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Trends in Climate Finance

The Paris Agreement in 2015 set the global target to keep the increase in global temperatures to 2°C above pre-industrial levels by the year 2100, and pursue efforts to limit it to 1.5°C. Following that, several actions have been taken with various countries setting and revising their Nationally Determined Contributions (NDCs).

 

The first Global Stocktake carried out in 2023 outlined that despite significant progress, the GHG emissions trajectories are not in line with the Paris Agreement and more efforts need to be made for mitigation and adaptation. The mitigation efforts to be focused on include tripling renewable energy capacity and doubling the average annual rate of energy efficiency improvements in this decade, phasing down unabated coal power, accelerating zero- and low-emission technologies such CCUS, deploying zero- and low-emission road vehicles, etc. The adaptation efforts aim at strengthening resilience and reducing vulnerability by focusing on addressing water-scarcity, health impact, infrastructure, poverty eradication, etc. The finance needs of developing countries are estimated at approx. USD 5.8 trillion for pre-2030 period to implement their NDCs. Hence, it has become important to mobilize private sector funds as well.

 

India has set a goal of becoming net zero by 2070, with ambitious targets for 2030 for renewable energy capacity and reductions in carbon emissions and carbon intensity. The Indian Carbon Credit Trading Scheme (CCTS) has been notified as market-based mechanism to set-up the Indian Carbon Market (ICM). The ICM will subsume the existing PAT-ESCerts and REC schemes for obligated entities. It will also provide offset mechanism for registering voluntary projects. The institutional framework has already been established and ICM is expected to become operational by 2026. The BEE has also notified detailed compliance procedure under CCTS and approved sectors in the offset mechanism. Further, India is also developing Climate Finance Taxonomy for categorizing sectors, classifying financial instruments and setting standards for green finance. This will help to prevent green washing and aligning economic activities with climate goals.

 

The climate change issue has also become important for businesses. The reporting mandates by regulators, financial institutions and investors have expanded to cover various sectors. Financiers are also offering debt at concessional rates for green projects. Capital is also being deployed via private equity, venture capital and impact funds, fostering innovation and increasing adoption of climate change solutions.

 

Majority of the investments still focus on software-based solutions, though many climate startups are providing hardware, hard-tech and infrastructure products. The gap exists because of larger scale of investment required in hardware solutions. Writing bigger checks on such ventures is considered risky by several VCs, compounded by limitations on ticket-sizes and fund cycles. Some corporates / corporate VC arms and asset financiers are bridging the gap, but that’s not sufficient to address the growing funding needs of climate hardware ventures.

 

The emergence of ChatGPT and generative AI startups has led to investors becoming familiar with pumping in tens of millions of dollars at initial funding rounds. While similar conviction is required to grow hardware-focused climate startups, it is also important to recognize that they would typically generate 2x-3x financial returns as they scale up.

 

It is projected that India needs USD 100+ billion a year until 2030 to meet its climate goals. This quantum would cover required investments across energy transition, climate adaptation, electric mobility, sustainable agriculture, infrastructure decarbonization and waste & circularity. Some of the emerging areas where investments need to be made are electricity grids, bioenergy, large-scale battery storage, commercial EVs, e-waste and plastic-waste recycling, cooling systems, green infrastructure, climate data analytics, etc. Besides private investments, the development of a strong carbon market and integration of offset projects would facilitate optimal funds flow towards mitigation and adaptation activities.

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