Green and Transition Finance in India

India stands at a unique crossroads, balancing the goals of decarbonisation and industrial growth. While the power and transport sectors have made notable strides toward decarbonisation, industrial emissions remain a significant challenge. To meet its climate commitments, India will require an estimated capital influx of USD 10.1 trillion by 2070. This is where both green and transition finance come into play, with green finance backing low-emission technologies aligned with the Paris Agreement, and transition finance supporting sectors that do not yet have viable green alternatives. This dual approach is critical as India faces increasing pressure from carbon border adjustments, especially for its energy-intensive industries like steel, cement, and aviation.

The Role of Green and Transition Finance

Green finance refers to capital allocated to projects that directly align with near-zero emissions technologies, such as solar and wind energy. These projects, already backed by political will and market demand, primarily focus on the renewable energy sector. Transition finance, on the other hand, targets sectors that are difficult to decarbonize, like steel, cement, and aviation, which collectively account for over 40% of global greenhouse gas (GHG) emissions. These sectors are essential to economic growth and cannot adopt green alternatives in the short term due to technological and financial constraints.

For India, decarbonizing such industries is critical, as they contribute significantly to the country’s overall emissions. For instance, the steel industry alone accounts for 5% of India’s total GHG emissions, and the cement sector adds another 4%. Moreover, industrial emissions are projected to increase 2.6 times between 2020 and 2050, which underscores the urgent need for robust financial mechanisms to support the transition.

Capital Needs for Decarbonisation

India’s decarbonisation journey will require cumulative investments of over USD 10.1 trillion by 2070. As of now, only 25% of the needed capital for mitigation flows into the economy, signalling a massive gap in financing. Globally, an annual capital investment of USD 3.5 trillion is necessary by 2050 to build a net-zero economy and avert climate catastrophes. For India, this means scaling up investment not just in renewable energy but in energy-intensive industries, which will also require policy incentives and technological breakthroughs, such as carbon capture, utilization, and storage (CCUS).

Sectors in Focus: Hard-to-Abate Industries

India’s hard-to-abate sectors—steel, cement, aluminium, and aviation—contribute a large share of industrial emissions, with limited viable green alternatives currently available. Decarbonising these industries is more complex than in the power or transportation sectors because the emissions largely arise from chemical processes intrinsic to the manufacturing stages. For example, nearly half of the emissions in the cement industry come from the decomposition of limestone during production. While the power sector can transition to renewable sources like solar and wind, finding low-emission alternatives for industrial processes remains a challenge. In heavy industries, improving energy efficiency, circularity, and material efficiency could reduce emissions by 40%, but achieving net-zero will require a broader mix of clean hydrogen, electrification, and CCUS technologies.

Transition vs. Green Finance

While green finance has been widely accepted as the backbone for renewable energy investments, transition finance is still an emerging concept. Unlike green finance, which supports industries with clear paths to decarbonisation, transition finance funds those sectors for which achieving net-zero emissions is not feasible in the short term. For example, transition finance can be used to fund projects aimed at enhancing the efficiency of refrigeration or retrofitting gas pipelines to introduce hydrogen. The global market for green debt stands at over USD 2.2 trillion, while transition finance is just emerging with USD 12.5 billion globally.

Challenges and Solutions

India faces numerous challenges in scaling up both green and transition finance. From an economic standpoint, many low-carbon technologies carry high costs and performance risks, making them less competitive. Institutional challenges also abound, as public and private institutions often operate in silos, with minimal coordination. On the regulatory front, financial institutions face hurdles due to the lack of formal guidelines. As of 2021, no transition bonds had been issued in India, although green bond issuance stood at USD 18.3 billion.

To overcome these challenges, financial institutions need to innovate, creating new instruments such as transition bonds and sustainability-linked bonds. Multilateral banks, like the International Finance Corporation (IFC), are already providing blended finance solutions, mixing funds from public, private, and philanthropic investors to support high-impact transition projects.

Policy and Regulatory Support

To accelerate the transition, India needs strong policy support, such as subsidies, tax breaks, and mandates to create demand for low-emission products. Regulatory bodies must also provide guidelines for emissions reduction and energy efficiency across sectors. Financial sector innovation is equally important to facilitate new products aligned with green and transition finance. Although SEBI has introduced ESG (Environmental, Social, Governance) rating guidelines and disclosure frameworks like BRSR (Business Responsibility and Sustainability Reporting), more comprehensive policies are required to mobilize capital at scale.

Conclusion

India’s transition to a low-carbon economy is both a challenge and an opportunity. While green finance will continue to play a pivotal role, transition finance is crucial for hard-to-abate sectors that lack viable green alternatives. Achieving the necessary capital flow of USD 10.1 trillion by 2070 will require a multifaceted approach that includes policy incentives, financial innovation, and public-private partnerships. By balancing industrial growth with decarbonisation, India can position itself as a global leader in both sustainability and economic development.

Credit

This article is based on “An Introduction to Green and Transition Finance,” published by the Observer Research Foundation (ORF), authored by Neha Khanna and Mannat Jaspal.