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India should introduce carbon-pricing system

May 4, 2023

The ‘Report on Currency and Finance’ has been prepared by the Department of Economic and Policy Research. It does not represent the views of the RBI.

India needs to introduce a broad-based carbon pricing system to meet its climate goals, the Reserve Bank of India (RBI) said in a report on Wednesday. The ‘Report on Currency and Finance’ has been prepared by the Department of Economic and Policy Research. It does not represent the views of the RBI.

The report has urged the government to introduce an emissions-trading system, linked to the green taxonomy to cover all the sectors of the economy.

The report also stated the need to bring about an effective green taxonomy so that sustainable green assets and activities can be identified and the potential risk of green washing can be limited.

In the United Nations Climate Change Conference, 2021, India pledged to cut its emissions to net zero by 2070. Half of India’s energy is expected to come from renewables by 2030.

Broadly, the report estimates that India’s annual green financing requirements could be at least 2.5% of the GDP. India would have to arrange for new investment of $7.2-12.1 trillion till 2050, which would be a challenge.

In the absence of policy interventions, estimates show that India’s carbon emissions could increase to 3.9 gigatonne by 2030 from 2.7 gigatonne in 2021. On the other hand, a balanced policy intervention can lower carbon emissions to 0.9 gigatonne by 2030.

“The enormous scale of the green transition challenge and the colossal cost of delayed policy actions warrant a comprehensive de-carbonisation strategy, encompassing all carbon emitting sectors of the economy and all available policy levels,” the report said.

The central bank will soon issue a disclosure framework on climate-related financial risks and guidance on climate scenario analysis and stress testing.

The report has urged the government to adopt a sector-specific approach to mitigate climate risks since different sectors of the economy have varying emission intensities. It noted that the response of individuals to climate events by geographical locations must be taken into consideration.

“Alongside significant technological breakthroughs required to achieve green transitioning in the hard-to-abate industrial sectors, policy focus on sectors with low emission intensities such as textiles, fisheries, land transport and services could support India’s growth and employment objectives,” the report said, adding that India has already demonstrated a capacity to achieve transformations in certain sectors like renewables and agriculture.

Before implementing green capital regulation, NPAs in the banking system must be reduced to alleviate potential financial risk, it said. “If green capital regulation amplifies NPAs, it could impede monetary policy transmission.”

[The Financial Express]

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