect to certain emissions by purchasing additional credits at the weather-related catastrophes have increased in market rate, but it will also weigh the potential recent decades. While part of this increase may be fi nancial benefi ts of limiting or even reducing its due to increases in exposure (i.e. increasing value emissions. The International Petroleum Exchange of property insured in areas prone to physical started trading futures on the price of carbon- risks), it may also be due to increase in severity dioxide emission rights in April 2005, following of weather events. In the USA, destruction caused the European Union’s imposition of limitations by hurricane Andrew resulted in some insurance on companies’ emissions of carbon dioxide and companies going insolvent in 1992 (McChristian, emission of greenhouse gases by others. The 2012). Failure and distress in the insurance sector success of the policy can be gauged by the fact that within three months, it was conducting daily can potentially destabilise the fi nancial system. trades on more than 500 contracts (Levinson, III.54 One of the ways to mitigate underwriting 2005). risks is diversifi cation. Insurance companies III.56 The Government of India has initiated which operate over varied geographical locations actions to create a market for carbon credits which will have lower exposure to any particular severe will help India achieve its NDC goals. Between weather event as each such event will affect only 2010 and June 2022, India issued 35.94 million a small portion of its counterparties. With global carbon credits (Yarlagadda, 2022). For details, cooperation, an innovative fi nancial risk transfer please refer to Chapters II and IV. solution called Index Based Flood Insurance (IBFI) has been developed, particularly suitable Greening of Central Bank Balance Sheet for states with many small holding farming III.57 Sovereign debt issued by reserve currency communities, against fl ood losses. Re-insurance countries generally forms part of a central bank’s is another tool which can help diversify risk by forex reserves. Given the differences in carbon allowing insurance companies to share some of footprints across countries, the ‘greenness’ of the physical risks with fi nancial institutions that are sovereign bonds issued by them varies drastically. not directly exposed to them. The composition of sovereign debt held by a 96CLIMATE CHANGE AND FINANCIAL SECTOR central bank in its reserve portfolio determines the III.59 In case of India, as the Reserve Bank does carbon intensity of such portfolio. If countries with not hold corporate bonds in its portfolio, the above higher carbon footprints have more weightage in measures are not applicable. If the Reserve Bank the portfolio, it leads to higher carbon intensity keeps some of the recently issued sovereign green of the reserves. In some central banks, the asset bonds in its portfolio, it may serve the objective portfolio may also consist of corporate bonds and of greening the balance sheet. However, greater other private securities. Greening of central bank greening of the central bank balance sheet will balance sheet involves re-adjustment of these require development of a functional secondary portfolios to increase the weightage of green market, so that green bonds, like other government bonds. securities, can be bought or sold in the secondary III.58 So far, the international experience in market. greening of central bank balance sheets is limited. 8. Concluding Observations BoE is the fi rst central bank to issue climate related fi nancial disclosures annually since III.60 Central banks and the fi nancial sector 2020. The report consists of a review of carbon regulators have increasingly recognised the rising emission intensity of the BoE’s assets. As part of risks to fi nancial stability from climate change the quantitative easing strategy during COVID-19, and have been exploring ways to support the net the BoE had bought over GBP 20 billion worth zero transition goals while preserving fi nancial of corporate bonds (Milliken, 2022). The BoE stability. Financial markets have already become declared in 2021 that it will try to reduce the aware and are driving capital reallocation to carbon intensity of its corporate bond portfolio facilitate adaptation, risk pricing and mitigation. and their latest fi nancial disclosure shows that the The non-linear and multidimensional assignment weighted average carbon intensity of the portfolio problem involving all key stakeholders has no has declined by 18 per cent from 2020 (Bank of easy solution. The success of any fi nancial England, 2022a). The ECB had also undertaken sector risk mitigation strategy will also depend on quantitative easing during COVID-19 in which it dynamic recalibration of policies, growth in the bought corporate bonds. An assessment by the pro-green investors and their appetite for green ECB in 2020 found that 8.4 per cent of its asset fi nancial investment. portfolio consisted of debt instruments of fossil III.61 An assessment based on energy intensity fuel related companies, while only 1 per cent was ESG securities (Oil Change International, 2021). of borrowing sectors to gauge transition risks of The ECB has since undertaken policy measures Indian banks suggests that risks may emanate to green its balance sheet. In 2021, it announced from banks’ exposures to basic metals, and that certain ESG bonds will be accepted by the generation and distribution of energy. Hearteningly, ECB as collateral. The Swiss National Bank and in the recent years, bank credit to green industries Banque de France have also announced that has accelerated at a pace faster than that to other they will not have corporate bonds of companies industries. This may be a sign of rising climate risk which use coal in their portfolios (Oil Change awareness driving credit allocation pattern in the International). economy. 97REPORT ON CURRENCY AND FINANCE III.62 Estimates suggest that annual green reporting, and verifi cation) to track both domestic fi nancing requirement could be about 2.5 per cent and international climate fi nance is under of GDP to address the infrastructure gap caused consideration. In this vein, there is a need for a by climate events, which could increase if faster unifi ed statistical framework, including a consistent carbon emission reducing goal has to be pursued and comparable taxonomy, regular disclosures, than what is committed under the NDC. and monitoring. Though an expert committee has been set up, India is yet to publish its taxonomy, III.63 A stylised partial equilibrium model based which would require a signifi cant amount of work on the interrelationship between banks and relating to standardisation and interoperability. NBFCs suggests that any large-scale default by An internationally harmonised taxonomy will be NBFCs arising on account of physical or transition essential for the development of the green bond risk may spill over and adversely affect the overall market and other mitigation tools. macro-fi nancial stability. III.64 To ascertain the transmission channels References of climate shocks to the fi nancial sector, a Acharya, V., H. Almeida, F. Ippolito, and A. DSGE model calibrated for Indian parameters is Perez (2014). Credit lines as monitored liquidity employed. The simulation results highlight that insurance: Theory and evidence. Journal of climate events could lead to destruction of capital fi nancial economics, 112(3), 287-319. stock, impacting consumption and output. The adverse impact on infl ation could also harden Acharya, V., H. Almeida, F. Ippolito, and A. Perez- interest rates, amplifying the initial impact on Orive (2020). Bank lines of credit as contingent capital stock. Loss of collateral value and higher liquidity: Covenant violations and their implications. pressure on market and funding liquidity in the Journal of Financial Intermediation, 44. banking sector can potentially become a source Acharya, V., H. Almeida, F. Ippolito, and A. Perez- of fi nancial vulnerability. Orive (2021). Credit Lines and the Liquidity III.65 A climate stress test conducted for India Insurance Channel. Journal of Money, Credit and suggests that PSBs are more prone to climate Banking, 901-938. risks than their private sector counterparts and ACPR (2020). Scenarios and main assumptions of may face capital shortfalls in case of extreme the ACPR pilot climate exercise. Technical Report, adverse climate shocks, particularly in the rarest Autorité de contrôle prudentiel et de résolution. event of banks being necessitated to repay their borrowings and deposit liabilities simultaneously. ACPR (2021). A fi rst assessment of fi nancial risks stemming from climate change: The main results of III.66 The proper functioning of a regulatory the 2020 climate pilot exercise. Technical Report, framework requires a robust statistical Autorité de contrôle prudentiel et de résolution. infrastructure to evaluate climate risks. India currently uses platforms such as PAT (perform, Aglietta, M., and E. Espagne (2016). Climate and achieve, trade) and RPO (renewable purchase fi nance systemic risks, more than an analogy? The obligations) for tracking GHG emissions. The climate fragility hypothesis. 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Herald. 103REPORT ON CURRENCY AND FINANCE Annex III.1: Methodology and Underlying Assumptions for Measurement of Green Finance Requirements Hughes et al. (2010) estimate the following model to estimate infrastructure funding gap due to climate shock: Using annual cross-country data for more than 100 countries, the above relationship is estimated for 10 infrastructure related indicators, viz., electricity generating capacity, number of fi xed telephone lines, road length, aircraft movement, container movement, municipal water use per person, industrial water use per person, number of hospital beds, number of teachers in schools and number of post offi ces. The subscripts i and t represent country and year, respectively. The explanatory variables related to temperature and precipitation measure the extent of climate change, per capita GDP indicates the impact of climate change on aggregate demand and urbanisation measures the demand for infrastructure. includes controls which are unrelated to climate change, such as country size and landscape pattern. While the estimated regression coeffi cients for the explanatory variables in the above model represent the average global relationship, the models are calibrated for India using the following climate change scenarios applicable to India (Table 1). Table 1: Assumptions on Indian Scenario of Climate Change Variable Impact of Climate Change (Per cent) Per Capita GDP loss due to climate change# -2.0 Temperature (Mean)-Population weighted 2.0 Temperature (Mean)-Inverse Population weighted 0.4 Precipitation (Mean) -2.0 Precipitation (Range) 5.0 Urbanisation* 1.5 Note: Estimates for temperature and precipitation indicate deviation of the observed values between 2011-12 and 2019-20 from the long-term averages between 1950 and 2020. Sources: #: Authors’ assumptions. *: World Bank. Indicates annual growth rate in urban population to total population ratio. Other indicators are based on data from India Meteorological Department (IMD). 104POLICY OPTIONS TO MITIGATE IV CLIMATE RISKS* The enormous scale of the green transition challenge and the colossal cost of delayed policy actions warrant a comprehensive decarbonisation strategy, encompassing all carbon emitting sectors of the economy and all available policy levers – fiscal, technology, regulatory, trade and monetary. The policy mix needs to strike the right balance between a carbon tax, technology support for non-fossil fuel, green hydrogen, carbon capture and storage, standards for energy efficiency, regulatory tweaks incentivising flow of adequate resources for green projects and adoption of energy saving appliances at home and in business establishments. Estimates suggest that compared with a no policy action scenario that could increase India’s carbon emissions to 3.9 gigatonnes by 2030 (from 2.7 gigatonnes in 2021), a balanced policy intervention can lower carbon emissions to 0.9 gigatonne by 2030. 1. Introduction options, however, suggest that the strategy may have to be dynamic to be effective, and there must IV.1 A successful transition to a net zero be an unwavering commitment displayed through economy would require a strategy of “deep timely actions to achieve the net zero target. decarbonisation” encompassing all carbon emitting sectors, ranging from power generation IV.2 An effective strategy would fi rst need to and transportation to industrial production recognise the dimension of the challenge. Of the processes, construction activity, agriculture, and current annual carbon emissions in India, about above all, nudging the citizens to change their 40 per cent could be addressed by replacing lifestyle habits and consumption preferences. fossil fuels with renewables, another 15 per cent India’s emphasis on the Mission LiFE (Lifestyle by switching over to electric vehicles (EVs) and for Environment) aims at making individuals energy effi cient electrical appliances in residences adopt sustainable lifestyles to minimise carbon and business establishments. The remaining 45 footprints. Even as fi rms and households have per cent, however, relate to hard-to-abate sectors, progressively been adopting greener business viz., heavy industries, animal husbandry and practices and lifestyle changes, the enormous agriculture (Mony, 2022). They are hard to abate scale of the transition challenge and the colossal because either technology to support the green cost of delayed actions warrant comprehensive transition is not available or the cost is prohibitive. policy interventions using all feasible options as A business-as-usual scenario can only increase an integral part of the country’s decarbonisation the annual absolute size of carbon emissions by strategy. India already has a long-term low-carbon about 2.6 times between 2020 and 2050 (Paltsev development strategy in place (MoEFCC, 2022), et al., 2022). While use of more renewables and which sets out clearly the country’s envisaged energy effi cient practices can reduce emissions multi-pronged climate action plans. International from the hard-to-abate sectors by 15-20 per cent by experience and emerging risk mitigating policy 2050, appropriate carbon pricing would be critical * This chapter has been prepared by a team comprising Sitikantha Pattanaik, Dhirendra Gajbhiye, Abhilasha, Monika Sethi, Silu Muduli, Shobhit Goel, Saksham Sood, Soumya Suvra Bhadury, Rajas Saroy, Satyam Kumar, Prashant Kumar and Rashika Arora. 105REPORT ON CURRENCY AND FINANCE to reducing carbon emissions by 80 per cent by in the solar supply chain – polysilicon, silicon 2050. The Energy Conservation (Amendment) Act, wafer, photovoltaic (PV) cells and PV modules – 2022 recognises the importance of carbon pricing and access to strategic minerals such as lithium, and aims at development of a carbon market or an rare earths, copper, zinc, chromium and graphite. emissions trading system (ETS), where the focus Therefore, the goal of enhancing and securing the will be on reduction of carbon emissions rather capacity for a successful green transition may have than the current emphasis on energy effi ciency to contend with known and unknown impediments. under the Perform, Achieve and Trade (PAT) Increasing geo-economic fragmentation of the scheme. In the context of the forthcoming Carbon world economy is amplifying uncertainty about Border Adjustment Mechanism (CBAM) of the access to technology, industrial raw materials and European Union (EU), an early attention to carbon fi nal products for individual countries, with a few tax/ETS in India has become necessary. major economies cornering disproportionately large shares of available global supplies. IV.3 The second key dimension of the challenge is the scale of resources required for mitigation, IV.5 Each sector of the economy faces adaptation and disaster management. Financial formidable challenges that could potentially slow resources have two key components – cost down the pace of green transition. Globally, rice and availability – but much of the current policy farming, cattle rearing and biomass burning are focus has been on keeping the cost low through estimated to account for more than a fi fth of total greenium. The real challenge for India will be in methane emissions. While India has a National arranging new investment, estimated to be in the Mission for Sustainable Agriculture (NMSA) to range of US$ 7.2 trillion (baseline scenario) to promote climate-smart agriculture and climate- US$ 12.1 trillion (accelerated scenario) till 2050 smart villages aimed at avoiding excessive (Ghosh, 2023). One of the related challenges in use of water and electricity, adopting climate fi nancial planning would be managing the costs resilient cropping practices, and reducing carbon of decarbonisation – as several carbon emitting emissions; wider adoption on a sustained basis industries, buildings and fi rms would have already would be required going ahead. In the power made large fi xed investments, while also deploying sector, despite laudable progress in generating considerable labour force, which may have to be renewable energy, the country’s dependence re-trained to facilitate re-deployment in greener on fossil fuels remains large, and the fi nancial ventures. stress facing electricity distribution companies, IV.4 The third dimension relates to access to though easing in recent years, continues. In the technology and mineral resources at an affordable transportation sector, the state road transport cost. Increasing dependence on new technologies companies have limited fi nancial capacity to used in batteries; solar panels and wind turbines; phase out old vehicles, and the cost of EVs needs green hydrogen; carbon capture, utilisation and to fall much more to enhance their attractiveness storage (CCUS); and e-waste management to the common man. While solar and wind energy would require higher expenditure on research and generation costs are reducing, their uneven supply development (R&D) and strategic collaboration. cycles pose a major challenge given the costs of Currently, there is a high degree of concentration storage technology. In the construction sector, 106POLICY OPTIONS TO MITIGATE CLIMATE RISKS despite known climate-smart building techniques policy initiatives and options, such as the current and guidelines, most construction projects prefer tax-subsidy mix and budgetary allocations, extant low-cost techniques, in view of the large carbon taxes, ETS, and sovereign green bonds. shortages of housing in urban areas and the Section 3 explores evolving innovations and rising cost of construction in the country. Despite technology-based solutions across various sustained efforts of the Bureau of Energy sectors that are essential for securing desirable Effi ciency (BEE) and rising enforcement of progress towards a greener and cleaner India. effi ciency norms, energy conservation practices Section 4 examines the scope in trade policy for are not widely adopted in businesses. The accelerating the pace of green transition. Section limited fi nancial capacity of several municipal 5 reviews and proposes a gamut of regulatory corporations has been a constraint for sewage measures to support the green transition, while and waste treatment in cities in sync with the Section 6 delves into market-based solutions. national green transition plans. Therefore, a Section 7 discusses the complementary role that multi-pronged policy approach is necessary monetary policy could play in supporting green that recognises the trade-offs of each policy transition. Section 8 examines ways to nudge intervention and uses a mix of incentives and consumers/businesses to contribute to green enforcement for optimal results that accelerate transition embracing the virtue that “green begins green transition. at home/self” and as part of people’s clean India movement (Swachh Bharat Abhiyan). Section IV.6 Set against this context, this chapter 9 presents a scenario analysis to highlight the explores the policy choices available to India critical role of policy interventions in reducing today for transitioning to a greener and cleaner carbon emissions compared with a business-as- India over the coming decades. The broad usual scenario and recommends the need for available policy levers include fi scal policy, concerted actions covering all spheres of policy technology-enabled solutions, regulatory making. The concluding section sets out specifi c measures, trade policy, and monetary policy, policy recommendations, encompassing those besides energy conservation norms for wider that are already part of the animated debate at voluntary adoption by the households and various stages of implementation, or are new and more effective interventions by fi rms under need greater attention. corporate social responsibility recognising the rising preference of investors, shareholders and 2. Fiscal Policy Initiatives other key stakeholders in every business for pro-planet realignment of business strategies. IV.7 For a policy-induced structural shift in the Governments, the world over, have been leading economy to achieve the net zero target, large the fi ght against climate change risks by setting scale reallocation of resources would be required national climate action plans, coordinating from carbon-intensive to green industries/sectors, across borders with key stakeholders, identifying besides sizeable additional investment within a national-level challenges to sustainable pre-set time frame. Fiscal policy, therefore, must development and nudging individuals and play a prominent role, backed by an actionable and fi rms to embrace climate-friendly lifestyles and time-bound policy framework. Green fi scal policy business practices. Section 2 discusses fi scal encompasses the use of fi scal instruments such 107REPORT ON CURRENCY AND FINANCE as taxes, subsidies, grants, and expenditures to and Union Territories (UTs) to promote alternative help align the fi scal policy with climate and other fertilisers and balanced use of chemical fertilisers, environmental goals (Petrie, 2021). MISHTI (Mangrove Initiative for Shoreline Habitats & Tangible Incomes) scheme for mangrove IV.8 The rationale for fi scal intervention is plantation along the coastline and on salt pan premised on the confl icting interface between lands through convergence between funds under public fi nances and the green transition goal. the Mahatma Gandhi National Rural Employment On the one hand, governments across the Guarantee Scheme (MGNREGS) and the world subsidise fossil fuels – US$ 1 trillion in Compensatory Afforestation Fund Management 2022 alone (IEA, 2023a) – on the other hand, and Planning Authority (CAMPA); and the Amrit they also spend large budgetary resources on Dharohar scheme to encourage optimal use of protecting the environment, such as expenses wetlands, and enhance biodiversity, carbon stock, on environmental R&D, incentivising adoption of eco-tourism opportunities and income generation greener technology, management of fl ora and for local communities. fauna to protect natural habitats, and building disaster resilient infrastructure. Besides pro-active IV.10 Climate change adaptation generally measures to mitigate climate change risks under requires an increase in government spending a well-designed strategy, adapting to climate to minimise the damage from climate-related change would also entail large fi scal costs. Due disasters (Dabla-Norris et al., 2021). Climate to the potential effects of climate change on change mitigation can be pursued through long-term economic growth, it has emerged as carbon pricing, as it helps generate revenues an important risk to public fi nance sustainability which can be invested in green projects and/ (Baur et al., 2021). or used in providing incentives to the private sector for reducing emissions, including through IV.9 The Union Budget 2023-24 has identifi ed innovation in green technologies (Ferdinandusse ‘Green Growth’ as one of its seven priorities, et al., 2022). which will guide the economy through the Amrit Kaal. Accordingly, the Government announced IV.11 As of April 2022, 70 carbon pricing several measures to facilitate the transition of the initiatives, covering 23.2 per cent of global economy to lower carbon intensity and reduced greenhouse gas (GHG) emissions, have been put dependence on fossil fuels, such as building in place (Chart IV.1). Its potential, however, is still infrastructure to evacuate renewable energy untapped as most carbon prices are below the from Ladakh and allocation for Green Hydrogen levels needed to deliver signifi cant decarbonisation Mission, which targets annual production of 5 (World Bank, 2022a). The EU has the largest and million metric tonnes (MMT) by 2030. Additionally, most vibrant ETS – the EU ETS – where prices the Budget has also introduced new schemes have moved close to 100 per tonne of carbon such as GOBARdhan (Galvanizing Organic Bio- dioxide (CO ) (Financial Times, 2023). This is 2 Agro Resources Dhan) scheme to set up 500 new higher than in several other countries but still lower ‘waste to wealth’ plants; PM PRANAM (Programme than 120 per tonne of CO that would be required 2 for Restoration, Awareness, Nourishment and by 2030 to decarbonise by 2050 (Ferdinandusse Amelioration of Mother Earth) to incentivise States et al., 2022). 108POLICY OPTIONS TO MITIGATE CLIMATE RISKS Korea and Shanghai) and (b) baseline and credit Chart IV.1: Summary Map of Carbon Pricing Initiatives system, in which baseline emission levels are defi ned but there is no fi xed limit on emissions. Entities that reduce their emissions more than the mandated amount can earn carbon credits to sell to underachievers (e.g., Alberta and Tokyo); (iii) Feebates and Regulation; which include a sliding scale of fees (or rebates) for carbon emissions above (or below) certain rates. Examples include emission standards for vehicles, fuel quality standards for petrol and diesel (e.g., China, India, Japan, and Indonesia), tax rebates for Notes: 1. 70 Carbon Pricing Initiatives implemented, which include 47 national jurisdictions and 36 subnational jurisdictions. EVs, and higher fees on high-emitting vehicles 2. India’s recently amended Energy Conservation Act, 2001 empowers the Government to specify a carbon credit trading scheme, which (e.g., Singapore and India). The structure of can aid carbon price discovery in India. Source: Reproduced from Carbon Pricing Dashboard (World Bank); accessed fees and rebates is usually set to make the on April 21, 2023 system revenue neutral. While feebates and regulations may have limited mitigation impact, IV.12 The commonly used fi scal policy they can play an important role in fostering measures to mitigate and adapt to climate change investment in green energy (IMF, 2019); and are: (i) A carbon tax or a green tax; a compulsory, (iv) Public green investment; even as the private unrequited payment to the government on tax sector is likely to take the lead in undertaking bases deemed to be harming the environment. additional green investment, the public sector When the green taxes are introduced along with will need to act as a catalyst for the transition, a reduction in other taxes (such as labour tax or through direct investment, co-fi nancing, public- social security), it is viewed as an environmental private partnership (PPP) or state guarantees tax reform (ETR). ETRs were fi rst introduced (Ferdinandusse et al., 2022). Governments may in the Nordic countries in the 1990s followed be incentivised to increase green investment by by other European countries, Australia (2011), implementing a green golden rule, under which Japan (2012) and Chile (2014) (Gramkow, green investment expenditure is exempt from 2020); (ii) ETS; a market-based solution, which fi scal rules (Darvas and Wolff, 2022). enables carbon emitters to trade emission units IV.13 Fiscal authorities in emerging market to meet their targets. There are two main types economies (EMEs) need to carefully consider of emission systems: (a) cap-and-trade, where the pros and cons of these policy options, as well an upper limit on emissions is fi xed and emission as the methods used to implement them when permits are either auctioned or distributed – determining carbon pricing. For arriving at a those exceeding the limit must buy carbon credits suitable carbon pricing policy framework for India, and those operating within the limit earn carbon it is necessary to understand how carbon taxes credits (e.g., Kazakhstan, Switzerland, South and subsidies have been used in other countries. 109REPORT ON CURRENCY AND FINANCE Chart IV.2: Tax Revenues from Non-renewable Energy (During 2017-18 to 2019-20) Note: Figures are averages for 2017-18 to 2019-20. Source: OECD. IV.14 Countries that tax non-renewable energy Carbon Tax sources, including transportation fuel are shown IV.16 Governments impose carbon tax on CO 2 in Chart IV.2. India is not included in this group of emitters to make them internalise the associated countries because there is no explicit carbon price negative externalities and attain socially optimal specifi cally imposed on fuels like gasoline and diesel. These petroleum products are, however, Chart IV.3: Countries with Highest Subsidies on subject to substantial excise duty and value-added Non-renewable Energy (During 2017-18 to 2019-20) tax (VAT). The total contribution of the petroleum sector to the exchequer in 2021-22 stood at 3.3 per cent of GDP1. IV.15 Several countries subsidise fossil fuels, with the total amount of subsidies (both explicit and implicit) as a share of GDP high enough to disincentivise and constrain green transition efforts (Chart IV.3). Keeping in perspective the international experience, we explore next the scope of carbon taxes and ETS in India. Note: Includes both implicit and explicit subsidies. Figures are averages for 2017-18 to 2019-20. Source: Parry et al. (2021). 1 Authors’ calculations based on data from the Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas, Government of India. 110POLICY OPTIONS TO MITIGATE CLIMATE RISKS production levels. CO emissions have increased on a per capita basis, it is one of the lowest 2 between 2002 and 2022, particularly in Asian (Chart IV.4c). To date, very few Asian economies countries vis-à-vis the advanced economies (AEs) have incorporated carbon taxes into their climate (Charts IV.4a and IV.4b). India is the third largest risk-mitigation strategies. emitter of CO after China and the US, though, 2 IV.17 Carbon taxes have been introduced by 36 jurisdictions as of April 2022 (World Bank, 2022b). Chart IV.4: CO Emissions and Carbon Tax These are levied per unit of metric tonne of carbon 2 dioxide equivalent (tCO e). Finland was the fi rst a. Total Emissions and Share – 2021 2 country to adopt a carbon tax, followed by Sweden and Norway. As of April 2022, the carbon tax rate of Finland stood at US$ 85 per tCO e. Uruguay 2 has the highest tax rate of US$ 137 per tCO e, 2 followed by Switzerland and Sweden at US$ 130 per tCO e each. The adoption of carbon taxes 2 signifi cantly reduced GHG emissions in Finland, Sweden, and Norway (Andersson, 2019; Bruvoll and Larsen, 2004; Khastar et al., 2020). b. Two Decadal Change IV.18 Estimates based on data for the Asia and Pacifi c region suggest that a carbon tax of US$ 25 per tonne could reduce emissions by 21 per cent by 2030, with these nations outperforming their Paris Agreement targets and generating additional revenues of 0.8 per cent of GDP (Dabla-Norris et al., 2021). For India, a US$ 25 per tonne of carbon tax is estimated to reduce emissions by about c. Per capita Emissions – 2021 25 per cent by 2030 (IMF, 2019)2. Limiting global warming to 2 degree celsius, however, would require a carbon tax that may have to rise rapidly to US$ 75 per tonne of carbon dioxide by 2030. Carbon taxes are found to be more effective, but comparatively less used, whereas non-tax risk mitigation measures such as the ETS, feebates and regulations are less effective and therefore should be used as a complement to carbon taxes Note: The size of the bubble in Chart 4b represents the share of CO emissions in global CO emissions. 2 (Dabla-Norris et al., 2021). The proposed 2 Source: Our World in Data and World Bank (2022a). implementation of border carbon adjustments 2 The scenario analysis in Section 9 of this Chapter uses same estimates. 111REPORT ON CURRENCY AND FINANCE (BCAs)3 by some of the AEs to prevent their regressive. The imposition of carbon taxes can mitigation efforts from being undermined also reduce social welfare and is more likely to increase strengthens the case for other nations to implement income inequality (Khastar et al., 2020). Revenue a carbon tax4. recycling, i.e., earmarking revenues from carbon taxes for spending on citizen welfare schemes can IV.19 India introduced a clean energy cess on help enhance public support for carbon taxation. It coal at a rate of `50 per tonne in 20105. The tax is estimated that the introduction of carbon pricing proceeds were earmarked for the newly created without revenue recycling could increase the Gini National Clean Energy Fund (NCEF) to fund coeffi cient by 0.59 per cent over the baseline research and innovative clean energy technology scenario of business as usual in 2030 (Zhao et al., projects. The utilisation of funds from NCEF was, 2022). With a progressive recycling scheme (i.e., however, low and disbursements were aligned lower income groups receiving higher benefi ts), more with ongoing programmes/missions of however, the Gini coeffi cient in 2030 would be various ministries/departments than with the fund’s 0.34 per cent lower than the baseline. stated objectives (Pandey, 2013). In July 2017, the clean energy cess was replaced by the Goods and IV.21 The impact of carbon taxes also depends Services Tax (GST) compensation cess of `400 on the utilisation of tax proceeds. There are three per tonne on coal production, which was meant possible ways to utilise tax proceeds to reduce to bridge the revenue shortfall of States due to tax burdens and improve economic outcomes: the implementation of GST. Furthermore, with an (a) providing a lumpsum dividend to households, excise tax of `19.9 per litre on petrol and `15.8 as in the United Kingdom and France, which can per litre on diesel by the Central Government and improve progressivity but may reduce employment a VAT by the State Governments, the consumption and income by disincentivising work/search for of petrol and diesel is heavily taxed in India. It is work among the unemployed; (b) a corporate tax estimated that 54.7 per cent of GHG emissions in rate cut, which may increase output, productivity, India are subject to a positive net effective carbon and innovation but at the cost of likely reduction rate (NECR).6 The NECR in India is the highest of progressivity; and (c) a reduction in income tax, in the road transport sector and zero or negative as in Finland, which can improve progressivity, in other sectors such as agriculture, industry and income, and employment (Pomerleau and Asen, buildings (OECD, 2021a). 2019). Hence, the third strategy may be the preferred policy tool to reduce the adverse impact IV.20 Carbon taxes on fossil fuels entail of a carbon tax. distributional consequences as they are generally 3 A border carbon adjustment is an environmental trade policy that consists of levying import fees by carbon-taxing countries on goods manufactured by non-carbon taxing countries. 4 In December 2022, the EU Member States and the European Parliament agreed to the world’s fi rst Carbon Border Adjustment Mechanism, which will be effective in its transitional phase from October 1, 2023 and in its permanent phase from January 1, 2026. 5 The cess was subsequently increased to `200 per tonne in March 2015 and to `400 per tonne in March 2016. In terms of carbon tax equivalent, the latest increase translated into a carbon price of US$ 4 per tonne of carbon dioxide. 6 NECR is the Effective Carbon Rate (ECR) adjusted for fossil fuel subsidies. ECR is the total price that applies to CO emissions from 2 energy use because of market-based instruments such as fuel excise taxes, carbon taxes and carbon emission permit prices (OECD, 2021a). 112POLICY OPTIONS TO MITIGATE CLIMATE RISKS Table IV.1: Step-wise Considerations for Implementing a Carbon Tax Utilisation of tax revenue Implementation (cid:129) Revenues may be utilised for the promotion of clean technology Determination of tax rate (cid:129) Phased yet timely and R&D spending on low-carbon implementation is crucial, with Determination of tax base There are two approaches to technology. institutional amendments. The determining the tax rate: All fuels that produce carbon tax base and rate may be (cid:129) Since a carbon tax may increase should be considered as the 1) Social cost of carbon - tax gradually increased over time. the burden on low-income universal tax base. rates are estimated based households as they may not be able (cid:129) Inclusion of carbon taxes in on the social cost due to to switch to low-carbon technology GST, Central Excise and State emissions of CO. quickly, appropriate offsets may be 2 VAT, may help implementation required. 2) Abatement approach - in India. carbon tax is imposed to (cid:129) Small industries using less carbon- meet specifi c emissions effi cient production technology may reduction targets committed increase their fi nal prices which at international fora. may degrade their competitiveness. Hence identifying and subsidising these industries using the tax proceeds may be required. Source: EY (2018). IV.22 At present, India does not have an explicit post-disaster losses must also be an integral part carbon tax system but it imposes taxes on the use of the medium-term fi scal policy strategy. After of fossil fuels, as noted earlier. As and when a decades of congressional stalemate, the Infl ation carbon tax is introduced, it is important to recognise Reduction Act (IRA) in the US was passed on that several considerations must predate its account of two major strategic shifts. First, carrots implementation (Table IV.1). Moreover, the World score higher over sticks to build political support Bank recommends that countries imposing carbon and hence the law subsidises clean energy rather taxes should target higher economic growth, than taxing carbon pollution. Second, the law spend more on clean technology, provide direct explicitly favours US-made products (such as EVs) benefi t transfers to low-income households and and clean energy, as part of a broader shift toward effectively regulate and monitor environmental strategic intervention to promote and protect fi rms in targeted sectors such as production of objectives of carbon pricing. semiconductors (Joselaw and Montalbano, 2022). Feebates and Subsidies Emissions Trading Systems (ETS) IV.23 Fiscal measures should also support IV.24 Like a carbon tax, an ETS has its own investment in clean technologies through greater challenges and benefi ts (Table IV.2). Adopting a budgetary outlay on R&D for developing low- new carbon pricing mechanism such as the ETS carbon technologies and by compensating losses may necessitate overhauling the current carbon arising from the transition to clean technologies tax/subsidy framework. to incentivise fi rms to adopt these technologies. Investment in climate resilient infrastructure and IV.25 India’s Energy Conservation (Amendment) specifi cally earmarked resources for managing Act, 2022 has drawn attention to the importance 113REPORT ON CURRENCY AND FINANCE Table IV.2: Carbon Tax and ETS: Government the authority to create a system Advantages and Disadvantages for trading carbon credits, laying the foundation for a legitimate carbon market. Several EMEs Carbon Tax ETS (accounting for around half of the global GHG Advantage Provides certainty Increases certainty about the price of about emission emissions) have so far implemented or are carbon reductions and environmental benefi ts. contemplating carbon pricing using ETS or carbon Disadvantage The outcome of The costs of achieving taxes (Table IV.3). emission reductions is the desired level unknown. of abatement are IV.26 Mexico conducted several pilots involving unknown. specifi c enterprises before its three-year trial Source: Observer Research Foundation (2022). operational phase in 2020. China implemented its of carbon markets and green fi nancing via green national ETS market in 2021 after trials in eight bonds for meeting the country’s decarbonisation provinces. The federal structure of India could targets. Its scope is substantial, and it gives the help in implementing ETS pilot programmes Table IV.3: Carbon Pricing Mechanism in Emerging Market Economies Name GHG Status Description Scope Emissions (Share of GHG (as per cent emissions of World covered) emission) Argentina 0.80 Carbon Tax (Implemented) Implemented a Carbon tax in 2018, replacing the fuel tax 20 per cent Brazil 2.92 ETS (TBC) National Climate Policy aims to promote ETS. Since 2013, a Not decided group of leading companies have participated in a voluntary ETS simulation China 24.23 ETS (Implemented) The world’s largest ETS, in terms of covered emissions, was 33 per cent. implemented in 2021. Indonesia 3.94 Carbon Tax (Implemented) Passed a law to implement carbon tax in October 2021, Working 26 per cent / ETS (TBC) towards a mandatory ETS in the power sector using Carbon tax South Korea 1.31 ETS (Implemented) Launched a cap-and-trade based ETS at a national level in 2015 73 per cent. Malaysia 0.80 ETS (TBC) Considering between Domestic ETS and Carbon tax Not decided Mexico 1.35 Carbon Tax (Implemented) Carbon tax is an excise tax under the special tax on production 44 per cent. / ETS (TBC) and services that was implemented in 2014 Poland 0.64 Carbon Tax (Implemented) Part of the Environmental Protection Act that covers CO 3.75 per cent. 2 emission, dust, sewage, and waste. South Africa 1.13 Carbon Tax (Implemented) Places a price on CO emissions from large businesses in the 80 per cent. 2 industry, power, and transport sectors. Thailand 1.13 ETS (TBC) Following COP 26, the government is developing guidelines for Not decided ETS, expected to be released in 2022 Türkiye 1.31 ETS (TBC) Laws governing monitoring, reporting, and verifi cation (MRV) Not decided were implemented in Türkiye in 2012, and monitoring of GHG emissions from large installations began in 2015. India 6.75 Carbon Tax (TBC) NA NA Note: TBC: To be confi rmed. Source: Our World in Data. 114POLICY OPTIONS TO MITIGATE CLIMATE RISKS Table IV.4: Emissions Trading Model in Surat Key Areas Details Background  Pollution reached a high level in Surat in 2018.  Surat was selected as the location for the pilot programme. ETS model in Surat  ETS is a regulatory mechanism that aims to reduce pollution load in a region while simultaneously minimising the business compliance cost.  Different types of businesses can buy and sell the rights to release particulate matter into the atmosphere by exchanging licences, measured in kilograms (kgs) that fall within this cap. Trading  At the beginning of every month (during which the emission permit is valid), 80 per cent of the total cap of 280 tonnes for that period is distributed free to all participating units.  GPCB will offer the remaining 20 per cent during the fi rst auction of the compliance period at a fl oor price of ` 5/kg. Auctions  Transactions like these take place on the trading platform known as ETS-PM, which is hosted by the National Commodities and Derivatives Exchange e-Market Limited (NeML), where all participants must register a trading account.  There are two types of auctions: (i) Uniform price auction and (ii) Continuous market. To satisfy compliance responsibilities, units may acquire and sell leftover permits at the fi nal auction price 2-7 days before the compliance period ends. Punitive Actions  Environmental damage compensation to the amount of ` 200/kg will be assessed for emissions over a unit’s permit holdings when the compliance term ends.  An upper limit has been established so players cannot stockpile permits to gain an unfair advantage. Source: Gujarat Polltuion Control Board (GPCB): Emissions Trading Scheme (Pilot Project, 2019). across states. The gradual enlargement of its and hence, a consistent reporting template scope into a more practical nation-wide ETS needs to be put in place to record climate-related would require simulations and pilots. On July 15, expenditures and report them in a Climate Budget 2019, the Gujarat Pollution Control Board (GPCB) Report as a supplement to the annual budget. introduced India’s fi rst ETS and the world’s fi rst Even before that, an effective green taxonomy to cap-and-trade market in particulate pollution limit the potential risk of greenwashing is needed. (Table IV.4). Starting with the fi rst climate budget published by Nepal in 2013, several countries have followed IV.27 An ETS provides a transformational suit, including Bangladesh, Indonesia, Moldova, alternative to command-and-control policies that are expensive, infl exible and could be enforced Kenya, Norway, Sweden and France (Petrie, by imposing costly and time-consuming penalties. 2021). In India, Odisha became the fi rst state to The ETS is anticipated to provide emissions publish a climate budget report in 2020. reduction certainty without signifi cantly altering IV.29 To meet its climate goals, India needs to the existing carbon tax or subsidies, and may be introduce a broad-based carbon pricing system adopted in India for accelerating decarbonisation in line with the global best practices highlighted in industries like transportation. ETS may be above. Furthermore, a variant of the NCEF may politically more acceptable and relatively easier to be instituted, to which all receipts from carbon implement (IMF, 2022a). taxes and proceeds from the recently introduced IV.28 Public spending on climate change and green bonds may be credited. Expenditure tagging related issues remains underreported in India, must be undertaken to highlight separately 115REPORT ON CURRENCY AND FINANCE expenditures that benefi t the environment, and Chart IV.5: Sovereign Green Bond Issuances those that are harmful, to produce full-fl edged climate budget reports, which may be instrumental in better identifying the green fi nancing needs and attracting international fi nancing (Petrie, 2021). Sovereign Green Bonds IV.30 Sovereign green bonds (SGBs) are similar to traditional Government securities except that they contain a “use of proceeds” clause which states that the funds will be utilized solely for green investments (Ando et al., 2022). The fi rst ever SGBs were issued by Poland in 2016, followed by France, Fiji and Nigeria in 2017. Note: The chart represents the total SGB issuances of each country as of While several EMEs have started issuing SGBs, mid-April 2023. Source: Bloomberg, accessed on April 19, 2023. advanced economies are the frontrunners in SGB issuances so far (Chart IV.5). India issued its fi rst which occurs when the SGB exhibits a lower yield SGBs amounting to `16,000 crore in 2022-23. compared to the traditional Government bond, due While SGBs are gaining popularity, their market to strong demand from investors following greater remains shallow as they account for only 0.2 per transparency on the use of bond proceeds, despite cent of all Government debt securities issued in lower liquidity of SGBs (Ando et al., 2022). SGBs the OECD area and 12 per cent of total green can be a stable source of fi nancing for Government bond issuances in EMEs (OECD, 2021b). expenditure on climate related infrastructure IV.31 Some of the benefi ts of SGBs include and can facilitate the transition to a low-carbon lower refi nancing risk as these bonds are economy which would, however, depend on generally issued with a long maturity (Doronzo how they perform relative to conventional bonds et al., 2021); and a green premium (or greenium) (Box IV.1). Box IV.1 Emerging Market (EM) Green Bonds: The Signifi cance of Greenium ‘Greenium’- a premium over vanilla bonds, is an integral Global fi nancial conditions have infl uenced the evolution feature of a successful green bond issuance strategy. of the spread between the return on EM green bonds and JP Morgan’s EM Green Bond Index outperformed the their non-green counterparts. A tighter global fi nancial comparable JP Morgan EM Bond Index in 2022, extending condition (proxied by the US fi nancial conditions) is the cumulative over-performance since December 2017 associated with an increase in the spread, and the to 790 basis points (bps) (IFC, 2021; Bloomberg, 2022). association almost doubled from the pre-COVID to post- When the green bond index outperforms the conventional Covid period. For example, the correlation was 0.31 in bond performance, the greenium widens (Chart 1). the pre-COVID period (2018 M01- 2020 M02) and rose (Contd...) 116POLICY OPTIONS TO MITIGATE CLIMATE RISKS Chart 1: Total Return Performance (JP Morgan EM Green Chart 2: National Financial Conditions Index Index versus JP Morgan EM Aggregate) Note: Spread represents the difference in the returns of these indices. J.P. Morgan ESG Green Social & Sustainability IG EUR Bond Total Return (JPEIGSSE) Index. Source: Bloomberg and Authors’ calculation. Source: Federal Reserve Bank of Chicago. to 0.61 (2020 M03 – 2022 M12). Granger causality Table 1: Granger Causality Test Results results between spread and fi nancial conditions strongly Null-Hypotheses NFCI does not Spread does not support causality from the National Financial Conditions Granger Cause Granger Cause Spread NFCI Index (NFCI) to spread at 1 per cent level of statistical Lags = 2 13.13*** 2.15 signifi cance (Chart 2 and Table 1). (0.00) (0.13) Lags = 3 9.42*** 1.49 While assessing the pricing of SGBs, it would be important (0.00) (0.23) to recognise the signifi cance of global fi nancial conditions Lags = 4 10.18*** 1.24 (0.00) (0.31) in shifting investor appetite, besides the role of a pool of Lags = 5 9.72*** 1.07 savers, both domestic and foreign, who may accept lower (0.00) (0.39) returns on such bonds if the proceeds are clearly earmarked Note: All coeffi cients are F-Statistics; Terms in bracket are p-values. and used for green projects. Sample: December 2017 to December 2022; Blue shaded region shows easy global fi nancial conditions, whereas red shaded part References: represents tight fi nancial conditions (post October 2021 tightening of global fi nancial conditions is the outcome of high infl ation and expected IFC (2021). Emerging market green bonds report: On the rise in the US fed funds rate). Source: Authors’ calculations. road to green recovery. 3. Innovation and Technology Adoption processes, including R&D; investment, economies of scale and public policy changes. As per this IV.32 Technical progress can be a key enabler to view, public institutions have an important role achieving a successful green transition. Besides in allowing effi cient price discovery for desirable increasing the productivity of resources, it can resource allocation and providing a conducive reduce the degradation of natural resources and environment for environment-related innovation. curtail pollution. In most traditional economic Therefore, Governments have a more direct models and growth theories, technology is role in developing and diffusing technology for modelled as an exogenous variable that appears sustainable development and fi nancing basic as ‘manna from heaven’. Endogenous growth research for green innovation. In this context, this theories acknowledge that technological change section explores alternative technology choices occurs as a result of identifi able and deliberate available to the policymakers today while pursuing 117REPORT ON CURRENCY AND FINANCE the path to a clean, green and sustainable energy support in China, the EU and Latin America (IEA, transition. 2022a). India has made signifi cant strides towards a sustainable energy mix over the past few years, Renewable Energy with an installed capacity from renewable sources IV.33 Technology solutions have helped discover of energy of more than 157 GW (PIB, 2022a), and and exploit alternative energy sources, enhance the share of renewables in electricity generation energy effi ciency of current and new systems, increasing from around 16 per cent in CY2015 reduce risks arising from climate change, and to 23 per cent in CY2022. This is in pursuance of lower renewable energy costs. India’s vision of achieving the Net Zero Emission IV.34 Most energy-economy models, in target by 2070 and increasing renewables capacity fact, historically underestimated the pace of to 500 GW by 2030. A granular analysis of India’s deployment of renewable energy technologies electricity generation mix shows that the share of and overestimated their costs (Way et al., 2022) solar energy has increased from 0.6 per cent in (Chart IV.6). Compared to continuing with a 2015 to 5.6 per cent in 2022 (Chart IV.7). Hydro- fossil fuel-based system, a rapid green energy power share remains steady at approximately 10 transition may result in signifi cant savings. The per cent, while the share of wind energy has nearly price of electricity from utility-scale solar PVs has doubled. The share of coal and natural gas in the reduced by 89 per cent from 2009 to 2019, while electricity mix has reduced over the years. The key prices of lithium-ion batteries have fallen by 97 per challenge in raising the share of renewable energy cent since their commercial introduction in 1991 is not only incentivising domestic production of (UNDP, 2022). solar panels, wind turbines, batteries and EVs, but IV.35 Renewables’ growth in 2022 was much also facilitating research and technology extension faster than initially expected, driven by strong policy for dealing with the fl uctuating energy output from Chart IV.6: Cost and Use Trends of Various Energy Sources a. Inflation-adjusted Useful Energy Cost b. Global Useful Energy Production Source: Reproduced from Way et al. (2022). 118POLICY OPTIONS TO MITIGATE CLIMATE RISKS IV.37 As part of its LT-LEDS, India aims at Chart IV.7: Net Electricity Production by Source (TWh) carrying out a just, smooth and sustainable transition away from fossil fuels by making India a green hydrogen hub, increasing electrolyser- manufacturing capacity in the country, and undertaking a three-fold increase in nuclear power generation capacity by 2032. Additionally, the LT- LEDS focuses on low-carbon transportation, by increasing the use of biofuels through ethanol blending in petrol (which is envisaged to rise to 20 per cent by 2025 from 10 per cent under the Ethanol Blended Petrol programme), increase in EV penetration and promotion of green hydrogen fuel. Note: Data labels show percentage shares, calculated as a per cent of total net electricity generation; they may not add to 100. Source: IEA Monthly Energy Statistics, and Authors’ calculations. Solar Power, Batteries and EVs IV.38 In line with international trends, the cost of renewable energy sources like solar and wind, solar power generation has come down in India and securing the entire supply chain. in recent years, with the lowest auction winning IV.36 Various policy steps have been taken by tariffs hovering in the range of `2-3 per kilowatt- the Government towards a sustainable energy hour (kWh). Installed capacity is increasing in a mix, including the new solar-powered toll plazas, mission mode, but the focus now needs to shift development of Mass Rapid Transit Systems to addressing viability of solar power for use by (MRTS) across cities, the National Smart Grid all. Important sources of non-conventional energy, Mission and the Green Energy Corridor Project wind and solar, face two major challenges - high for an effi cient transmission and distribution fl uctuation in supply due to their dependence on network for renewable energy and the Faster environmental factors such as sunlight and wind Adoption and Manufacturing of Hybrid Electric speed, and infl exibility in scaling up or down in vehicles (FAME India) scheme. More recently, line with the demand. Hence, a grid with high solar India submitted its long-term low greenhouse and wind capacity needs stabilising mechanisms gas emission development strategies (LT-LEDS) to manage fl uctuations in demand. One solution at the 27th Conference of Parties (COP 27) of could be supplementing the grid with readily the United Nations Framework Convention on variable sources like run-off-the-river hydro or Climate Change (UNFCCC) at Sharm El Sheikh geothermal energy. Another could be to manage (MoEFCC, 2022). The LT-LEDS is a crucial policy demand through the use of smart grids that can tool that can help a country to place short-term monitor power fl ows from points of generation to climate actions in the context of the long-term points of consumption and control the power fl ow structural changes required to transition to a low- or curtail the load to match generation in real- carbon and climate-resilient economy. time or near real-time. The National Smart Grid Mission is a step in this direction and is expected 119REPORT ON CURRENCY AND FINANCE to inculcate dynamic pricing mechanisms to India achieved the milestone of one million EV incentivise consumers to shift their usage over registrations in 2022 – a substantial jump from different times of the day in response to price 3,31,365 registrations a year ago. Globally, signals. the success of EVs has largely been driven by sustained policy support through subsidies aimed IV.39 The smart grid will also facilitate distributed at increasing EV sales and crowding–in charging generation, especially rooftop solar generation, infrastructure and manufacturing capacity. by allowing movement and measurement of energy in both directions using control systems IV.41 In India, the FAME scheme has been and net metering, which could help “prosumers” extended to FAME-II till the end of 2024, which i.e., the consumers that both produce and now includes a 50 per cent increase in purchase consume electricity, to safely connect to the grid. incentives for electric two-wheelers to `15,000 Yet another option is developing Energy Storage per kWh of battery capacity. This is important, Systems, which involve converting excess solar given that India is the largest two-wheeler market and wind power to potential energy in batteries, in the world. The FAME-II scheme has provided supercapacitors, compressed air energy storage subsidies to the tune of `1,000 crore to develop systems, fl ywheels, and gravity storage or pumped almost 2,900 charging stations across 25 states. hydro storage plants. Rapid technological progress Additionally, the National Highways Authority of and cost competitiveness have made batteries the India has set an objective to install EV charging mode of choice for most applications (ISGF, 2019). stations every 40-60 km along national highways, The research priorities for electrical batteries covering 35,000-40,000 km of highways by 2023. in India include new cell chemistries emerging Nineteen states in India offer some form of policy from the lithium-ion family, such as lithium-air, support for EVs, such as purchase incentives, lithium-sulphur or other metals, such as sodium exemptions from road taxes, and subsidies for and magnesium. The recent discovery of 5.9 investment in battery manufacturing and related million tonnes of lithium reserves should enhance components (IEA, 2022c). the indigenous impetus for green transition and IV.42 The switch to EVs is bound to exert help India in reducing its import dependence for pressure on mines for supply of minerals such as this crucial mineral. Nevertheless, research and copper, lithium, nickel, manganese and graphite innovation for exploring other battery technologies and for rare earth elements that are used in EV is a strategic requirement. manufacturing (Chart IV.8). This is true even for wind IV.40 EVs have emerged as the next frontier in power. It is important that the environmental costs mobility, with global electric car sales exceeding of mining and extraction are accurately factored 10 million units in 2022. Cumulatively, the number in, and appropriate compensation mechanisms of electric cars on road exceeded 26 million in are devised. The prices of these metals surged 2022 - more than fi ve times the stock in 2018 in the aftermath of the war in Ukraine, and their (IEA, 2023c). According to the Vahan dashboard7, supply chain remains highly concentrated. 7 Ministry of Road Transport and Highways, Government of India (accessed on April 17, 2023). 120POLICY OPTIONS TO MITIGATE CLIMATE RISKS Chart IV.8: Mineral Intensity of Selected Clean and Fossil Energy Technologies Source: Reproduced from IEA (2022d). IV.43 Three-fourths of worldwide lithium-ion processing, manufacturing and assembly of solar battery production is centred in China, and over PVCs, wind turbines, EV batteries and related half of lithium, cobalt and graphite processing and components. refi ning capacity is located there. Central and South IV.44 The electrifi cation of the road transport America and Africa hold a large share of reserves sector will have to be supported by subsidies, of minerals used in the renewable power supply especially in the case of charging stations, until chain (Chart IV.9). China currently dominates the EV density is suffi cient to sustain the charging processing, manufacturing and assembly phases infrastructure without any support. Incentivising of the supply chains of key renewable energy the installation of home chargers in existing technologies. India needs to secure its supply parking spaces, mandating EV readiness for new chain, including through indigenous production buildings and installation of chargers in existing and outward foreign direct investment (FDI), as buildings are the way forward. Recycling of metals being pursued by the European nations and the involved in battery and EV production or moving to US. India neither has substantial reserves of newer technologies such as lithium iron phosphate such minerals (other than the recently discovered cathodes and manganese-rich cathodes may lithium), nor is it globally competitive in processing be necessary to combat metal shortages and capacity. Hence, there is an urgent need to secure a encourage local battery production. Battery steady supply of these minerals through diplomatic standardisation and developing a common set efforts recognising the benefi ts of South-South of standards for testing and evaluating second- cooperation and at the same time, incentivising hand batteries may be necessary for the effective investment for creating large capacity for material recycling of old batteries. 121REPORT ON CURRENCY AND FINANCE (TERI, 2022). Presently, most consumption is of Chart IV.9: Geographic Concentration of Selected Clean Energy Technologies by Supply Chain Stage and grey hydrogen8 and its use is largely confi ned to Country/Region, 2021 the fertilizer and refi nery sectors. Hard-to-abate sectors such as cement, steel and transport can be potential future hydrogen-consuming sectors. Green hydrogen can be an effective way of storing excess energy during times of low demand to be fed back into the grid when demand rises. The cost of green hydrogen is expected to be reduced by more than 50 per cent by 2030, largely driven by the decrease in the cost of renewables and electrolysers in India (TERI, 2022). The National Green Hydrogen Mission aims to make India a global hub for production, utilisation and export of green hydrogen and its derivatives. Moreover, it would reduce fossil fuel imports by more than `1 lakh crore by 2030, thereby bringing down the overall import bill. Various public sector enterprises and conglomerates have announced long-term investment commitments in the green hydrogen space. IV.46 Furthermore, the Green Hydrogen Mission could be a major catalyst for India’s decarbonisation, built on the government’s proactive policy focus, ambitious private sector partnership and advantageous production Notes: NAM: North America; Rest of APAC: Asia-Pacific excluding China and India; CSAM: Central and South America. Alum: Aluminum. Source: Reproduced from IEA (2022d). environment. With abundant renewable resources availability coupled with comparatively lower construction costs than competing regions, Green Hydrogen India is well positioned to take the lead in IV.45 Green hydrogen is the hydrogen produced green hydrogen production. Indigenisation of by the electrolysis of water molecules using technological processes and industry-led R&D energy from renewables. India currently consumes for breakthrough technology would be the key about 6.17 MT of hydrogen annually, and this is to enhancing electrolysis capacity for green expected to grow to 28 MT per annum by 2050 hydrogen production. 8 Hydrogen is classifi ed as grey, blue, and green based on the method of production. Grey Hydrogen is the most widely produced, and is generated from methane through steam reforming, which generates a signifi cant amount of carbon dioxide. Hydrogen is labelled blue whenever the carbon generated from steam reforming is captured and stored underground through industrial carbon capture and storage. Green hydrogen is produced by using clean energy from surplus renewable energy sources to split water into two hydrogen atoms and one oxygen atom through electrolysis. 122POLICY OPTIONS TO MITIGATE CLIMATE RISKS Carbon Capture Utilisation and Storage (CCUS) with eight of them under construction as of October 2022. The declining trends are largely in IV.47 Leading US tech companies9 have response to the Fukushima disaster in 2011, after pledged US$ 925 million to remove CO from the 2 which even fi rm believers in nuclear power as the atmosphere (known as carbon capture) to arrest viable path to sustainable energy security, such global warming. Globally about six gigatonnes as France, decided to scale down. Post-pandemic of CO a year is required to be removed from 2 energy shortages and the energy crisis in Europe the atmosphere by 2050 to avert any disastrous on account of the war in Ukraine, however, have effects of climate change (McKinsey & Company, led to a revival of interest in nuclear power. 2022). The inclusion of Carbon Capture Utilisation and Storage (CCUS) as one of the 13 IV.49 New technologies, such as very small activities that qualify for carbon trading in India’s reactors, are emerging, which are sealed and do upcoming carbon trading market may provide a not require regular refueling, making them well- more diversifi ed toolkit for India to tackle CO suited for applications in which the entire reactor 2 emissions (PIB, 2023). Moreover, the Ministry of can be plugged into a grid or dropped into a Petroleum and Natural Gas (MoPNG) received remote location where they can operate for many `35,000 crore grant in the 2022-23 budget, years till refueling is required. In a bid to reduce its which is expected to be deployed in carbon dependence on imported Uranium, India is tilting sequestration technologies such as CCUS. Thus, towards thorium based nuclear reactors in the CCUS can play a crucial role in achieving India’s long run, since this fuel is available in the monazite goal of reducing CO emissions by 50 per cent by sands of the eastern and western coasts of the 2 2050 by decarbonising hard-to-abate industries country. such as steel, cement, and petrochemicals (NITI Artifi cial Intelligence (AI) and Machine Learning Aayog, 2022a). However, its expensive cost (ML) for Sustainable Energy Transition structure and unproven technology pose certain IV.50 In recent years, a large volume of data downside risks. has been unlocked through the Internet of Things Nuclear Energy (IoT) enabled sensors, satellite data and drones, IV.48 According to the World Nuclear Industry with scope for using AI, ML, and blockchain to Status Report 2022, the share of nuclear energy identify and propagate climate solutions. These in global commercial gross electricity generation technologies can help measure, understand and in 2021 dropped to 9.8 per cent – the lowest in evaluate challenges and make forecasts, enable four decades – and 40 per cent below the peak informed policy choices, permit the automation of of 17.5 per cent attained in 1996. Nuclear energy responses, optimise resource use, and provide generation in India accounted for 2.6 per cent of smart infrastructure. Moreover, AI can also help total electricity generation in 2022. India has 19 of integrate renewables of fl uctuating supply by the world’s total 411 functioning nuclear reactors enabling smart grids that partially match electricity 9 Four big tech companies – Alphabet, Meta, Shopify, and Stripe. 123REPORT ON CURRENCY AND FINANCE demand to times of high sunshine and wind speed. such as electricity systems, transportation and AI is estimated to have the potential to enable climate prediction (Table IV.5). the fulfi lment of 93 per cent of the environmental Sustainable Development Goals (Rolnick et al., IV.51 With technology expected to shape the 2023). Various ML technologies have immense progress on green transition, it is important to potential to provide green solutions in domains prioritise an innovation-supportive policy regime Table IV.5: Machine Learning and its Deployment for Climate Change Solutions Solution Domain Causal Computer Interpret- Natural Reinforce- Time- Transfer Uncer- Unsu- Inference Vision able Language ment Series Learning tainty pervised Models Process- Learning Analysis Quantifi - Learning ing and cation Control Electricity systems Enabling low-carbon electricity ✅ ✅ ✅ ✅ ✅ ✅ Reducing current-system impacts ✅ ✅ ✅ ✅ Ensuring global impact ✅ ✅ ✅ Transportation Reducing transport activity ✅ ✅ ✅ ✅ Improving vehicle effi ciency ✅ ✅ Alternative fuels & electrifi cation ✅ ✅ Buildings and cities Optimising buildings ✅ ✅ ✅ ✅ Urban planning ✅ ✅ ✅ ✅ The future of cities ✅ ✅ ✅ ✅ Industry Optimising supply chains ✅ ✅ ✅ Improving materials ✅ Production & energy ✅ ✅ ✅ Farms & forests Remote sensing of emissions ✅ Precision agriculture ✅ ✅ ✅ Monitoring peatlands ✅ Carbon dioxide removal Direct air capture ✅ Sequestering CO ✅ ✅ ✅ 2 Climate prediction Uniting data, ML & climate science ✅ ✅ ✅ ✅ Forecasting extreme events ✅ ✅ ✅ ✅ Source: Rolnick et al. (2023). 124POLICY OPTIONS TO MITIGATE CLIMATE RISKS accompanied by a large and sustained increase time data, and advanced analytics and modelling in R&D expenditure (Box IV.2). capabilities can help predict the impact and cost- effectiveness of programmes. Digitalisation can Digitalisation and Energy Effi ciency be an effective communication tool to enable IV.52 Digitalisation could prove to be a potent more user-centred policies during programme means to enhance energy effi ciency, saving implementation (Table IV.6). energy in the major energy-intensive sectors Transportation Sector such as transportation, buildings and industry (Chart IV.10). At the policy design stage, digital IV.53 The transportation sector accounts for tools can provide access to more granular and real- about 28 per cent of global fi nal energy demand Box IV.2 Innovation for Sustainable Energy Transition Innovation is central to putting the world on a sustainable Table 1: Panel Data Analysis Results energy path. It creates value by improving existing processes Variable Model (1) Model (2) Model (3) and generating new ways of doing business. Innovation Share of Share of Share of Renewable Renewable Renewable augments the portfolio of policy options available and the Energy Energy Energy potential strategies to meet goals. Over time, it brings down Per Capita CO 0.004 -0.001 -0.002** 2 the costs of achieving set goals (Kobos et al., 2006). Emissions (0.005) (0.009) (0.001) Using a panel dataset of 12 AEs and EMEs (including Coal Dependence for -0.001*** -0.001** -0.001*** Electricity (0.000) (0.000) (0.000) India) with annual frequency between 1996 and 2020, the R&D Expenditure 0.042** -0.095*** -0.075** factors infl uencing the share of renewable energy in total Share in GDP (0.018) (0.021) (0.034) energy consumption is assessed (Table 1). The analysis 2-year lag of R&D 0.141*** 0.105*** Expenditure Share (0.039) (0.037) incorporates per-capita CO equivalent emissions and in GDP 2 per capita GDP to control for common but differentiated Log GDP per capita 0.005 0.003** (0.014) (0.002) responsibilities in climate change mitigation, and the levels Log Oil Reserves 0.016*** of oil and natural gas reserves – since availability of such (0.002) reserves domestically may infl uence the preferred local Log Gas Reserves 0.010 (0.007) energy mix. Gross domestic expenditure on R&D consists Intercept -0.041 -0.053 -0.027 of the total expenditure (current and capital) on R&D by all (0.055) (0.175) (0.019) resident companies, research institutes, universities, and R2 0.62 0.74 0.96 Government laboratories. It is found that higher the R&D Observations 129 75 73 related expenditure as a per cent of GDP, greater is the shift Countries 12 7 5 to renewable energy. This effect may be experienced with Notes: ***: p<0.01, **: p<0.05, *: p<0.1; Robust standard errors in parenthesis. a lag (of about two years, as in Models 2 and 3). Hence, All models use the random effects specifi cation (as supported by the the fruits of innovation may take time to yield results, Hausman test) and incorporate year fi xed effects. Notes on variables: Renewable energy consumption (exajoules); extend to the commercial space and fi nally percolate into Per Capita CO emissions (million tonnes of CO equivalent per 1 2 2 the actual energy mix. Technology innovation does not billion population); Coal Dependence for electricity (coal share in total electricity generation); R&D Expenditure as a share of GDP (per cent); evolve in a vacuum: the market structure, public support GDP per capita (2017 US$ PPP); Proven Oil Reserves (thousand for entrepreneurship, and direct government investment million barrels); Proven Gas Reserves (trillion cubic metres). Data from BP Statistical Review and World Bank. all infl uence how rapidly new technologies emerge and References: are adopted. This is true for energy as for other sectors of Kobos, P.H., Erickson, J.D. and Drennen, T.E. (2006). the economy. These fi ndings suggest that enhancing and Technological learning and renewable energy costs: incentivising the fl ow of resources for innovation is essential implications for US renewable energy policy. Energy Policy. to achieve a greener energy mix in the future. Volume 34, Issue 13. Pages 1645-1658. 125REPORT ON CURRENCY AND FINANCE Chart IV.10: Digitalisation’s Potential Impact on Energy Demand Sectors Source: Reproduced from IEA (2017). and 23 per cent of global CO emissions from net effects of Automated, Connected, Electric 2 fuel combustion (IEA, 2017). The dynamics and and Shared (ACES) mobility will play a key role Table IV.6: Digital Tools Used for Promoting Energy Effi ciency Tool Country Project Description Geographic Europe Hot Maps Project Open-source tool allowing city planners to visualise geographical Information System areas with potentially high heating or cooling loads, which could then (GIS) mapping and be prioritised for energy effi ciency upgrades as part of heating or remote sensing cooling action plans. Virtual buildings and Singapore Virtual Singapore 3D digital replicas of every building in the city providing the capability digital twin cities to accurately simulate how new developments and planning changes in the city might affect a range of energy-related indicators, road and foot traffi c fl ows, heating and cooling needs, etc. Digital certifi cation EU, China QR codes coupled With QR codes attached on appliances and linked to a database, and compliance with smartphones consumers can easily check and compare the energy effi ciency of and apps appliances Digital communication US Building Online tool created to help people access and browse data on building and networking Performance energy performance, from governments, utilities, energy effi ciency Database programmes, building owners and private companies. Natural language US US Department of Scan through texts and numerical data on energy investments and processing Energy company information to track innovation and clean energy progress. Web search analytics Sweden, Denmark, NordCrawl Project Web scraping provides an alternative method for regulators to assess Finland, Iceland whether models are being sold that do not meet Minimum Energy Performance Standards. Using automated tools, regulators can quickly scan online shopping websites to assess which models are being offered for sale in their country. Source: IEA (2021b). 126POLICY OPTIONS TO MITIGATE CLIMATE RISKS in shaping the overall transport sector’s future Industries energy and emissions trajectory. In cities with IV.55 Industry accounts for 38 per cent of global high population density and good public transport fi nal energy consumption and around one-fourth networks, digitalisation could contribute to a shift of total CO emissions (IEA, 2022f). Proactive 2 away from the traditional paradigm of vehicle Government policies in this regard may help ownership towards the provision of Mobility as small and medium-sized enterprises, that may a Service (MaaS), which could simplify shared not have had so far suffi cient exposure to these mobility services by offering a unifi ed routing and technologies. The adoption of energy management payment platform. systems such as ISO 50001 – the global standard Green Buildings for energy management – is driven by Government policies or incentives in many countries. IV.54 In 2021, buildings accounted for nearly 30 per cent of global fi nal energy consumption and Climate-resistant Agriculture/Infrastructure 27 per cent of total energy sector emissions (IEA IV.56 Agriculture globally accounts for 25 2022e). Digitalisation has signifi cant potential to per cent of GHG emissions, with four per cent enhance user comfort in buildings while reducing contribution to global GDP. Adapting suitable overall energy use. The energy load of a building technologies for climate change mitigation can be managed using active control systems that measures in agriculture is important as it still use real-time data from sensors. Wherever feasible, accounts for a large share of income in many low- active controls should also integrate intelligently income countries, absorbing a sizeable proportion with building energy services sharing information of the labour force. Climate Smart Agriculture to and from the grid, facilitating better electricity (CSA) practices have been recognised globally for supply and demand management. Similarly, smart developing sustainable agri-food systems, in line lighting in public places, notably street lighting, with the Food and Agriculture Organisation (FAO) may also cut down energy use beyond the direct Strategic Framework 2022-2031. energy savings from the use of light emitting diode IV.57 Technological advancements in (LED) lamps, and by connecting streetlights to agriculture at various phases of the crop life traffi c lights and other traffi c management tools. cycle through Integrated Pest Management Policymakers and companies need to ensure that (IPM), Conservation Tillage and Enhanced devices are able to provide and receive information Nutrient Management are crucial and should be using open-source or compatible software to allow promoted through public investment for long-term for interoperability across technologies. Supportive sustainability. Furthermore, awareness about the policy frameworks, such as bulk procurement role of precision agriculture techniques for mass of energy-effi cient technologies and white agricultural production should be further enhanced certifi cates10 can help by driving down product as empirical studies show that it can reduce costs and ensuring that those technologies deliver the amount of chemicals required for optimum energy savings. 10 A tradeable instrument issued by an authorised body guaranteeing that a specifi ed amount of energy savings has been achieved, usually combined with an obligation on a utility to achieve a certain overall amount of energy savings. 127REPORT ON CURRENCY AND FINANCE cultivation and reduce the level of nitrogen residue 4. Trade Policy (Bongiovanni et al., 2004). IV.60 Since the mid-1980s, with the rise of IV.58 The relevance of these new agricultural globalisation, EMEs have seen a rapid increase technologies has increased in India due to growing in production-related carbon emissions, in part climatic events like erratic rainfall, cloudbursts and due to production for exports (Chart IV.11). heat waves. Many start-ups in the agri-tech space International carbon emission transfers (from are providing sustainable solutions for improving AEs to EMEs) increased much faster than growth farm productivity, reducing crop losses, better in international trade and GDP in the 1990s and crop storage and lowering dependence on water early 2000s; however, they have been declining and weedicides. The advancements in methods of since 2006 (Peters et al., 2011). Notwithstanding agricultural practices may bring about substantial the distinct deglobalisation since 2018 driven by environmental benefi ts such as increased water geo-economic forces, emission transfers through retention capacity and accumulation of organic trade remain a major challenge. carbon. IV.61 International trade leads to GHG emissions IV.59 Enhanced usage of technologies such in multiple ways and measuring the overall impact as mapping and surveying, airborne laser of trade on carbon emissions is a complex task. scanning, satellite remote sensing, tide gauges, Over the past decades, GHG emissions from satellite altimetry and GPS could help develop production and transport of traded goods and robust climate change adaptation mechanisms services have increased. There has been growing to minimise the impact of these shocks. Building a climate-resistant infrastructure network is also important given its spillovers to other sectors of Chart IV.11: Trade Imbalances in GHG Emissions the economy. A study on the potential impact of a major fl ood in Paris found that the infrastructure sector could bear 30 to 55 per cent of the direct cost of fl ood damage (OECD, 2018). Resilient infrastructure networks are key for reducing direct losses and negating the challenges posed by climate vulnerabilities. India’s aspirations to build a strong infrastructure network are refl ected in recent initiatives such as the National Infrastructure Pipeline, the National Logistics Policy and GATI Shakti. India has spearheaded the global initiative for robust regional disaster management systems Note: Net emission transfer refer to the international carbon emission transfer, defined as the difference between the carbon emission embodied in production (including exports) and the carbon emission embodied in by launching the Coalition for Disaster Resilient consumption (including imports). Source: Reproduced from WTO (2021). Infrastructure (CDRI) (Das, 2023). 128POLICY OPTIONS TO MITIGATE CLIMATE RISKS evidence suggesting that increasing global trade IV.64 Broadly, the following areas have been may lead to environmental degradation (Abman identifi ed for inclusion of necessary environmental and Lundberg, 2020). It is estimated that 20-30 provisions in trade agreements – removal of per cent of GHG emissions have been due to tariff and non-tariff barriers on green goods and international trade (WTO, 2021). Economic growth services; clauses regarding environmentally and productivity increases have been regarded as harmful/benefi cial subsidies; border adjustment the potential gains from trade liberalisation, but the carbon taxes; green procurement; international impact of such liberalisation on the environment is cooperation on climate change goals; and debatable (Grossman and Krueger, 1995). regulatory coherence (The Economist, 2019; J Ferrante, 2016). Almost 97 per cent of all IV.62 While AEs tend to be net importers of GHG RTAs notifi ed to the WTO include at least one emissions, EMEs and commodity-dependent environmental provision (WTO, 2022a). economies tend to be net exporters (WTO, 2021). Policy initiatives and advancements in IV.65 India has so far signed 14 Free Trade environmental and energy effi ciency technologies Agreements (FTAs) with its trading partners. can reduce GHG emissions associated with In addition, it has signed 6 limited coverage production for exports and their transportation. In Preferential Trade Agreements (PTAs). The this context, international trade can play a crucial TREND database covers PTAs signed up to role in diffusing green technologies and improving 2021 and includes information on 16 agreements carbon effi ciency by (i) focusing on green and clean signed by India. On average, each PTA in India energy products in regional trade agreements; contains around 12 environmental provisions. An (ii) reducing the carbon content of international examination of the environmental provisions in trade and (iii) promoting environmental quality India’s PTAs reveals that around 70 per cent of standards and eco-labelling. these provisions are only in 3 PTAs, with Singapore, Climate change focus in regional trade agreements Japan and South Korea. Most of the Indian PTAs include provisions on the conservation of natural IV.63 Regional trade agreements (RTAs) resources, general exceptions for trade in goods have generally proliferated with the recent if they are related to the life (health) of animals geo-economic shifts and the preference for and/or plants, etc. Many relevant environmental friend-shoring. Currently, 355 RTAs are in force provisions, such as commitments to enforce worldwide, covering more than half of total domestic environmental measures, promote international trade (WTO, 2022). Traditionally, the production of renewable energy and energy primary focus of RTAs has been on lowering tariff effi ciency and dispute settlement mechanisms and non-tariff barriers to trade; however, there which are present in most of the other countries’ has been an increasing tendency towards the PTAs are either missing or are present only in one inclusion of environment-related provisions. RTAs, or two of India’s PTAs (Table IV.7). by including environmental provisions, can serve twin objectives – avoid adverse impact of trade IV.66 India’s recently signed PTAs are more liberalisation on the environment and promote comprehensive and include provisions relating trade of green goods. to the environment. For instance, a reference 129REPORT ON CURRENCY AND FINANCE Table IV.7: Environmental Provisions in Most of the Global PTAs Description of Provision Presence in India’s PTAs 1 Conservation of natural resources  2 General exceptions for trade in goods if relate to the life (health) of animal/plant  3 Norms relating to technical barriers to trade  4 Sanitary and phytosanitary measures and environment  5 Implementation of obligations found in other environmental agreements (such as commitments at the Rio  Summit, Millennium Development Goals, etc.) 6 Environment reference in preamble  7 Coherence with domestic trade or investment policies  8 Level of environmental protection such as not relaxing environmental measures to encourage trade × 9 Sovereignty in determining own environmental policies × 10 Conservation of forests × 11 Promote production of renewable energy and energy effi ciency × 12 Interaction between energy policies/agriculture/transport and environment × 13 Binding obligations such as commitment to enforce domestic environmental measures × 14 Pesticides, fertilisers, toxic or hazardous products and chemicals × 15 Contact point on environmental matters × 16 Establishment of an inter-Governmental committee × 17 Dispute settlement mechanisms × 18 Education or public awareness for environmental protection × 19 Joint scientifi c cooperation on environment protection including monitoring/assessment × 20 General obligation to exchange information related to the environment including provision of information × when taking measures to protect the environment 21 Exclusion of environmentally harmful inventions from patentability × 22 Technical assistance, training or capacity-building provided to another party for environmental protection × Source: TRade and ENvironment Database (TREND). Morin, JF, A. Dür and L. Lechner (2018), “Mapping the trade and environment nexus: Insights from a new dataset”, Global Environmental Politics, vol. 18(1). to environmental protection is included in the a comparative advantage. India is the highest preamble to India’s agreements with the UAE ranked G20 country according to the Climate and Mauritius. Going forward, India’s future Change Performance Index 2023 and is also agreements are expected to cover more detailed the fi fth best performing country globally (RBI, climate and sustainable development provisions, 2023). Many Indian companies have aggressively given the emphasis being put by potential FTA expanded their investment in green sectors countries/regions such as the UK, Canada, such as solar equipment manufacturing, green and the EU on climate change. Environmental hydrogen production and energy storage, thereby provisions in trade agreements can be effective increasing India’s export potential in a world that is in improving environmental welfare, but they need increasingly becoming averse to importing carbon- to be specifi c and legally binding (Brenton and intensive products. The Government’s Production Chemutai, 2021). Linked Incentive (PLI) scheme also promotes IV.67 India needs to use its RTAs to facilitate green investment by incentivising manufacturing and promote export of goods and services of electric vehicles, solar photovoltaics, and required in the clean energy sector, where it has automotive cell company (ACC) batteries. There 130POLICY OPTIONS TO MITIGATE CLIMATE RISKS is a need to link such incentive schemes with future trade agreements so that effective provisions environment-related performance parameters can be incorporated in the areas where synergies (Box IV.3). Additional policy support through trade between trade and environmental objectives agreements would foster these efforts to increase can be established while retaining autonomy on green exports of the country. domestic environmental policy. Another daunting IV.68 EMEs face the challenge of identifying challenge for EMEs may emerge from the proposal and avoiding the incorporation of protectionist to introduce a carbon border tax (CBT) by some measures under the pretext of environmental of the AEs to restrict imports from countries policy by their AE trade partners (The Economist, having less stringent environment protection laws. 2019). Therefore, EMEs, including India, need Besides progressively reducing the carbon content to develop and employ expertise while fi nalising of India’s export basket, FTAs should emphasise Box IV.3 Green PLI: Exploring India’s Export Potential in Climate Friendly Goods (CFGs) On April 7, 2021, the government approved the Production Chart 1: K-means clustering based Centroid Cluster: Export Linked Incentive (PLI) scheme for high-effi ciency solar Share & Climate Friendly Goods (CFG) share PV modules. This is an important step towards gradually replacing fossil-fuel-derived energy with renewable energy. To explore India’s trade opportunities in 64 climate-friendly goods (CFGs) with India’s major trade partners, the CFGs are identifi ed under 6-digit HS code following the Dinda (2013) approach. The sub-groups under CFGs are classifi ed under various categories related to (i) clean coal technologies, (ii) wind energy; (iii) solar PV systems and (iv) energy-effi cient lighting. The optimal mix of trade partners and product categories in CFGs is identifi ed for boosting India’s export potential. India’s major trading partners since 2007 are examined using centroid clusters that best fi t the data, applying the K-means clustering algorithm. By minimising within-cluster variation, the clustering method attempts to determine the centroid position from a cluster of data points. Cluster Export Share CFG Share 1 2.69 0.07 In other words, K-means clustering minimizes within-cluster 2 -0.30 -0.01 ∑ variation i.e., c 1,K,c k{ W(C k)}. One common choice involves Source: WITS and authors’ calculations. minimising Euclideank= 1squared distance; W(C k)= |C1 | ∑ ∑p (x ij−x i'j)2 (Chart 1). The trade cluster analysis can provide insights k i,i,∈ Ck j=1 on developing effective trade engagements to enhance The centroid coordinates are identifi ed as (2.69, 0.07) and India’s export prospects in a world that is increasingly (-0.30, -0.01). In the case of cluster 1, it is observed that differentiating imports based on their carbon content. India’s exports share of CFGs is relatively high for those References: importing countries with whom India has a relatively lower overall export share. Whereas cluster 2 analysis reveals Dinda, Soumyananda (2013): Climate Change Creates that, India exports share of CFGs is low with importing Trade Opportunity in India. Working Paper at A.K.Dasgupta countries with whom India has a high overall exports share Centre, Visva Bharati 131REPORT ON CURRENCY AND FINANCE transfer of technologies that could facilitate green IV.70 Carbon emissions embedded in production transition. differ considerably across economies. EMEs tend to emit more emissions per unit of output than AEs Reducing carbon content of international trade (Box IV.4). With a few exceptions, indirect emissions IV.69 The amount of GHG emissions embedded embedded in production tend to be greater in an economy’s international trade is determined than direct emissions embedded in production. by a broad range of factors, including the size The amount of indirect emissions embedded in of the economy, the sectoral composition of its production tends to be higher in such economies foreign trade, its level of participation in global that are particularly active in downstream supply value chains (GVCs), the modes of transportation used for its imports and exports, and the energy chains. Conversely, economies active in upstream effi ciency of its production system, which depends supply chains tend to have lower indirect emissions in part on environmental and energy policies. embedded in production. Box IV.4 Carbon Emissions Embedded in International Trade – India’s Perspective Total carbon emissions embedded in gross exports (around emissions embedded in a country’s exports (EEE) and 9.7 gigatonnes of CO) accounted for around 29 per cent 2 foreign CO emissions embedded in its imports (EEI) (Kim of global emissions in 2018 (Source: TECO database, 2 2 and Tromp, 2021). Further, a comparison between CO 2021 edition, OECD). While global carbon emissions have 2 emissions and value-added in India’s trade can indicate the increased by approximately 57.3 per cent between 1995 environmental costs and economic benefi ts of trade (Table and 2018, global emissions embedded in exports have 1). Net value-added is the difference between domestic risen by about 90 per cent over that period. Considering value-added in the country’s exports (VAX) and foreign the carbon content of global trade, corrected for the size value-added in the country’s imports (VAM). of trade fl ows, it is observed that CO emissions per unit of 2 exports are considerably higher for the EMEs, while their NEI = EEEI – EEII; NVI = VAXI – VAMI imports emit comparatively less CO (Chart 1). 2 Table 1: Implications of Net Emissions of Exports An in-depth analysis of the sources of trade-related and Net Value Added emissions and their evolution can help in devising effi cacious Net Net value- Exporter/Importer Implication emission-abatement policies. Net CO emission of exports emissions added 2 exports are calculated as the difference between domestic CO 2 NE > 0 NV > 0 Net emissions Incurring exporter, net value- environmental added exporter costs but earning Chart 1: Carbon Emissions Embedded in Trade – 2018 economic benefi ts (corrected for size of trade flows) from trade NE > 0 NV < 0 Net emissions Incurring exporter, net value- environmental as added importer well as economic costs NE < 0 NV > 0 Net emissions Earning importer, net value- environmental and added exporter economic benefi ts NE < 0 NV < 0 Net emissions Earning importer, net value- environmental added importer benefi ts but incurring economic costs Source: Trade in embodied CO database (TECO), OECD 2021 edition, Source: Kim and Tromp (2021). 2 2 Authors’ calculations. (Contd...) 132POLICY OPTIONS TO MITIGATE CLIMATE RISKS Chart 2: Comparison of CO Emissions and Value-added in India’s Trade 2 a. Net Carbon Dioxide Emissions Exports for India b. Net Value Added Imports for India Source: Trade in embodied CO database (TECO), OECD 2021 edition, Source: Trade in Value Added (TiVA), OECD 2021 edition, Authors’ 2 2 Authors’ calculations. calculations. For most periods, EEEI > EEII implying NEI >0, i.e., India’s net Chart 3: India’s Emissions Intensity exports add to carbon emissions. On the other hand, VAXI < VAMI implying NVI <0, i.e., India’s net value-added through trade is negative. Thus, India incurs both environmental and economic costs in its trade (Chart 2). Following Kim and Tromp (2021), emission intensity of value-added on exports (EIE) is assessed as a ratio of domestic emissions embodied in exports to domestic value- added of exports, and the emission intensity of value-added on imports (EIM) as a ratio of foreign emissions embedded in imports to foreign value-added of imports. EIEI = EEEI/ VAXI EIMI = EEII/VAMI. Net emissions intensity Source: Trade in embodied CO database (TECO), OECD 2021 edition, NEII = EIEI - EIMI Authors’ calculations. 2 2 If NEII > 0, India’s CO emissions generated by one unit 2 in domestic value addition and relatively lower embedded of value-added on exports are more than the foreign CO 2 carbon emissions. emissions generated by one unit of India’s value-added on imports and vice versa. Both EIE and EIM have witnessed References: a downward trend, suggesting improvements in carbon Kim, T.-J., & Tromp, N. (2021). Analysis of carbon emissions emissions through net exports, but NEI still remains embodied in South Korea’s international trade: Production- positive, indicating scope for further improvement (Chart 3). based and consumption-based perspectives. Journal of Trade policies in India, therefore, should consider Cleaner Production, 320, 128839. https://doi.org/10.1016/j. encouraging exports in sectors with scope for improvement jclepro.2021.128839 IV.71 The current global tariff and non-tariff dirty sectors, reducing restrictions on access barriers are skewed in favour of dirty industries, to environmental goods and services and thereby implicitly subsidising carbon emissions environmentally preferable products; collective (Shapiro, 2021). Greening of trade would require efforts for developing standards on carbon focused attention on factors such as a review emissions embedded in products; promoting of country tariffs, removing biases favouring access to low-carbon technologies; international 133REPORT ON CURRENCY AND FINANCE cooperation to ensure a coherent and predictable barrier. Therefore, there is a need for promoting policy environment; and, mobilising adequate an internationally harmonised ecolabelling system fi nancial and technical assistance (WTO, 2022b). to promote sustainable development without putting an unnecessary burden on producers and Environmental Quality / Eco-labelling consumers. IV.72 Environmental quality/eco-labelling is a IV.75 The available literature also suggests market-based tool to encourage demand for and that multiplicity of standards, complexity of the supply of products and services, which in turn could certifi cation process and its costs, regulatory have a lower harmful impact on the environment compliance costs, and the lack of certainty about over a product’s life cycle (WTO, 2003). Eco-labels fi nancial benefi ts exclude small-scale producers can change consumer behaviour by guiding them in EMEs from accessing standards-compliant towards more environment-friendly purchase markets (UNCTAD 2022). Therefore, small or decisions (Marrucci et al., 2019). For producers, medium scale producers should be provided labelling schemes can provide incentives to with suffi cient handholding while pursuing improve the environmental performance of the sustainable growth objective through the products (Harris et al, 2021). They infl uence R&D instrument of eco-labelling. activities for cleaner production methods and thereby promote innovation. 5. Regulatory Measures IV.73 A large number of environmental labelling IV.76 Even as fi scal resources are expected and information schemes (ELIS) have been to be at the forefront for meeting the fi nancing introduced globally over the past few decades. For requirements of the national green transition instance, the Ecolabel Index is the largest global strategies, with the growing investor appetite for directory of ecolabels that currently tracks 456 contributing to the private sector green initiatives/ ecolabels in 199 countries across 25 sectors. In projects, fi nancial sector regulatory realignments India, to increase the acceptance of environment have become essential to provide a congenial friendly and sustainable products and services, environment to facilitate higher fl ow of resources the Bureau of Energy Effi ciency (BEE) has been for a greener economy. In this vein, eight institutions tasked with enhancing the energy effi ciency of from four continents started the Network of Central appliances, and the Bureau of Indian Standards Banks and Supervisors for Greening the Financial (BIS) for setting safety, quality and performance System (NGFS) in December 2017. The NGFS parameters of products. has 125 members as of March 2023. IV.74 A growing number of such schemes IV.77 Addressing climate-related risks entails globally tends to increase compliance costs for four main building blocks – disclosures, data, producers and thus affects their competitiveness vulnerability analysis and regulatory/supervisory (OECD, 2021c). Multiple schemes may also create practices and tools (RBI, 2022a). The fourth block is confusion and loss of credibility for consumers. where the regulators and supervisors have a role, Such measures sometimes create a hindrance transcending the work of the prior three blocks. to free trade by effectively acting as a non-tariff Regulations and supervision aim at making the 134POLICY OPTIONS TO MITIGATE CLIMATE RISKS industry future-ready to: (i) bear the climate events a mandatory compliance. The CSR legislation is resiliently without upending fi nancial stability; a tool to hasten the green transition as it guides and (ii) become the main purveyor of fi nancing the corporate sector to undertake activities that for adoption of technologies that can lead to a generate positive externalities. low carbon economy and help meet the national Green Finance commitments. A major aspect of the regulatory IV.80 Green fi nance comprises fi nancing of realignment is sensitisation and cognisance of climate-related risks in the organisational strategy, green investments and policies that promote governance, risk management and assurance mitigation or adaptation (Lindenberg, 2014). functions of the fi nancial services fi rms and The cumulative total expenditure for adapting to integrating those risks into the existing prudential climate change in India is estimated to be `85.6 frameworks. lakh crore (at 2011-12 prices) by the year 2030 (MoEFCC, 2022). IV.78 The Reserve Bank had in December 2007 advised banks to put in place a Board-approved plan IV.81 Central banks as fi nancial regulators have of action towards helping the cause of sustainable several policy instruments at their disposal to development. It brought out a discussion paper infl uence investment decisions and the allocation on climate risk and sustainable fi nance in July of resources and credit to achieve the sustainability 2022, which was preceded by a survey of banks targets (Dikau and Volz, 2018). Central banks can in January 2022. The feedback received on the mandate banks and other fi nancial institutions discussion paper has been examined. On April 11, to consider climate and environmental risks 2023, the Reserve Bank announced a framework through regulation which could be in the form for acceptance of green deposits11 to foster and of: (i) disclosure requirements – as mandatory develop the green fi nance ecosystem in the disclosure requirements pertaining to climate- country. Guidelines on: (a) disclosure framework related risks of banks may prevent misallocation on climate-related fi nancial risks; and (b) guidance and mispricing of assets and sharp price on climate scenario analysis and stress testing, corrections in the future; (ii) environment risk are expected in due course. The Reserve Bank is management – mandating fi nancial institutions setting up a dedicated webpage on its website to to incorporate environment risk factors in their host all instructions, press releases, publications, risk management process; and (iii) green asset speeches and communication on climate risk and ratio (GAR), i.e., the proportion of total assets sustainable fi nance. invested in sustainable projects or economic IV.79 Corporate social responsibility (CSR), activities – prescribing fi nancial institutions to which had its genesis in the voluntary approach maintain a minimum threshold level. These may of “doing good” is also a part of the regulatory help divert the fl ow of fi nance from carbon- toolkit since the Government has legislated it as intensive sectors to green projects. A study 11 A green deposit is an interest-bearing fi xed deposit in the Indian rupee whose proceeds are earmarked for allocation to green fi nance – fi nancing of projects entailing climate risk mitigation, climate adaptation/resilience and other related objectives. Guidelines have been laid out for impact assessment and reporting and disclosure. 135REPORT ON CURRENCY AND FINANCE fi nds signifi cant reduction in fossil fuel holdings IV.84 The regulations governing issuance of of fi nancial institutions in France following the green debt securities have been tightened. An imposition of detailed reporting requirements issuer desirous of issuing green debt security of climate-related risk exposure and efforts to is required to make additional disclosures in mitigate climate change (Nguyen and Mésonnier, the offer document, such as details about the 2021). decision-making process followed to determine IV.82 A taxonomy of green fi nance can help the eligibility of projects/assets for which funds are the funding institutions in analysing better the being raised; systems/procedures to be employed climate risk in their loan portfolios, enhancing for tracking the deployment of the proceeds of green fi nancing while lowering the risk of the issue; intended types of temporary placement greenwashing12. A more robust network of third- of the unallocated and unutilised net proceeds party verifi cation, impact assessment and rating from the issue of green debt securities; details the green credentials of businesses, projects on alignment of the objective with India’s NDC in and instruments could mitigate greenwashing case of the proceeds raised through the issuance concerns, while also facilating increased funding of transition bonds, among several others. Further, at lower cost. an issuer with listed green debt securities is IV.83 In this regard, recent regulatory measures required to make additional disclosures related to related to green bonds in India assume the utilisation of the proceeds of the issue, details signifi cance. The Securities and Exchange of unutilised proceeds, qualitative performance Board of India (SEBI) has issued guidelines that indicators and, where feasible, quantitative objectively defi ne the purposes for which funds performance measures of the environmental can be raised through ‘green debt security’ and impact of the projects/assets (SEBI, 2023c). These the scope has been enhanced to include pollution additional disclosures are expected to improve the prevention and control; circular economy; and sustainable fi nance landscape in the country by eco-effi cient products (SEBI, 2023a). Within the enhancing public trust in the utilisation of funds for ambit of green debt security, sub-categories their intended uses. have been introduced: (a) blue bonds, related to water management and the marine sector; Macroprudential Norms (b) yellow bonds, related to solar energy; and IV.85 Macroprudential regulation aims at (c) transition bonds, related to transitioning to a mitigating systemic risks in the fi nancial system. more sustainable form of operations, in line with India’s Nationally Determined Contribution One method to achieve this is through expanding (NDC). The SEBI has also outlined dos and don’ts the stress testing framework of banks to include to address concerns related to greenwashing the potential impact of climate-related events on (SEBI, 2023b). their balance sheets. 12 Activities or claims by a company/organisation that are intended to make people think that it is concerned about the environment, even if its real business harms the environment. 136POLICY OPTIONS TO MITIGATE CLIMATE RISKS IV.86 The main objective of bank capital portfolios and increase their fragility. Therefore, regulation is to safeguard a bank’s balance sheet Pillar I capital regulation may not be appropriate in scenarios of unforeseen adverse shocks and to manage both fi nancial stability and fi nancing reduce the overall risks to fi nancial stability13. As green sectors. a regulatory policy instrument, several regulatory IV.88 Another possible policy instrument could institutions have advocated relaxing risk be the green supporting factor (GSF). The GSF weights for sectors with low carbon footprints to relaxes the capital requirement for investments incentivise banks to extend more credit to those in the green sector. It, however, suffers from sectors (Gelzinis, 2021). A few studies have also the same limitation that green investments may suggested introducing an ‘environment coeffi cient’ not be less risky. Another risk that banks face which would help to internalise the pollution risk of is downgrade of ratings due to investment in the borrower. Therein, a bank’s asset is weighted environmentally risky assets. That could raise the by the extant prudential regulation weight and external risk-premium of both equity and debt. As then multiplied by an environment coeffi cient, a result, it may reduce the profi tability of banks. thus determining an environment-risk weighted Since retained earnings form a part of reserves, asset (Esposito et al., 2019). A coeffi cient value which, in turn, constitute tier-1 capital of banks, of 1 is considered the benchmark between the GSF may alter the adequacy of capital base to green and brown sectors – the green sector mitigate short-term credit losses. As an example takes a value between 0.5 and 1 and the brown of this policy design, the European Commission sector takes a value between 1 and 1.5. This introduced a ‘Small to Medium Enterprise (SME) can incentivise banks, particularly those facing a supporting factor’ tool to increase lending to higher cost of regulatory capital, to allocate more SMEs, but there is little evidence that it fulfi lled the loans to green sectors. This loan adjustment objective. The same argument also holds for GSF, towards the green sector can help in accelerating whose design is based on unproven previous the pace of transition to a low-carbon economy. policy tools and limits its appeal as an instrument IV.87 There are, however, certain issues with to incentivise banks to lend to the green sectors. capital regulations. A few studies argue that these IV.89 Less capitalised banks that face a relatively are short-term risk management tools to absorb higher cost of raising external regulatory capital unforeseen losses. These losses are based could get an incentive to invest in green projects on the Value-at-Risk approach that uses high- to abide by the capital requirement. Although frequency historical data whereas climate events these banks could help the economy to transit are not as frequent to estimate the Value-at- to a low-carbon equilibrium, it may also amplify Risk associated with adverse climatic situations their fragility and increase systemic risk. Hence, (Coelho and Restoy, 2022). Moreover, it has not environment-adjusted risk-weighted assets and been fully established that low-carbon projects GSF can only be implemented if the green projects are less risky. Reducing weights for these projects are relatively less risky. Capital regulation and might deteriorate the asset quality of banks’ loan GSF can be complemented with close monitoring 13 Banks keep a minimum amount of capital as a proportion of their total risk-weighted assets (RWAs) to absorb unforeseen losses. The RWAs are calculated by multiplying the book value of the loans with their respective risk weights assigned by the bank’s regulator. The riskier the loan, the higher the risk weight. 137REPORT ON CURRENCY AND FINANCE and supervision to attenuate the fi nancial risks refi ned as ‘National Voluntary Guidelines on Social, that are generated in loan portfolio adjustment Environmental and Economic Responsibilities of (Baranovi et al., 2021). The Prudential Regulation Business’, 2011. The voluntary guidelines were Authority (PRA) of the Bank of England (BoE) subsequently converted into mandatory CSR recommends further work on the design and provisions in Section 13514 of the Companies Act, calibration of the regulatory capital to reduce the 2013. unintended consequences of green bank capital IV.93 The total CSR expenditure at `26,190 regulation (PRA, 2021). The PRA requires entities to provide details on their adapted stress testing crore in 2020-21 was more than double the value calculations and methodologies to assess whether in 2014-15, registering a compound annual growth assumptions, judgements, and factoring of output rate of 17.3 per cent. While education and health in fi rms’ decision-making are appropriate. care have attracted a signifi cant share of the CSR expenditure, fl ow of funds towards environmental IV.90 Prior to the implementation of the green sustainability has also increased, albeit at a slower capital regulation, the non-performing assets pace (Chart IV.12). (NPAs) in the banking system need to be reduced to alleviate potential fi nancial risk. If green capital IV.94 A major chunk of the CSR expenditure is regulation amplifi es NPAs, it could impede concentrated in a few states such as Maharashtra, monetary policy transmission (John et al., 2016; Gujarat, Karnataka and Tamil Nadu. States like Muduli and Behera, 2021). Hence, comprehensive Bihar have received a minuscule amount in direct disclosure of information related to climate risks and incorporating these risks in banks’ Internal Chart IV.12: Sector-Wise CSR Expenditure Capital Adequacy Assessment Process (ICAAP) under Pillar 2 are a few policy tools that may incentivise regulated entities to extend credit to sectors with lower climate risk. IV.91 Another method is to prescribe exposure limits. Imposing a ceiling on the exposure of banks to carbon-intensive industries to limit the fl ow of resources to the polluting sectors could free up resources for the green sectors. Corporate Social Responsibility (CSR) Norms IV.92 The Ministry of Corporate Affairs had issued the ‘Voluntary Guidelines on Corporate Social Responsibility’ in 2009 which were further Source: National CSR Portal. 14 Every company having a net worth of `500 crore or more, or turnover of `1000 crore or more or a net profi t of `5 crore or more during the immediately preceding fi nancial year shall constitute a CSR Committee of the Board. 138POLICY OPTIONS TO MITIGATE CLIMATE RISKS Chart IV.13: CSR Expenditure by Companies a: Share of Top 10 Companies in Total CSR Expenditure b: Share of Companies Reporting Higher than Prescribed CSR Expenditure Source: National CSR Portal. CSR expenditure. While the concentration of current CSR rules do not allow CSR in activities industries and corporate houses in a few States undertaken by companies in pursuance of their is the likely reason for the lopsided nature of CSR normal course of business, which restricts them expenditure, a higher geographical diversifi cation from using their natural expertise in conducting is desirable. socially responsible business. It is proposed IV.95 The top ten companies, in terms of CSR that companies may be allowed to pursue CSR expenditure incurred, account for around one-fi fth activities in their business operation domains. of the total (Chart IV.13a). An encouraging trend is Third, while the entries in Schedule VII, Section the rise in the share of companies reporting higher 135 of the Companies Act (activities that CSR expenditure than prescribed for statutory companies may include in their CSR policies) are compliance (Chart IV.13b). to be interpreted liberally, it is proposed that the IV.96 While developments in the CSR space list be rationalised to a few broad areas, as certain have been encouraging; there is scope for companies may fi nd the current list prohibitive further improvement. First, since industries and (Sinha, 2021). Fourth, CSR rules allow multi- corporate houses are concentrated in a few year projects with timelines not exceeding three States, there is an inequitable geographical years, excluding the fi nancial year in which the spread of CSR spending. Section 135 of the project commenced. This incentivises companies Companies Act recommends that “the company to avoid long-term projects (say afforestation), shall give preference to the local area and which may require a more extended period of areas around it where it operates, for spending regular funding. Fifth, fi rms/companies operating the amount earmarked for CSR activities”. It is proposed that geographical diversifi cation in in relatively polluting sectors may be encouraged CSR spending for companies with large CSR to use a part of their CSR obligations to adopt budgets may be mandated by law. Second, the climate-friendly technologies/processes. 139REPORT ON CURRENCY AND FINANCE CSR – the First Mover Group is a need to internalise such activities and make them part of a company’s development strategy. IV.97 A fi rm that invests in socially responsible In India, the primary challenge in assessing activities ahead of its competitors can reap the the success of CSR lies in the lack of reliable benefi ts of the fi rst-mover advantage. As per indicators of progress (Kumar and Ruhela, 2021). the available literature, fi rms in a duopoly with Further, there is a need to publicise the gains horizontally differentiated products can infl uence that can accrue to companies in terms of the fi rst the willingness of the consumers to pay a higher mover advantage. price by investing in socially responsible activities. If the CSR investment spills over to the follower, Energy and Climate Ranking of States by NITI the latter can benefi t from the second-mover Aayog advantage through increase in sales (Kopel, IV.100 In 2022, the NITI Aayog released the State 2021). Energy and Climate Index (SECI) to track the IV.98 Through CSR activities, a profi t- efforts made by the States and UTs in the climate maximising fi rm can achieve competitive and energy domains. The index has been designed advantage by focusing on customers with social to assess and identify the scope for improving the preferences and a higher willingness to pay. performance of States and to help them effi ciently Thus, the market itself offers incentives to make manage their energy resources. the economy green. The fi rst-mover advantage, IV.101 Besides high dependence on imports, however, dissipates with every fi rm turning green, especially for crude oil, the energy sector accounts making winners out of companies that have the for a dominant share of the total GHG emissions best execution (The Economist, 2008). Strict of India. Therefore, a paradigm shift is required environmental regulations force companies to towards clean energy, with the twin objectives of develop greener technologies, and thus promote ensuring affordable and reliable energy to all and innovations that may offset or even exceed the reducing dependence on fossil-based energy costs of regulatory compliance (Porter and Linde, by accelerating the clean energy transition. To 1995). Strict regulations lead to technological achieve these two goals, the Government is learning and trigger innovations that generate focusing on downstream delivery to improve the new areas of specialisation (Brandi et al., 2020). transmission and distribution infrastructure and IV.99 India was the fi rst country in the world to the fi nancial position of the electricity distribution make CSR mandatory (Samantara and Dhawan, companies (DISCOMs); enhance access to 2020). The inclusion of the CSR mandate in the clean and affordable cooking fuel; and ensure Companies Act, 2013 was a major step in engaging 24*7 supply of electricity. All these efforts require the corporate sector in the equitable development differential planning and execution. In the spirit of the country. CSR results in fulfi lling the triple of cooperative and competitive federalism, objectives of profi ts, protection of the environment awarding ranks to measure a State’s initiatives and fi ght for social justice or what is known as the can play an important role in improving the triple bottom line. To make CSR meaningful, there country’s performance in green transition. This 140POLICY OPTIONS TO MITIGATE CLIMATE RISKS Table IV.8: Composition of State Energy and Chart IV.14: States Ranking and Score in SECI Climate Index (SECI) Parameters Weightage Sub- (Per cent) indicators DISCOMs’ performance 40 9 Access, affordability, and reliability of 15 5 energy Clean energy initiatives 15 3 Energy effi ciency 6 3 Environmental sustainability 12 4 New initiatives 12 3 Source: NITI Aayog, 2022b. will also be useful for the policymakers and the state authorities in identifying the leaders and the laggards in the energy sector and in fi ne-tuning policies by benchmarking against the best. The index consists of 6 parameters which are built from 27 indicators (Table IV.8). IV.102 The scores and ranks are presented separately for large States, smaller States, and UTs (Chart IV.14). The top performers like Gujarat, Punjab and Goa have done well in DISCOMs’ performance parameter by addressing the issues Note: J&K includes Ladakh. Source: NITI Aayog, 2022b. of reducing the debt-equity ratio, aggregate technical and commercial losses, and complexity 6. Market-based Solutions of tariffs. In terms of clean energy initiatives, Chandigarh, Delhi and Goa have performed well IV.103 With ‘abatement’ as the new catchphrase, as they have been able to pivot towards clean there is a movement afoot to lower carbon cooking fuel supply, renewable energy generation footprints, even by the traditionally large and CNG vehicles. Tamil Nadu and Maharashtra emitters. The market is also actively adopting have done well in terms of energy effi ciency by sustainability, guided not just by altruism but also pushing for adoption of the Energy Conservation in search of higher return. This has sparked a Building Code and nudging for industrial energy trend towards decarbonisation and digitalisation, savings. Tripura and Delhi have higher scores in nudging the market to come out with tools like the new initiatives parameter on account of higher environmental, social and governance (ESG) EV penetration and shifting consumers to smart ratings for corporates and debt/equity funds meters. guided by ESG principles. Moreover, in recent 141REPORT ON CURRENCY AND FINANCE years, private equity (PE) fi rms – the bedrock and societal factors. These factors impact fi rms’ of capitalism – have become sensitive to ESG performance and sustainability. Therefore, there factors in allocating their investment. is a need to measure and evaluate a company’s performance on ESG parameters, in addition to ESG Rating of Financial Instruments and Entities fi nancial performance. A heartening development IV.104 There is a growing recognition that is that Indian companies are increasingly matching companies do not function in isolation; they are their growing ESG concerns with actions to both affected by, and, in turn, affect environmental support green transition (Box IV.5). Box IV.5 Do Indian Companies Walk the Talk on ESG? The importance of Environmental, Social and Governance critics have pointed out the scope for divergence between (ESG) factors has grown rapidly over the last decade, the words of corporates and their actions. As corporates try becoming a prominent agenda item at company board to establish goodwill, their communication may emphasize meetings and in corporate communications. The rising ESG, without corresponding changes in their activities and focus on sustainability by customers and growing investor performance, akin to greenwashing. preference towards ESG-compliant investment products An exercise was carried out to assess whether the evolution have ensured that companies are increasingly vocal about of Indian companies’ ESG communication over the years ESG-related aspects in their management commentary, has been accompanied by an improvement in their ESG as evident from several studies which have gauged this scores. The evolving ESG focus of Indian companies is trend using text-mining techniques (Kiriu and Nozaki, 2020; examined by analysing the annual reports of 50 large-cap Castellanos et al., 2015; Ho et al., 2021). Nevertheless, companies since 2012-13. These companies are mostly Chart 1: Average ESG Scores and Word Shares in Annual Reports of Companies a. ESG score versus ESG word share b. E score versus E word share c. S score versus S word share d. G score versus G word share Source: BSE; Refinitiv; and Authors’ Calculations. (Contd...) 142POLICY OPTIONS TO MITIGATE CLIMATE RISKS part of the NIFTY-50 index15. The 491-word ESG dictionary ; compiled by Baier et al. (2020) is used to compute the share of such words in companies’ annual reports. The historical where, ESG is the ESG score, W is the ESG word share (in ESG scores from Refi nitiv16 are used to proxy companies’ per cent) in the annual report, M is the market capitalisation actual performance on ESG parameters. The average (proxy for the fi rm’s size) and D and S are indicators for ESG scores of Indian companies have improved over the year and the industry of operation, respectively. It is the last decade, especially for the Environmental and the found that with higher usage of ESG-related terms, the Social pillars, while the score for the Governance pillar has ESG scores also increase (Table 1). This result holds even fl uctuated (Chart 1). The rise in the share of ESG-related after controlling for market capitalisation, industry-specifi c words in the companies’ annual reports has corresponded dummies, and different model specifi cations. with the encouraging trend of improvement in performance- The empirical evidence shows that fi rms placing greater based metrics. emphasis on ESG in their communication also tend to be To examine whether companies that talk more about ESG better ESG performers. In this context, it would be interesting show better ESG performance, the following panel data to see how the new reporting requirements introduced by regression model (with time- and industry-fi xed effects) is SEBI, in conjunction with the law on CSR, would impact the estimated covering data for the period 2012-13 to 2021-22: companies’ ESG performance. Table 1: Regression Results Dependent Variable: ESG Score (1) (2) (3) (4) (5) (6) ESG Word Share 3.779** 3.762** 3.491** 3.369*** 3.737*** 3.838** (1.598) (1.602) (1.619) (0.935) (1.166) (1.916) Log of Latest Market Capitalisation 3.677* 3.390 (2.231) (2.337) Log of Market Capitalisation 1.125 0.945 (1.174) (1.830) Intercept 37.751*** -50.065 -51.036 39.629*** 21.809 19.194 (5.971) (53.204) (57.166) (2.882) (15.935) (24.888) Sample Size 431 431 431 431 306 306 No. of Firms 50 50 50 50 35 35 Individual-specifi c Effects Random Random Random Fixed Fixed Random Year Fixed Effects Yes Yes Yes Yes Yes Yes Sector Fixed Effects No No Yes No No Yes Errors Robust Robust Robust Clustered Clustered Robust Notes: 1. Hausman test lends support to random effects specifi cation. 2. ***: signifi cant at 1 per cent, **: signifi cant at 5 per cent, *: signifi cant at 1 per cent. 3. Standard errors in parentheses. References: Baier, Philipp, Marc Berninger, and Florian Kiesel (2020) “Environmental, Social and Governance Reporting in Annual Reports: A Textual Analysis”, Financial Markets, Institutions & Instruments 29, No. 3. Castellanos, Arturo; Parra, Carlos; and Tremblay, Monica, “Corporate Social Responsibility Reports: Understanding Topics via Text Mining” (2015). AMCIS 2015 Proceedings. Ho, Jerry C., Ting-Hsuan Chen, and Jia-Jin Wu (2021) “Are Corporate Social Responsibility Reports Informative? Evidence from Textual Analysis of Banks in China” China Finance Review International 12, no. 1. Kiriu, Takuya, and Masatoshi Nozaki (2020) “A Text Mining Model to Evaluate Firms’ ESG Activities: An Application for Japanese Firms” Asia-Pacifi c Financial Markets 27, No. 4. 15 As of October 2022. 16 The ESG score measures a company’s ESG performance based on verifi able reported data in the public domain. Refi nitiv captures and calculates over 630 company-level ESG measures, of which a subset of 186 of the most comparable, are used in the scoring process. These are then grouped into 10 categories that are further rolled up into the three scores – environmental, social and corporate governance. 143REPORT ON CURRENCY AND FINANCE IV.105 The ESG rating agencies assess Chart IV.15: Sectoral Average ESG Score companies across geographies/industries on their custom-defi ned templates to evaluate a fi rm across the ESG pillars and assign a rating to it. The coverage of Indian companies by the major global ESG rating providers (ERPs) is limited. The India ESG leadership summit report, however, covered 586 companies (CRISIL, 2022). An analysis of the ESG scores for Indian companies in major sectors reveals that information technology (IT) companies expectedly have the highest average ESG scores, while transport infrastructure companies have the lowest scores (Chart IV.15). Component-wise analysis of ESG scores found the highest degree of variation in the environmental score, both within Source: CRISIL; and Authors’ Calculations. and across sectors. IV.106 On the relationship between fi rm-specifi c and perceived valuation by the investors is characteristics and ESG performance, it is found inherently correlated with its performance on the that fi rms with higher market capitalisation have ESG parameters. A good performance on the higher ESG scores (Chart IV.16a). When the ESG parameters is a refl ection that the fi rm can sample is reduced to include only large fi rms, minimise its risks on the ESG front, enabling it to the relationship between market capitalisation grow and also get rewarded by the investors. Also, and ESG score becomes even more prominent a large company has more resources at hand to (Chart IV.16b). This shows that a fi rm’s growth improve its performance on the ESG front, and Chart IV.16: Relationship between Market Capitalisation and ESG Score a: All Rated Companies b: Largest 50 Companies Source: Bloomberg; CRISIL; and Authors’ Calculations. 144POLICY OPTIONS TO MITIGATE CLIMATE RISKS has greater stakes, driving it to make investment sources of non-fi nancial information, there is scope that mitigates risk from ESG-related events. for wide variations in the ESG ratings of the same fi rm by different providers (Chatterji et al., 2016). IV.107 As fi nancial market participants become An analysis by Bloomberg found that an ESG increasingly interested in ESG-related aspects, rating upgrade for many companies was rarely the role and infl uence of ESG ratings and accompanied by their record on sustainability data providers is growing. These entities have, (Simpson et al., 2021). however, come under increased scrutiny in recent times. The International Organization of IV.110 Further, research has shown that an ESG Securities Commissions (IOSCO) in its report rating agency’s underlying bias or the overall view of on ESG Ratings and Data Products Providers a fi rm has an infl uence on the ESG rating provided has highlighted issues such as: (a) lack of clarity/ to the fi rm (Berg et al., 2019). Also, the precision alignment on defi nitions, including on what exactly and effi ciency of ESG ratings cannot be evaluated the ratings measure; (b) lack of transparency by commonly used procedures like back-testing, about the methodologies behind the ratings/data due to the absence of simple observable outcome products; (c) uneven coverage of rating products variables such as default events (Erhart, 2022). offered; and (d) concerns about the management These issues and the absence of an appropriate of confl icts of interest when the ratings and data regulatory regime to oversee the methodology or product providers, or their closely associated data collection process, further undermine the entities, perform consulting services17 for the client credibility of ESG ratings. companies (IOSCO, 2021). IV.111 The ESG scores of fi rms located in EMEs IV.108 Two major concerns on the methodology are found to be systematically lower than those in employed for computation of the ESG scores are: AEs (IMF, 2022b). This is partly explained by the (i) Most ESG ratings include too many parameters treatment of missing data on certain parameters. leading, at times, to a convoluted picture making The absence of a globally agreed reporting format it tough for the average investor to understand makes ERPs adopt parameters which are most what the aggregate ESG score stands for; and widely reported and relevant for the AEs, thus (ii) The arithmetic average is mostly employed for putting the fi rms in the EMEs at a disadvantage. aggregation of different parameters to compute the IV.112 The IOSCO has recommended that ESG rating. It corresponds to viewing E, S and G regulators should focus their attention on ESG scores as perfect substitutes, allowing a company ratings and data products providers. Standardised the fl exibility to mask its poor performance in one defi nitions of the terminologies and written policies parameter by focusing on good performance in and procedures would enable the ESG ratings and others. data products providers to generate high quality IV.109 With each ERP using its own proprietary data. Public disclosures of their methodologies and system, algorithms, metrics, defi nitions, and processes would help achieve transparency. The 17 There may be instances where the ERP also has a consulting subsidiary which might be providing other services such as on improving ESG performance and even non-ESG related consultancy to the company it is rating. 145REPORT ON CURRENCY AND FINANCE entities being assessed should streamline their performance indicators under each of the E, S disclosure processes for sustainability-related and G attributes aimed at enhancing credibility information in accordance with the applicable and investor confi dence in the ESG-related regulatory and other legal requirements (IOSCO, disclosures. This is to be achieved by verifi cation 2021). of the reported data by an assurance provider. IV.113 Following the nudge from the IOSCO, The BRSR core will have to be fi led by the top several securities market regulators are updating 150 listed entities from 2023-24 and will be their guidelines on ESG ratings and data products progressively extended to the top 1000 by 2026- providers. An ESG rating/score is only as good 27. Further, based on disclosures in the BRSR as the data used to arrive at it. Standardised core framework, the ERPs will publish a core and regular company disclosures are, therefore, ESG rating based on assured/verifi ed data. To of utmost importance. SEBI took the fi rst step curb greenwashing at the scheme level by mutual towards making ESG reporting a part of regulatory funds (MFs), the regulator has mandated that an reporting in 2012, when it mandated the top ESG scheme shall invest at least 65 per cent of its 100 listed entities by market capitalisation to fi le assets under management (AUM) in companies, Business Responsibility Reports as part of their where assurance on BRSR core is undertaken. annual reports. This requirement was progressively Further, to get a complete picture and account extended to the top 500 listed entities in 2015 and for ESG footprints associated with the value to the top 1000 in 2019. chain of a company, SEBI has introduced ESG IV.114 SEBI has now introduced a revamped disclosures and assurance as per BRSR core, disclosure framework, titled the Business for the supply chain of top 250 companies on a Responsibility and Sustainability Report (BRSR), “comply-or-explain” basis from 2024-25 and 2025- which aims to put more emphasis on quantifi able 26, respectively (SEBI, 2023d). metrics (SEBI, 2021). This, in turn, would allow IV.116 Regulators can identify the ESG leaders easier measurement and comparability across and standardise some of the practices and companies, sectors and time. The BRSR seeks processes adopted by them as mandated disclosures from listed entities on their performance regulations over time. This can allow the regulation against nine principles of the ‘National Guidelines formulation process in the ESG space to be well- on Responsible Business Conduct’. Reporting tested and have wider acceptability. under each principle is divided into essential and leadership indicators. The essential indicators are IV.117 A framework after incorporating required to be reported on a mandatory basis, recommendations from all the stakeholders while the reporting of leadership indicators is including relevant ministries, industry associations, voluntary. Filing of BRSR is compulsory for the environmental policy advocacy groups, and other top 1000 companies by market capitalisation from regulators including the Reserve Bank will help 2022-23. This should result in better data quality address the major issues plaguing ESG ratings. on ESG parameters. SEBI is establishing a regulatory framework and IV.115 Further, SEBI has introduced a framework a code of conduct for ERPs which covers a range of BRSR core which consists of select key of pertinent concerns related to business models, 146POLICY OPTIONS TO MITIGATE CLIMATE RISKS accountability and transparency in the rating new funds launched. This pattern refl ects that process (SEBI 2023e; SEBI 2023f). while investors lap up the new fund offers in the ESG domain, subsequent investment remains ESG Funds tepid. Post the delta wave of COVID-19 in India, IV.118 The fi rst ESG Fund in India was launched not only have the new fund offers for ESG funds by the SBI Mutual Fund in 201718. The onset of stopped, but there have also been outfl ows. the pandemic gave a major impetus to ESG funds across the world, including India. While it led to the IV.120 ESG funds and indices have been criticised launch of 8 new funds with the ESG theme, the for various reasons. First, is their stock selection, AUM of ESG funds more than quadrupled in less with some questionable inclusions and exclusions. than two years to `13,146 crore as on December The 20 largest ESG funds globally have, on 31, 2021. There was, however, stagnation in average, investment in 17 fossil fuel producers asset growth thereafter, driven not just by decline each, thereby undermining the environmental in valuation but also net outfl ow of `1,393 crore dimension of ESG investing (The Economist, in 2022-23. As a result, the AUM of ESG funds 2021). Second, a considerable portion of funds declined to `10,427 crore as on March 31, 2023 labelled as ESG don’t select stocks based on (Chart IV.17a). ESG ratings or performance on ESG parameters IV.119 An analysis of the net infl ows data shows but use ESG ratings as one among many risk large infl ows in some months followed by negligible management tools for their usual portfolios. This infl ows in subsequent months (Chart IV.17b). The is analogous to non-ESG themed funds being large infl ow months are typically those which had labelled as ESG. Chart IV.17: ESG Funds in India a: Fund Size (AUM) b: Net Inflows in ESG Funds Source: Morningstar. 18 SEBI had issued a circular on categorisation/rationalisation of mutual fund schemes to bring about uniformity in the functioning of asset management companies and to standardise attributes of mutual fund schemes across specifi c categories. One of the categories introduced was sectoral/thematic under equity mutual funds, which is used for the launch of ESG funds. Post re-categorisation of norms by the SEBI, the SBI Mutual Fund converted its erstwhile SBI Magnum Equity scheme into an ESG themed mutual fund and renamed it as SBI Magnum ESG Equity Fund. 147REPORT ON CURRENCY AND FINANCE IV.121 In order to provide better clarity on the ESG positioned to support the green transformation strategies of MFs, the regulator has proposed new as its longer investment horizon positions it to sub-categories of ESG funds based on underlying undertake investments in projects with long strategies. A more active stewardship role for asset gestation periods. A major limitation of PE/VC management companies has been envisioned funding, however, is that it is mainly restricted mandating enhanced disclosures on voting to small-sized private companies that potentially decisions with specifi c focus on ESG factors. For have large commercial value but not necessarily ESG-related funds, a separate section on ‘fund projects that have the most signifi cant social and manager commentary’ and case studies detailing climate benefi ts. issues like the application of the ESG strategy in IV.125 There is considerable opportunity to the fund has also been introduced (SEBI, 2023d). accelerate the deployment of PE/VC capital, IV.122 The absence of dedicated ERPs of global especially in emerging markets. In Asia, just 24 repute for EMEs, including India, is a factor per cent of private assets are committed to ESG, contributing to the limited infl ow of ESG funds to compared with Europe’s 80 per cent (Chart IV.18). them. Allocations to EMEs (equities and bonds) by IV.126 India too has seen the entry of private ESG funds are lower than those by non-ESG funds. investment groups in the climate fi nancing ESG is a new trend, and regulators worldwide are landscape. Eversource Capital, a joint venture trying to understand the market before developing between Everstone (one of India’s leading detailed guidelines. This is a prudent thing to do private investment groups) and Lightsource as over-regulation may stifl e innovation. BP (BP’s renewable energy platform) started The Role of Private Equity Chart IV.18: Private Capital Assets Management IV.123 The global climate fi nance currently stands at about US$ 630 billion annually, which is about one-fi fth of the estimated requirement (Climate Policy Initiative, 2021). The share of private equity (PE) is less than 4 per cent (The City UK, 2022). With their high-risk appetite, PE and venture capital (VC) funds should increasingly fi ll the gap, guided by the returns that the investment generates. IV.124 In 2021, PE had US$ 6.3 trillion in AUM, projected to exceed US$ 11 trillion by 2026 (Eccles et al., 2022). The number of PE and VC signatories to Principles of Responsible Investment (PRI)19 Source: Preqin (2020): The Rise of ESG in Alternative Assets, Impact has quadrupled to 1090 by 2021. PE is uniquely Report. 19 PRI, a UN-supported organisation, is a leading proponent of responsible investment and supports its international network of investor signatories in incorporating ESG factors into their investment/ownership decisions. 148POLICY OPTIONS TO MITIGATE CLIMATE RISKS India’s fi rst dedicated climate change fund – the Monetary Policy Transmission Green Growth Equity Fund (GGEF) in 2018. The IV.129 Climate change could alter the speed, CGEF targets raising equity capital up to US$ role and nature of monetary policy transmission. 940 million for India’s green infrastructure sectors For instance, sectors that are more exposed to such as renewable energy, transport, resource climate-induced physical risks may face a higher effi ciency and energy services (Eversource risk premium due to greater credit risk and lower Capital, 2021). asset valuation. As a result, the credit channel and IV.127 With a deal value of US$ 7.9 billion, the the interest rate channel of monetary transmission share of ESG in total PE investment in India may get impeded. This section delineates the increased from 5 per cent in 2021 to 13 per cent in monetary policy tweaks that can encourage green 2022 (Bain & Company, 2023). About 90 per cent transition. of the cumulative investment of US$ 19.2 billion Green Quantitative Easing between 2018 and 2022 has been in clean energy IV.130 In the wake of the global fi nancial crisis, and electric mobility. This is driven by increased quantitative easing (QE) or large-scale asset cost competitiveness on the back of improved purchases, emerged as one of the primary effi ciency, growing climate awareness as also monetary policy tools of central banks in major Government policies including regulatory policies AEs. With the outbreak of the pandemic, QE was that provide the tailwind. widely adopted by both AEs and EMEs. 7. Monetary Policy IV.131 When central banks purchase corporate IV.128 While several central banks remain debt, they drive down risk premium, thereby cautious20 on incorporating climate concerns improving the ability of the corporates to fi nance directly in their monetary policy framework their activities at lower costs. Asset purchases and operations to avoid potential dilution of are mostly carried out on the principle of “market accountability in relation to their principal neutrality” – bonds are purchased in proportion mandate(s), the European Central Bank (ECB) to their outstanding quantity in the market to and the BoE are the two major central banks minimise the impact of the purchase on the that have adopted climate change considerations relative borrowing cost across sectors (Papoutsi explicitly into their monetary policy operations. It et al., 2021; Zielińska-Lont, 2019). The presence is estimated that the emission reduction through of externalities, however, often drives a wedge a carbon tax is four times the maximum reduction between market prices and effi cient asset values. possible through green quantitative easing (Abiry The market neutrality principle is, thus, suboptimal et al., 2022). The latter can, however, serve as an as it results in a pro-carbon bias by benefi ting large effective complementary policy instrument. fi rms in carbon-intensive industries (Schnabel, 20 In a seminar organised by the Riksbank in January 2023, the Federal Reserve Chairman mentioned that the Fed would not be a climate policy maker. At the same seminar, a member of the Executive Board of the European Central Bank re-iterated that the fi ght against climate change was a part of ECB’s offi cial mandate as long as it did not hamper its primary task of maintaining price stability. In this context, it was noted that the current tightening phase of monetary policy would not be deviated due to possible concomitant increase in the cost of efforts for de-carbonising the economy. 149REPORT ON CURRENCY AND FINANCE 2021). As per one estimate, over 70 per cent of reduction facility in November 2021. Under this, it the ECB’s corporate bond holdings belonged to provides commercial banks with funds worth 60 sectors associated with high or very high impact per cent of the principal amount lent by them for on nature (Kedward et. al., 2021). emissions-reducing projects at an annual interest rate of 1.75 per cent. The total outstanding loans IV.132 The ECB began decarbonising its under this scheme was US$ 43.6 billion as of corporate bond holdings in October 2022 (ECB, December 2022, supporting about 0.1 gigatonne 2022). Purchases for re-investment purpose are of reduction in CO emissions (Central Banking, tilted towards issuers with a higher climate score, 2 2023). which, in turn, is compiled from the backward- looking emissions sub-score, forward-looking IV.134 Under the extant rules in India, commercial target sub-score and climate disclosure sub-score. banks are required to invest 40 per cent of their This is helping the ECB in improving the weighted adjusted net bank credit in priority sectors, which average climate score of its holdings over time. In include renewable energy21. While this policy line with the UK’s commitment to net zero GHG helps channelise credit towards the renewable emissions by 2050, the BoE started greening its energy sector, it could be complemented with a corporate bond portfolio in November 2021, with targeted new scheme to provide low-cost funds an intermediate target of reducing the weighted to banks for onward lending and thereby, lowering average carbon intensity of the corporate bond the borrowing costs of fi rms operating in the purchase scheme portfolio by 25 per cent by 2025 renewable energy space. (BoE, 2021). Collateral Policy for Access to Liquidity IV.133 Further, some central banks have IV.135 The ECB has enunciated plans to green introduced new monetary policy tools to provide the collateral for its liquidity operations. It will low-cost funds to fi nancial institutions for restrict the share of assets issued by high carbon channelising them to private fi rms in sectors footprint entities that can be pledged as collateral such as clean energy, energy conservation and for borrowing from the Eurosystem. The new limits carbon reduction technologies (BoJ, 2021; Abiry et al., 2022). The Bank of Japan (BoJ) started would initially apply to marketable debt instruments funds-supplying operations to support fi nancing issued by non-fi nancial corporations and extended for climate change responses in 2021. Under this, to other instruments with improvement in climate- the BoJ provides 1-year loan at 0 per cent interest related data. The limit is expected to kick in before matching the investment or loans by banks in end-2024. Further, climate change risks are also projects that contribute to Japan’s actions to set to become a factor for determining haircuts on address climate change. The total outstanding corporate bonds used as collateral. The ECB is loans under this scheme was ¥4.4 trillion as of also working on bringing to fruition climate-related January 2023 (BoJ, 2023). The People’s Bank disclosure requirements for assets that can be of China (PBoC) launched the carbon emission pledged as collateral with a timeline of 2026. 21 Bank loans up to a limit of `30 crore to borrowers for purposes like solar-based power generators, biomass-based power generators, windmills, micro-hydel plants and for non-conventional energy based public utilities, viz., street lighting systems and remote village electrifi cation etc., are eligible for priority sector classifi cation. For individual households, the loan limit is `10 lakh per borrower. 150POLICY OPTIONS TO MITIGATE CLIMATE RISKS IV.136 In India, the only eligible collateral for for supervising the loan portfolios of the banks. availing funding from the Reserve Bank is A third-party verifi cation would, however, be Government securities, issued by the Centre or required to validate the carbon footprint of projects the States. Currently, the margin requirements and determine eligibility for reserve requirement on the collateral for availing central bank liquidity relaxation. Targeted reserve requirement increase in line with the residual maturity of the relaxations were adopted by the Reserve Bank collateral. Further, the margin requirement for in the past to direct lending to certain productive unrated State Government securities (SGS) is 1 sectors that have multiplier effects. In 2020, per cent higher than rated SGS of same residual during a 6-month period, incremental retail credit maturity bucket. A possible revamped collateral to automobiles and residential housing and loans policy could help in enhancing fl exibility for the to the Micro, Small and Medium Enterprises (MSMEs) were made eligible for deduction from Reserve Bank to allow relatively higher relaxation the net demand and time liabilities for computing in margin requirements for accepting SGBs, the reserve requirement for the tenure of the under the Liquidity Adjustment Facility/Marginal loan/fi ve years, whichever was lower. After the Standing Facility to provide liquidity. reserve requirement relaxation, credit offtake to CRR Exemptions on Green Credit MSMEs improved during the COVID-19 pandemic IV.137 To enhance credit fl ows to the low carbon (RBI, 2022c). Also, to give a fi llip to fi nancing of (or green) sectors or industries in transition, infrastructure, the Union Budget for 2014-15 had reserve requirement could be a possible policy announced that banks would be “permitted to instrument. Among EMEs, Banque du Liban, the raise long-term funds for lending to infrastructure central bank of Lebanon, follows a differentiated sector with minimum regulatory pre-emption reserve requirement policy based on the carbon such as CRR….”. The Reserve Bank issued footprint in the loan portfolios of banks (Dikau necessary guidelines in this regard in July 2014. and Volz, 2018). Banks that have a higher share As per sectoral deployment of credit data, the of green assets in their portfolio are mandated total outstanding credit to infrastructure increased lower reserve requirements. This increases the by 62.6 per cent between March 2014 and March availability of loanable funds for banks to earn 2023. a higher return. Implementation of this policy Central Bank Digital Currency (CBDC) requires a verifying authority/institution that IV.139 The Indian CBDC or e` is in the pilot stage certifi es the utilisation of a loan in green projects. for both wholesale and retail uses and is expected For instance, in Lebanon, the Lebanese Centre to be more environment friendly compared with for Energy Conservation – a government agency cash. CBDC helps curb emissions by nullifying – verifi es a project after which a loan becomes operations such as printing, storage, transportation, eligible for preferential reserve relaxation. and replacement of physical currency. The total IV.138 In India, since the Reserve Bank is the expenditure on printing of banknotes in 2021-22 regulator and supervisor of banks in addition was `4,985 crore and it does not account for the to being the monetary authority, it may not ESG costs of printing money (RBI, 2022d). At the require an additional institutional arrangement outset, instituting a CBDC may entail signifi cant 151REPORT ON CURRENCY AND FINANCE fi xed infrastructure costs but subsequent marginal nature, sustainable resource management, co- operating costs are estimated to be very low (RBI existence and cooperation (PIB, 2022b). Two 2022d). measurable objectives of the mission are to: (a) mobilise at least one billion Indians/other global IV.140 If designed with ESG objectives in mind, citizens to take individual and collective action a CBDC could be more environment friendly for protecting and conserving the environment compared to alternative cashless methods. during 2022–28; and (b) make at least 80 per Payments effected through CBDC would be cent of India’s villages and urban local bodies instantaneous and fi nal, and reduced reliance environment-friendly by 2028 (NITI Aayog, on clearing corporations and other settlement infrastructure could cut down energy consumption. 2022c). The transition process may involve The energy requirement of a digital currency distinct shifts in demand, supply and policies – a depends on its underlying technological stack. shift in demand patterns of individuals preferring Central banks may issue CBDCs based on environment-friendly goods and services; a shift energy-effi cient algorithm-driven processes as in supply in response to anticipated changes in against mining by numerous agents working demand pattern and also following a large number under competitive reward structures. This can of fi rms voluntarily embracing greener business help CBDCs have higher transaction throughput practices; and a shift in policy stance to support compared to crypto currencies for the same energy sustainable consumption and production. input. Further, contingent on specifi c details of IV.142 Mission LiFE 2022-23 enlisted 75 specifi c, how they are confi gured, CBDCs can be more easy-to-practice actions across seven categories energy effi cient than much of the current payment – saving energy; saving water; reducing single- landscape, including credit and debit cards (Agur use plastic; adopting sustainable food systems; et al., 2022). Estimates indicate that non-Proof of reducing waste generation; adopting healthy Work permissioned22 networks – what CBDCs are lifestyles; and reducing e-waste. A Government likely to be – are signifi cantly more energy effi cient programme to provide individuals with an than current credit card processing centres, in informed choice about one of the actions – energy part because the latter involve energy-ineffi cient saving – is the “Standards & Labelling Program” legacy systems. by the BEE. Star labelling of appliances is a cost- 8. Nudging Behavioural Change effective policy tool for improving energy effi ciency IV.141 Mission LiFE introduced by India at COP and lowering the energy cost of appliances for 26 aims to nudge individuals and communities the consumers. This programme aims to foster a to adopt environmentally sustainable lifestyles. sustainable “market transformation” by shifting the Behavioral changes that are required to mitigate market towards increased sales of energy-effi cient climate change include responsible consumption, star-labelled products. The Government’s zero a circular economy i.e., reuse and regeneration subsidy domestic lighting programme, Unnat Jyoti of materials or products, living in harmony with by Affordable LEDs for All (UJALA), launched in 22 Not publicly accessible. 152POLICY OPTIONS TO MITIGATE CLIMATE RISKS 2015, enhanced consumer awareness on fi nancial IV.145 Nudging behavioural changes would be and environmental benefi ts associated with the least cost yet effective way to pursue the energy effi ciency. The scheme makes affordable green transition agenda. Interventions such as energy accessible and has successfully reduced awareness creation through advertising, labelling the retail price of LED bulbs from `300-350 per and certifi cations (carbon labels on the lines of bulb to `70-80 per bulb (PIB, 2022c). food labelling), legislation (such as the recent ban on single-use plastic), incentivising purchase of IV.143 GOBARdhan is another multi-stakeholder sustainable products (such as subsidies by the driven Government scheme. Under the Government for EV adoption), could empower Swachh Bharat Mission Grameen – Phase II, consumers with information required for adoption GOBARdhan scheme is being pursued with the of low carbon products (Rajan and Vani, 2023). objective of supporting villages in managing their cattle, agro residues and biodegradable waste 9. Impact of Policy Interventions on Reducing effectively. The Department of Drinking Water Carbon Emissions: A Scenario Analysis and Sanitation is providing technical assistance IV.146 While all policy options covered in this and fi nancial support of up to `50 lakh per chapter need to form a part of a comprehensive district, aiding villages in converting their waste strategy for reducing carbon emissions in India, into wealth, improving environmental sanitation, fi scal, regulatory, and non-fossil fuel related curbing vector-borne diseases, and converting policies would be particularly important to organic waste to biogas and organic manure for achieving the intended ultimate net zero goal. use in rural areas. Globally, carbon taxes are reckoned as one of the most effi cient instruments for reducing carbon IV.144 A voluntary energy saving plan introduced emissions, particularly in hard-to-abate sectors by the EU in 2022 in the backdrop of tight natural such as iron and steel, non-ferrous metals, non- gas supplies following the Russia-Ukraine war – metallic minerals and chemicals (Paltsev et al., “Save Gas for a Safe Winter” – proposed a voluntary 2022; IMF, 2019). ETS – the auction or allocation of gas demand reduction target of 15 per cent from emission permits – may also help curb emissions August 2022 to March 2023. It suggested various by similar level if applied to a wider canvas of measures such as norms for use of air conditioning, economic activities. Standards for carbon emission street lighting, air drying laundry, switching off rates and energy effi ciency prescribed as part lights when not required, and improving home of regulatory policies, and feebates/rebates for insulation to reduce the demand for gas across the technologies that emit higher/lower than average economy from the public sector, businesses, as emissions could also help in reducing the overall well as households (European Commission, 2022). CO emission level in an economy. Similar voluntary norms could also be envisaged 2 for reducing food wastage – estimated at around 14 IV.147 Recognising that most of the available per cent of total production – between harvesting estimates on the impact of any policy intervention and retail, to reduced GHG emissions (Singh and in reducing carbon emissions are not precise and Chaudhary, 2023). conditional on the validity of assumptions, an 153REPORT ON CURRENCY AND FINANCE attempt is made to generate scenarios of the likely on Global Carbon Project, 2022). In the baseline CO emission reduction in India under various scenario of no policy intervention, the emission 2 policy interventions discussed above. Two broad level may rise to 3.9 gigatonnes in 2030 (please scenarios relate to imposing a carbon tax of US$ refer to Chapter 2). With the implementation of 25 per tonne and US$ 50 per tonne, respectively, carbon taxes, i.e., US$ 25 per tonne and US$ 50 of CO emission. Along with the carbon tax, other per tonne under the two scenarios, accompanied 2 policies such as feebate, regulatory policies and by other measures mentioned above, CO 2 ETS have been considered. These scenarios emissions can be reduced to about 0.9 and 0.1 mostly use the estimated parameters projected by gigatonne, respectively (Chart IV.19). The scenario the IMF (2019). The impact of progress on green analysis highlights the critical signifi cance of a hydrogen and EVs has also been considered, as multi-pronged policy approach to achieving the they can help reduce the demand for fossil fuels updated NDC committed in 2022. Besides the (Niti Aayog, 2022d). current policy thrust on incentivising renewables and EVs, innovative technologies such as green IV.148 Estimates suggest that a carbon tax of hydrogen, energy effi ciency, carbon sink and US$ 25 per tonne (US$ 50 per tonne in the second lifestyle changes, it may be necessary to introduce scenario) can reduce carbon emissions by 25 per explicit carbon taxes to reduce carbon emissions cent (36 per cent) compared with the baseline from the hard-to-abate sectors. scenario of “business as usual” projected for 2030 by the IMF (2019). A combination of other policies 10. Concluding Observations such as ETS, feebate and regulatory measures IV.150 Climate policies hold the key to disaster could reduce the CO emissions by nearly 93 per 2 risk reduction and protecting people and the cent of the reduction achieved through carbon planet. A comprehensive climate action plan, taxes. For the hard-to-abate sectors, the adoption building on growing public and political will, has of green hydrogen could cumulatively reduce three broad dimensions – design, implementation, CO emissions by 3.6 gigatonnes between 2020 2 and a constant review to assess what works and and 2050 (Niti Aayog, 2022). Similarly, as per the what does not. The strategic action plan covers Announced Policies Scenario (APS) of the IEA, both mitigation – reducing CO emissions, and the oil (or fossil fuel) displacement as a result of EV 2 adaptation – learning to adapt, while pursuing adoption in buses, trucks, vans and cars stands at climate resilient economic development. As 0.22 million barrels per day by 2030 (IEA, 2023a). the scale of the challenge is enormous and still Both, the adoption of green hydrogen and the growing, the battle against the climate crisis has to displacement of fossil fuels together can reduce be sustained, notwithstanding misinformation and nearly 1.1 gigatonnes of CO emissions between 2 greenwashing tendencies that may occasionally 2021 to 203023. disrupt the process. In 2022, the world population IV.149 As of 2021, India’s total CO emissions crossed the 8 billion mark, while the global 2 stood at 2.7 gigatonnes (Our World in Data, based growth outlook has remained subdued since the 23 Using a conversion factor of 0.43 metric tonnes CO/barrel as provided in the US EPA (2023). 2 154POLICY OPTIONS TO MITIGATE CLIMATE RISKS Chart IV.19: Scenario Analysis for CO Emission Reduction 2 a. Carbon Tax: US$ 25 per tonne b. Carbon Tax: US$ 50 per tonne Note: The 2030 baseline level of CO emissions without any policy intervention is as estimated by the IMF (2019). A carbon tax of US$ 25 per tonne (US$ 50 2 per tonne) could reduce emission by 25 per cent (36 per cent) in the hard-to-abate sectors. The regulatory policy mix consisting of ETS, feebates, and regulatory measures can contribute about 93 per cent of the emissions reduction that could be achieved through a carbon tax. Green hydrogen and EVs can reduce CO 2 emission by 1.1 gigatonnes. Carbon capture and storage can raise further the estimated benefits from technology. CO emission can be reduced to nearly 0.9 2 gigatonne (0.1 gigatonne) from a baseline level of 3.9 gigatonnes if all possible policy interventions are made in a co-ordinated manner as part of a national level strategy. The combined impact estimated here is indicative, based on available independent estimates for the impact of each specific type of policy intervention. Source: Authors’ calculations. COVID-19 pandemic with rising concerns about the Government and public sector enterprises possible moderation in trend growth (World for deployment of resources in green projects; Bank, 2023). Climate action plans of countries, feebates; and public green investment. First, India therefore, may have to balance the trade-off costs needs to introduce a broad-based carbon pricing of green transition. The unavoidable preference system in line with emerging global best practices for fossil fuel in several countries since the start to meet its climate goals. Second, a carbon tax of the Russia-Ukraine war highlights the need for may need to be accompanied by complementary fl exibility in implementing the climate action plan. redistributive policies due to its regressive nature, India already has in place a well-designed action in view of the inability of the weaker sections plan, with specifi c policy interventions aimed at of the society to move to eco-friendly modes of collectively pursuing the overall net zero target. production and patterns of consumption. Third, This chapter reviews all feasible policy actions – an ETS, linked to green taxonomy, covering existing and more – with an assessment of their all sectors of the economy may be introduced, likely contribution to reducing carbon emissions which can partly balance subsidy (less polluting relative to India’s updated NDC commitments. industries getting carbon credits for trading) and IV.151 Fiscal policy has a prominent role in tax (more polluting industries that should have to driving green transition given its high potential buy carbon certifi cates). While a carbon tax may effectiveness and the trust of the public in the be more effective, an ETS may be less politically Government’s actions being in the broader contentious. Fourth, there is a need for an effective national interest. Under fi scal policy, the various green taxonomy to identify sustainable green instruments available are carbon pricing using assets and activities and limit the potential risk of carbon taxes or ETS; green bonds issued by greenwashing. Finally, once a green taxonomy is 155REPORT ON CURRENCY AND FINANCE in place, there is a need to properly record public advances in application of AI and ML present an spending on climate change and related issues opportunity to tackle climate change through better and report them in a climate budget report as a resource management. In the transport sector, supplement to the annual budget. the concept of MaaS and ITS may be explored in India’s smart cities. Further, green building IV.152 The role of new technology and supportive standards may be complemented with IoT based policies for innovation is critical for progress monitoring and AI and ML driven optimisation to on both mitigation and adaptation fronts. The manage and reduce energy demand. Fifth, climate spurt in technological progress seen recently resilient agriculture is the need of the hour for a in renewable (solar and wind) energy, EVs, sustainable future, and climate-smart agriculture green hydrogen, carbon capture and storage, practices such as integrated pest management, and energy-effi cient appliances would require conservation tillage and enhanced nutrition a global framework to ensure easy access to management may be promoted, in addition to the technology for all, and an effi cient global supply development of a climate-resilient infrastructure chain with access to key minerals to make the network. The production of green hydrogen using green transition cost affordable. First, India needs renewable energy and investment in carbon to acknowledge that the technological advances capture and storage technologies would provide and the associated fall in prices of key inputs further impetus to sustainable energy security for have been driven by targeted policies and R&D the nation. investments by Governments the world over, and the same should be sustained, while exploiting IV.153 While carbon emissions could originate ways to improve access to technology and critical from any country, climate disaster risk is a mineral resources through multilateral, regional global concern. Trade policies have the potential and bilateral strategic partnerships. Second, India to contribute to risk mitigation. Liberalisation has achieved signifi cant progress in renewable of cross-border trade could provide gains to energy generation capacity, and efforts need to be developing countries in terms of economic stepped up in addressing the variability in wind and growth and enhanced productivity; however, its solar power supply through appropriate energy impact on environment remains debatable. India storage technology and demand management needs to recognise that protectionist policies of mechanisms using smart grids. Third, for countries are increasingly becoming sensitive enhancing domestic energy security given the risks to the carbon content of imports, which could from ongoing global geo-economic shifts, current affect India’s medium-term export outlook unless policies focussing on developing an indigenous Indian exports meet green standards of importing renewables supply chain would require ramping nations. At the global level, various steps also up of domestic capacity to mine lithium, cobalt need to be taken to facilitate the diffusion of green and rare earth elements and/or procure them technologies and improve the carbon effi ciency through long-term contracts and outward FDI; and of international trade. First, RTAs should increase domestic manufacturing of critical equipment such their focus on green and clean energy products. as batteries, electrolysers, PV cells, EVs, and Second, concerted efforts should be made to other associated components. Fourth, continuing increase the export share of climate-friendly 156POLICY OPTIONS TO MITIGATE CLIMATE RISKS goods across India’s key trading partners. Third, to spur the green fi nance ecosystem in India. As active steps may be taken towards reducing the mentioned earlier, there is however, an urgent carbon content of international trade. Fourth, need for a “green taxonomy” in India – clearly expertise in negotiating trade agreements needs spelling out what constitutes green can, inter alia, to be developed so that effective environmental help direct investment through better-designed provisions can be incorporated while retaining policies and improve the monitoring of progress. autonomy in formulating domestic trade policy. The SEBI’s recent move to objectively specify the Fifth, a level playing fi eld may be created for clean end-uses of a green debt security is an important and dirty industries in the domestic market so that development. ineffi ciencies in resource allocation through policy IV.155 The CSR Act is an important supplementary biases may be avoided. Sixth, eco-labelling – a tool for achieving, inter alia, climate goals. To market-based tool – may be used to encourage incentivise and strengthen the corporates’ green the demand for and supply of environment-friendly transition efforts, the CSR Act could be tweaked to goods. Also, small or medium scale producers widen the scope of geographies, businesses and need to be provided with suffi cient handholding timelines over which green projects are adopted for making progress towards sustainable growth and undertaken by companies. If the gains from through eco-labelling. the fi rst-mover advantage for any industry are IV.154 In India, the SEBI and the Reserve Bank communicated effectively, it could further enhance are taking steps to facilitate green transition the green agenda. The Government could also by enhancing disclosure requirements and prescribe regulations for entities operating in certain domains to contribute to green transition. strengthening risk assessment and management For instance, the Union Budget for 2023-24 of regulated entities. The Reserve Bank is announced that in due course a 5 per cent expected to set out the disclosure framework compressed biogas mandate will be introduced on climate-related fi nancial risks and guidance for all organisations marketing natural and on climate scenario analysis and stress testing biogas. The NITI Aayog’s initiative to rank states shortly. Central banks are still exploring ways to on the basis of performance in green transition, speed up the fl ow of fi nance to green projects and besides working as a gentle nudge to improve prevent misallocation/mispricing of assets through performance, also aids in fi ne-tuning policies in appropriate regulatory policies, including green the energy sector, leveraging both co-operative capital regulation, prescribing exposure limits to and competitive federalism. brown sectors and lowering risk weights for green sectors. To increase green lending, banks would IV.156 Recent regulatory measures taken in the need to invest in upskilling human resources for country make India a front-runner in developing the entire gamut of the credit appraisal system. a robust regulatory framework for ESG-themed While green fi nance has grown in prominence, investments. There is, however, a need to it thus far has had limited regulatory guidance. move cohesively to prevent the emergence of a The Reserve Bank announced the framework multitude of disconnected regional standards for for acceptance of green deposits in April 2023 ESG-fund classifi cation across the world. The 157REPORT ON CURRENCY AND FINANCE mandated BRSR in India is expected to generate environmentally sustainable and responsive better data on ESG parameters, which would, actions by companies, individuals and local in turn, help creation of standardised rating bodies, and help mobilise additional resources products and enhance credibility of companies’ for such activities. Nudging households and disclosures. The recent steps taken by SEBI business establishments for adopting environment regarding the framework for ERPs and other friendly lifestyles and business practices such aspects of sustainable fi nance would help address as energy conservation through prudent use of several issues plaguing ESG ratings of fi nancial air conditioning and heating systems, avoiding instruments and entities – defi nition, methodology wastages of food and water, and preferring green and possible confl ict of interest. PE investment products, services and fi nancial assets, could in ESG assets can be enhanced by continuing make the net zero goal more attainable. with the fi scal and regulatory push towards green IV.159 The scale of green transition challenge transition that helps fetch higher returns as fi rms is both enormous and complex, and only a with a sustainability focus, inter alia, enjoy cost multi-pronged action plan with a monitorable savings on account of greenium, lower regulatory implementation strategy covering all major carbon risk and decarbonisation-related effi ciency gains emitting sectors can help accelerate India’s while also achieving higher realisation from sale of progress towards the net zero goal. Without any products marketed as climate-friendly. policy action, India’s CO emission level may rise 2 from 2.7 gigatonnes (in 2021) to 3.9 gigatonnes by IV.157 Along with its primary mandate on 2030. A policy mix comprising a carbon tax of rupee price stability, monetary policy can play a equivalent of US$ 25 per tonne, current plans on complementary role in promoting green transition, progressively increasing the share of non-fossil taking into account the emerging new initiatives in (solar, wind) fuel in the energy mix, production and the sphere of monetary and liquidity management use of EVs and green hydrogen, and regulatory policies in other central banks. A few policies measures to incentivise resource allocation for that could be explored include lower margin green projects, could reduce CO emissions to requirements for SGBs when used as collateral 2 0.9 gigatonne by 2030. Higher rates of carbon tax for availing liquidity from the Reserve Bank, and can reduce the emission level further. 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