In order to speed up and drive green finance in the country and meet climate goals, India needs to put in place 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, in view of the inability of the weaker sections to move to eco-friendly modes of production and patterns of consumption, according to the ‘Report on Currency and Finance 2022-23’ released by the RBI on Wednesday.

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

It also recommended introducing an Emissions Trading System (ETS) linked to green taxonomy, covering all sectors of the economy, which can partly balance subsidy (less polluting industries getting carbon credits for trading) and tax (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 ‘green taxonomy’ in India, clearly spelling out what constitutes ‘green’, to help direct investment through better-designed policies and improve the monitoring of progress, it said, adding that effective green taxonomy is also needed to identify sustainable green assets and activities and limit the potential risk of greenwashing.

“Once a green taxonomy is in place, there is a need to properly record public spending on climate change and related issues and report them in a climate budget report as a supplement to the annual budget.”

Given that fiscal policy has a prominent role in driving green transition, the government has instruments such as carbon pricing using carbon taxes or ETS, green bonds issued by the government and public sector enterprises, feebates, and public green investment, the report said.

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

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

Ramping up domestic capacity

The report also made suggestions such as ramping up of domestic capacity to mine rare earth elements or procure them through long-term contracts and outward FDI; domestic manufacturing of critical equipment such as batteries, electrolysers and other associated components; advancing application of AI and ML for better resource management; complementing green building standards with IoT based monitoring and AI and ML to manage and reduce energy demand; boosting climate resilient agriculture; production of green hydrogen using renewable energy; and investment in carbon capture and storage technologies.

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