India’s ambitious climate goals, as outlined in its 2030 Nationally Determined Contributions (NDCs), underscore the urgency of transitioning to lower-carbon technologies across key industries. These include reducing GDP emissions intensity by 45% from 2005 levels and achieving 50% of installed electric power capacity from non-fossil sources. At the same time, India is on the verge of transitioning nine hard-to-abate industries from energy efficiency improvement (under the Perform Achieve and Trade scheme) to an emissions reduction regime (under the Carbon Credit Trading Scheme). To enable these transitions, India needs over USD 2.5 trillion by 2030, yet current investments cover less than a quarter of this requirement. Achieving net-zero emissions by 2070 will require an estimated USD 10.1 trillion in cumulative investments. This gap in financing calls for innovative solutions and partnerships that can catalyze investment in sectors critical to India’s climate transition, particularly hard-to-abate sectors like steel, cement, and heavy industries.
Decarbonizing hard-to-abate sectors such as steel and cement presents several barriers, including:
- Asset stranding: Many of the hard-to-abate sectors have locked into emission intensive technologies and processes that have yet to complete their full operational lifetime. Decarbonizing at this juncture would entail stranding those baseline assets leading to writing off sunk costs.
- High Initial Costs and Long Payback Periods: Decarbonization technologies come with substantial upfront costs and extended repayment timelines, which do not align with investors’ preference for quick returns.
- Technology Readiness and Scalability: Emerging technologies, such as carbon capture and green hydrogen, are often at the early or very-early stages of commercialization leading to uncertainty around their performance outlook and lifetime economics. Industries remain wary of such technology risks and are hesitant to adopt at scale.
- Financial Risk: The perceived risks associated with new technologies and the lack of familiarity with emerging carbon-reduction methods discourage private capital investment.
- Policy Gaps: While some policies exist, more comprehensive and supportive policy frameworks are needed to drive systemic change.
- Technology Innovation and R&D Support:
- Strengthening research and development (R&D) and improving the lab-to-market transition was emphasized as key to accelerating the adoption of low-carbon technologies.
- Innovations such as retrofitting existing industrial plants and promoting biomass-based Independent Power Producers (IPPs) can lead to immediate emission reductions and make a substantial impact.
- Financial Mechanisms for De-risking Investments:
- Risk-Sharing Mechanisms: Establishing first-loss and second-loss facilities to reduce perceived risks and improve the bankability of projects.
- Blended Finance: Combining public and private funds to lower risks for private investors, making it easier to secure financing for emerging technologies.
- Carbon Finance: Introducing carbon credit markets and emissions trading systems to monetize emissions reductions and incentivize investments in decarbonization.
- Challenge Funds for Startups: Launching funds targeted at startups and MSMEs to promote the development of scalable solutions for industrial decarbonization.
- Templatizing the appraisal for decarbonization projects: It was observed that commercial financial institutions involved in project financing would need hand-holding to better understand the nuances of appraising green/ decarbonization project proposals from industries. At the same time, there is a need for templatizing the appraisal process thereby making it repeatable and executable.
- Policy Interventions and Ecosystem Support:
- Guarantee Mechanisms: Providing guarantees to financiers and project developers to help them take higher risks.
- Integrated Support Mechanisms: Policies should integrate decarbonization technologies into value chains, ensuring long-term sustainability and scalability while offering immediate support to early-stage projects.
Need for a collaborative ecosystem based approach
The discussions at the Climate Finance Roundtable underline the importance of creating strong ecosystems, aligning financial mechanisms with the needs of decarbonization projects, and providing the policy frameworks necessary to scale innovations. As India continues its transition to a low-carbon economy, mobilizing greater financial resources through collaborative efforts will be critical in achieving its climate goals. By addressing the financial, technological, and policy barriers, India can accelerate the decarbonization of hard-to-abate sectors and contribute to the global effort to combat climate change.
