Green tagging : Mobilizing green finance in India

Abstract

This policy paper attempts to discuss the current landscape of global green finances and India’s position in this landscape by identifying its needs and gaps. It also introduces the concept of green tagging and attempts to devise a preliminary framework for a policy on green tagging in India. India’s Green Commitments, Needs and Gaps: According to Global Climate Risk Index 2020, published by environmental think tank Germanwatch, India is 5 th most vulnerable country globally to climate change impacts. Sustainable Development Goals: Worldwide, estimates by UNCTAD suggest that to finance these SDG goals US$5 to US$7 trillion per year is required worldwide and US$3.9 trillion per year in developing countries. However, the current investment in developing countries is around US$1.4 trillion leading to a shortfall of US$2.5 trillion per year. To meet its SDG goals, according to one estimate, India needs whooping US$8.5 trillion from 2016 until 2030. This amounts to an annual shortfall of about US$565 billion. Paris Agreement: Preliminary estimates by simply summing the finance needs in NDCs with a conditional component, comes to around US$4.4 trillion for the developing countries. India needs about $ 2.5 trillion between 2018 and 2030 (at 2014-15 prices) to fund its climate change actions. In stark contrast, India’s finances directed towards climate accounted to only $14.4 billion. Thus, India definitely needs to devise innovative strategy to boost up the infusion of green finance into its economy in both the public as well as private space. What is Green Finance: There is no universally accepted or internationally agreed definition of green finance. But broadly speaking, it can be defined as the enabler of positive shift in the global economy towards green and sustainable initiatives by ensuring climate security, environment security and ecological security leading to food, water and health security. Actors in Green Finance: International Organizations, Governments, Development Finance Institutions. , Climate/Environment Funds , Green Investment Banks , Institutional investors, International financial institutions, International capital markets , Domestic capital markets , Corporations, Venture Capitalists, NGOs and Philanthropists / Foundations and Rating agencies play an important role in mobilizing green finance. Categories and Instruments of Green Finance: The various instruments available for green finance include grants, loans, concessional loans, equity investments, export credits, guarantees, insurance etc. The green finance can be classified according to the source as external or internal for a country, each having public as well private sources. Issues with Green Financing: The issues related to the identification, monitoring, tracking, reporting of green finance leading to credibility issues in Indian context are lack of definition of ‘green’, lack of reliable processes for measuring impact, information asymmetry, greenwashing risk, high transaction costs and principal-agent problem. Green Tagging in International Space: In 1992 Rio Conference on Environment and Development, three conventions Convention on Biological Diversity, UN Framework Convention on Climate Change (UNFCCC) , UN Convention to Combat Desertification were adapted and to facilitate monitoring and statistically reporting on the development finance flows targeting the themes of Rio Convention 4 policy markers, called Rio Markers, were introduced. These are Biodiversity, Desertification, Climate Change Mitigation, Climate Change Adaptation. The 5th Environment Marker was introduced separately and is called Environment Marker. Donors, especially, European Commission, uses Rio markers and Environment marker to measure its environment and climate-relevant spending, i.e., Official Development Assistance (ODAs) and provide statistical reports to the OECD-DAC. These markers provide the score to the project according to the extent to which the themes are explicitly addressed at the level of problem analysis (context); objectives and results; and activities. There are several issues due to which they do not provide credible mechanism which are green finance still not defined properly, not new and additional resources, double counting, lack of granularity, counting not just grants, not actual disbursement, quality of data, self-tagging and non-coverage of private finance. Evolution of Policy for Green Tagging in India:- Definition of Green Tagging: Green tagging refers to the systematic process for identification and certification of the project/process/activity/investment as green, based on the agreed upon taxonomy of green finance, along with the metrics to measure the ‘greenness’ of that project/activity/investment, for the purpose of monitoring, tracking and reporting green finance flow. It includes development of green finance taxonomy, classification of green finances, defining green finance metrics and designing the tagging procedure. Evolution of Green Finance Taxonomy: Identifying rules, criteria and classification schemes for the labeling of an asset or project as ‘green’ can be referred as the taxonomy of green finance. India has not defined what it considers as Green Finance. To tap the green finance, it needs to first define it objectively, ensuring greater credibility, accountability, monitoring and reporting in the mechanisms. India has to steer a path of growth ensuring the sustainability, energy efficiency while addressing climate change, environmental and biodiversity loss concerns. Hence the definition to be adapted has to be chalked out considering India specific situations and aligned to India’s policies, action plans, guidelines and commitments. Identification of Green Targets, Sectors and Activities: The 8 green targets identified in this paper are climate change mitigation, climate change adaptation, clean and efficient use of energy, pollution prevention and control , transition to a circular economy, waste reduction, waster prevention and recycling, protection, conservation and sustainable use of natural resources, ecological protection and promotion of ecosystem services, biodiversity conservation and its sustainable management. Sectoral approach has been taken in classification to bring in more objectivity, granularity, and resolve ambiguity. This paper identifies the list of the sector as well as the activities falling in their ambit. Green Finance Metrics: Green finance metrics is a shade card developed in this paper to assess the extent to which a given project/process/program/activity is linked to the green targets. It defines 4 levels of green relevance of a particular project. Designing the Tagging Procedure: The tagging procedure which suits India’s need is an consultative task with involvement of various stake holders. MoEFCC should be the nodal agency for setting up this procedure and to set up a central agency central agency which tags/certifies/places the projects on green shade-card and then link them to the willing investors and also gives certificates to the investors about the greenness of their investment. Some of the questions that should be addressed while designing the tagging procedure are included in this paper. Conclusion: This paper has made an attempt to show how the first step of tagging green finances can be taken to provide credible, transparent, robust yet flexible system for better identification, tracking, monitoring, accounting and reporting of green finances in India, which may then boost up the flow of green investments.