Opinion
Let us deploy fiscal federalism against climate change
Summary
- It will ensure better use of resources and outcomes in a battle that all Indian states need to fight
In my last article (bit.ly/44IbHzV), I wrote about the global experience of using fiscal federalism for climate action. In India, the inherited regulatory and legal context of environment policy is highly centralized. It needs to be modified in consonance with the reality that Indian states must play the primary role in climate change adaptation and mitigation. Hence, there is a need for new federal institutions to rebalance governance capacity with states. The Constitution gives the Centre the lead role in key realms of climate governance, such as mines and petroleum, industry and inter-state waters. The concurrent list has much of the rest, including forests and wildlife, factories and electricity. Other important areas of climate governance, such as local government, agriculture and water governance, are the preserve of state governments.
However, the Centre has historically defined the framework in which states operate, generally through the National Action Plan on Climate Change (NAPCC), which has set eight national goals for climate action. All states have followed with state-level action plans (or SAPCCs). These outline the priorities of each, but with little mutual coordination. They are statements of intent with methods and funding constraints that vary, and are neither ‘investment ready’ nor aligned with the Centre’s net-zero target.
Effectively, state-level policies have been shaped by national schemes and centrally designed ‘model legislations,’ and channelled through institutional forums like the National Steering Committee on Climate Change (NSCCC), which comprises both central and state officials, and monitors state actions under the SAPCCs. Other forums include annual meetings of energy ministers, a forum of electricity regulators and the generally inactive Inter-state Council.
To enhance the use of fiscal federalism for climate change, India should:
Define activities and map climate finance channels: India should widen the mapping of programmes being implemented in various states vis-à -vis funding channels, building on Niti Aayog’s efforts to map programmes with aspects of climate change.
Enhance fund allocation: An adequate proportion of funds must be allocated to states through fiscal federal mechanisms specifically earmarked to cover climate-related initiatives and renewal energy.
Strengthen state capacity: Institutional mechanisms must be bolstered to plan, implement and monitor various initiatives. These are currently under the centrally run National Mission on Strategic Knowledge for Climate Change.
Incentivize climate action: India can introduce performance-based incentives for states that achieve significant progress towards climate goals. Additional grants could be given to states that do well on reducing emissions or increasing renewable energy generation.
Take climate finance mainstream: Integrating climate finance into the broader fiscal planning processes of states is crucial. This will ensure that climate considerations are properly incorporated into state budgets.
Harmonize policy: India needs to develop systems to harmonize policies and regulations related to climate change across states. This would provide a stable policy environment for businesses, investors and other stakeholders. The Centre can facilitate policy coordination and knowledge exchange among states to promote best practices.
Boost data gathering and monitoring systems: Robust data collection, management and monitoring systems at the state level are essential for fiscal federalism to effectively tackle climate change. This includes improving the quality and availability of climate-related data, establishing robust monitoring and evaluation frameworks, and promoting transparency in reporting. Standardized data collection and reporting formats can allow comparisons and aid informed decision-making.
Encourage public-private partnerships: These can leverage private capital and expertise. India should explore mechanisms to attract private participation through fiscal incentives, innovative financing models and risk-sharing arrangements. Collaborations between the government, private sector and civil society can bring in more resources and accelerate projects aimed at climate action.
Enlarge the Finance Commission’s (FC) role: India has a well-functioning institution of fiscal federalism in the FC. It already has a mandate related to disaster management and resilience, with the Centre and states sharing the financial burden of disaster mitigation, response and reconstruction. Recent FCs have also considered forest cover as a part of their horizontal distribution formula. However, forest cover is inadequate to capture today’s ecological challenges.
Hence, the 16th Finance Commission, expected to be notified soon, could be given the mandate for a net-zero plan that involves developing medium-term institutional and financing mechanisms for the distribution of funds to the subnational level. Future FCs could look at the issue both separately and in its entirety, with the principle of equity among states duly taken into consideration.
By focusing on the areas mentioned above, India can strengthen the role of fiscal federalism in addressing climate change. It would enable a more effective utilization of financial resources (including funds raised by green bonds), enhance state capacities, promote policy coherence and drive sustainable development across the country.
