To accelerate and boost green finance in the country and meet climate targets, India needs to implement a broad-based carbon pricing system in line with emerging global best practices and introduce a carbon tax.

Due to its regressive nature, the carbon tax may need to be accompanied by complementary redistributive policies, given the inability of the weakest sectors to switch to green modes of production and consumption patterns, according to the ‘Report on currency and Finance 2022-23’ published by the RBI on Wednesday.

The report, titled ‘Towards a Greener and Cleaner India’, does not represent the views of the RBI and is based on the findings and conclusions of contributors to the Department of Economic and Policy Research.

It also recommended introducing an Emissions Trading System (ETS) linked to the green taxonomy, covering all sectors of the economy, which can partly balance subsidies (cleaner industries getting carbon credits for trading) and taxes. (more polluting industries that should have to buy carbon). certificates). “While a carbon tax may be more effective, an ETS may be less politically contentious.”

green taxonomy

There is an urgent need for a ‘green taxonomy’ in India, which spells out clearly what constitutes ‘green’, to help direct investment through better designed policies and better track progress, he said, adding that there is also a need for an effective green taxonomy to identify sustainable green assets and activities and limit the potential risk of greenwashing.

“Once a green taxonomy is in place, public spending on climate change and related issues needs to be properly recorded and reported in a climate budget report as a supplement to the annual budget.”

Since fiscal policy has a prominent role in driving the green transition, the government has instruments such as carbon pricing through carbon taxes or ETS, green bonds issued by the government and public sector companies, feebates and public green investment, according to the report.

While India already has a well-designed climate action plan, more needs to be done to adopt new technologies and support policies for innovation for progress on both mitigation and adaptation.

India should explore ways to improve access to critical mineral resources and technology through multilateral, regional and bilateral strategic partnerships, and intensify efforts to address variability in wind and solar energy supply through appropriate energy technology. energy storage and demand management mechanisms using smart grids.

Increasing domestic capacity

The report also made suggestions such as increasing the national capacity to extract rare earth elements or acquire them through long-term contracts and outward FDI; national manufacturing of critical equipment such as batteries, electrolyzers and other associated components; advance the application of AI and ML for better resource management; complement green building standards with IoT and AI and ML-based monitoring to manage and reduce energy demand; promote climate resilient agriculture; green hydrogen production using renewable energy; and investment in carbon capture and storage technologies.

“India needs to recognize that countries’ protectionist policies are becoming increasingly sensitive to the carbon content of imports, which could affect India’s medium-term export prospects unless Indian exports meet green standards. of importing nations,” the report says.

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