Making climate change finance work for India

Making climate change finance work for India
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First Published: Tue, Nov 10 2009. 08 39 PM IST

Cost concerns: A wind farm in Jaisalmer, Rajasthan. Most of these clean energy technologies are currently more expensive than traditional ones, not least because of subsidies for fossil fuels. Mint
Cost concerns: A wind farm in Jaisalmer, Rajasthan. Most of these clean energy technologies are currently more expensive than traditional ones, not least because of subsidies for fossil fuels. Mint
Updated: Tue, Nov 10 2009. 08 39 PM IST
Investment in energy is critical for India. The World Energy Council estimates that about 56% of rural households in India have no access to electricity. The World Bank calculates that energy poverty levels such as these can reduce gross domestic product (GDP) growth by as much as 4% annually.
India is rightly striving for a step change in energy infrastructure investment over the next two decades to sustain and accelerate its economic growth. The International Energy Agency (IEA) suggests that to meet its future energy needs, India will need to expand its gross capacity to exceed 400GW—equal to today’s combined capacity of Japan, South Korea and Australia. IEA says this translates into an investment price tag for India of about $1.25 trillion (Rs58.12 trillion) in energy infrastructure—three-quarters in the power sector—by 2030.
However, to avoid becoming a major new contributor to climate change means India’s energy investments must also be “clean”. This involves using the latest low-carbon and energy-efficient technologies, such as decentralized solar, wind, solar-thermal, bio-energies, nuclear, clean coal (high-efficiency coal-fired power stations coupled with carbon capture and sequestration facilities) and smart grids.
Cost concerns: A wind farm in Jaisalmer, Rajasthan. Most of these clean energy technologies are currently more expensive than traditional ones, not least because of subsidies for fossil fuels. Mint
Most of these clean energy technologies are currently more expensive than traditional ones, however, not least because of subsidies for fossil fuels. This adds a “clean energy” incremental cost to the scale of investment required for India to eradicate its energy poverty. A 2008 analysis by Project Catalyst suggests that the extra cost for clean energy investment in all developing countries could reach up to $60 billion a year.
Even with margins for error, it is clear that hundreds of billions of dollars will be required by 2030 for India to tackle energy poverty using clean technology. Additional urgency arises from the fact that this investment needs to start soon in order to avoid a “lock in” to high carbon infrastructure projects and the prospect of emissions levels continuing to rise.
The scale and speed of investment that India requires puts into context the public finance schemes under discussion in the current climate negotiations. For example, the Mexican proposal on climate finance seeks to raise a $10 billion global fund from government pledges; the Norwegian proposal for a 2% auctioning of assigned amount units in the carbon markets will raise an estimated $15-25 billion per year; and suggestions for levies on international air travel and bunker fuels are expected to yield $8-25 billion per year together. Many other countries apart from India will have legitimate demands on these revenue streams. While extremely welcome, it is clear that there will just not be enough public finance available to meet all the needs of all. If the public money available, whether through overseas aid or through new funds emerging from the climate negotiations, will not nearly be enough, what is the plan B for meeting India’s clean energy investment needs?
Encouraging developed countries to allocate more aid may not be a robust strategy alone. It seems highly unlikely that some kind of global public finance revolution will occur in Copenhagen, for India or for any other developing country. Rich countries say, with some justification, that they have pushed their public debt to the brink over the last 12 months in order to bail out banks, thus saving the world from a dreadful global recession. Furthermore, plenty has been written over the last four decades about how wasteful aid can be, however well meaning, when pushed through the usual official delivery channels. Instead, could India make a proposition to developed countries for smarter rather than bigger flows of climate aid? Can Indian negotiators propose to take the climate finance on offer from developed countries and be entrepreneurial with it, perhaps using it to somehow leverage much more private capital to flow into India for clean-energy investments?
This could be advantageous to India. Private capital does not come with the politics or strings attached of foreign aid. Moreover, rather than being off-balance-sheet as most overseas aid is, enhanced levels of investment from private capital into clean-energy infrastructure would actually be a boost to Indian GDP. It is also well documented that green energy investments create more jobs than their fossil fuel equivalents per megawatt hour of energy produced.
Using public funds to attract private capital also changes the geometry of developing country negotiations on finance: instead of demanding more aid from the West, they would start suggesting smart ways to make climate finance work more productively to boost their economic growth. The consequence is that India (or other developing countries) would start building different modalities for delivering and using the climate finance on offer. New forms of development finance architecture could emerge, designed by developing countries.
What if India proposed that development finance institutions such as the Asian Development Bank or the World Bank shifted their balance sheets away from projects alone and more towards providing a scale increase in risk mitigation products to attract private finance investment in Indian infrastructure? UNEP Finance Initiative research suggests risk mitigation products, (related to currency risk, political risk, future power purchase agreement guarantees, for example) which multilateral development banks can offer (note that the Asian Development Bank is only one of two financial institutions in Asia with an AAA credit rating) can catalyse between two and 13 times the level of private capital than the original public funds could if they were used to pay for a project directly. Alternatively, what if India demanded the creation of its own version of the US government’s Overseas Private Investment Corporation—an “India Private Investment Corporation”—through which the overseas climate finance on offer would be used to buy down the risk at a fund level for those private investors looking to finance clean infrastructure in India? The potential to leverage private capital flows into Indian infrastructure could be large.
Furthermore, what if institutional investors in richer countries such as sovereign wealth funds from the oil rich nations and pension funds from Western countries could be attracted into providing equity through cornerstone funds to finance Indian low-carbon infrastructure, on the back of these multilateral development bank or “IPIC” initiatives buying down most of the risk? Could a slew of new investment funds be assembled on using these new equity offerings, to finance India’s energy needs and associated infrastructure sector, tackling both energy poverty and to shift towards the latest low-carbon technologies?
These and other proposals are ideas that the World Economic Forum has been exploring in collaboration with partners from industry, the financial sector and the multilateral development banks. A recent report released by the World Economic Forum at climate week in New York in September set out an approach, similar to the above, which could generate a suite of regional funds for developing countries of up to $75 billion each every three years to 2030. This scale of finance would significantly affect India’s attempts to finance the energy poverty challenge in a low-carbon manner.
On the occasion of the 2009 World Economic Forum’s India Economic Summit, a group of Asia’s leading infrastructure fund managers were convened alongside multilateral development bank and policy experts, to test these ideas further. Potentially, it is through these kinds of public-private financing initiatives that India will be able to mobilize the investment it requires to meet its energy poverty challenge using clean technologies.
Dominic Kailashnath Waughray is a senior director at the World Economic Forum.
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First Published: Tue, Nov 10 2009. 08 39 PM IST