India’s Climate Finance Requirements: An Assessment

Global CO₂ emissions have been on a relentless rise, driven by industrialization, deforestation and the burning of fossil fuels. India is poised to be one of the most affected nations by climate change due to a combination of geographic, economic and social factors. To address climate risks while maintaining high growth rates, it is becoming increasingly important for India to adopt effective climate adaptation and mitigation measures. Various studies have estimated the climate finance requirements of India in the range of $160-$288 billion annually up to 2030. These estimates are model-based and have followed top-down approaches that fail to address granular and sector-specific climate finance requirements.

A new technical paper from Janak Raj and Rakesh Mohan for the Task Force on Climate, Development and the IMF adopts a bottom-up approach, focusing on four key carbon-emitting sectors—steel, cement, power and road transport—that together accounted for over half of India’s carbon emissions in 2023. The study assesses the additional capital expenditure (capex) India would require to decarbonize these sectors, beyond the capex projected under a business-as-usual (BAU) scenario up to 2030.

Main findings:

• Decarbonizing steel, cement, power and transport will require an estimated $467 billion in climate finance between 2022 and 2030 (about $54 billion annually, or 1.3 percent of GDP), with hard-to-abate sectors driving the bulk of the cost.
  • Steel and cement decarbonization drive India’s climate investment needs, jointly amounting to more than 80 percent of the total. These investment requirements largely depend on carbon capture and storage (CCS), which is expensive and not yet available at scale in India.
  • Contrary to assumptions, the capex required for power is $57 billion, relatively low when compared to steel and cement. Up to this point, power is the sector that has received the most attention in mitigating the impacts of climate change.
• Decarbonization of the four sectors would result in a large reduction in the use of fossil fuels—291 million tons of coal and 72 billion liters of petrol and diesel—and mitigation of 6.9 billion tons of CO₂ in the power, steel and cement sectors.
  • The road transport sector could not be included in the CO₂ mitigation estimate as the relevant data was not readily available.
• Calculations show that India will be able to absorb up to $474 billion in external finance until 2030. Furthermore, fiscal space for public climate spending is limited, as the general government debt-to-GDP ratio remains high.
  • This suggests that the bulk of the resources for climate action may have to be financed by the domestic private sector.

These findings underscore the scale of investment and action required, and point to clear sector-specific steps India can take to align its growth trajectory with its climate ambitions.

Policy recommendations:

• Encourage private financing for decarbonization in high-emitting sectors through subsidies, with support for R&D and technology transfer to develop affordable alternatives.
• Speed up the shift from internal combustion engine vehicles to electric vehicles by building charging infrastructure and establishing clear regulatory measures.
• Expand renewable energy generation by investing in grid upgrades, battery storage and hydro-pump storage, taking advantage of lower capital costs compared to fossil fuels.
• Periodically reassess climate finance estimates and strategies to account for evolving technologies and demand requirements.

Overall, the technical paper provides a novel bottom-up estimate of India’s climate finance needs. The significant investment required to decarbonize four of the country’s high-emitting sectors underscores the importance of a carefully calibrated economic strategy. Such a strategy would help India navigate the challenge of advancing its development goals and economic growth while addressing climate vulnerabilities.