The Climake Newsletter offers quick digests and insights around what is happening in climate finance. While Climake’s current focus of work is India-centric, we will capture a global perspective of climate finance in this newsletter on a fortnightly basis.

Scaling up climate investments will require innovation in five key areas — As the arrow indicates, climate investments are facing an upward trend, but is growing fast enough? (Hint, it could be better)

Hello! We are back after an almost 6 month hiatus, owing to… a lot of different things. It has been a busy ol’ time and we hope to be able to share about new initiatives and opportunities that have shaped and come out of it in the coming editions.

A lot has also happened around the world in the last 6 months, with implications for climate action. The US’ Inflation Reduction Act is expected to bring in billions of dollars in investment to achieve their 40% carbon emission reduction by 2030. India has announced an aim to set up a carbon market for the country, a gateway for more concerted requirements on emission reduction (more on this later). And, of course, we have the Ukraine-Russia conflict that has, and continues to have, a multitude of implications from the immediate, near-term human and societal cost of war, to food security consequences, and energy transition implications.

This newsletter will now be back to a regular pace of publishing every 2 weeks hereon where we will look to in capturing all these and more, and as always we invite you to share your thoughts, feedback, brickbats to improve the work we do.

Climate Finance by the Numbers

13%

The proportion of carbon credits issued globally in 2021 as compared with global GHG emissions for the same year

Through compliance and voluntary mechanisms, carbon credits equivalent to 478 million tonnes of carbon dioxide equivalent were issued globally in 2021, a 48% increase from the previous year. As credits are usually valid and realised over multiple years, it simplistic and likely incorrect to say that 13% of the world’s GHG emissions was offset in 2021 through carbon credits.

Carbon credits are seen as a crucial piece in financing climate action solutions. Voluntary carbon credits, ones that are purchased by companies and organizations to meet their GHG commitments dominate the market accounting for over 75% of credits sold, while the remaining was sold in the compliance markets, where companies and governments purchase credits against international and domestic regulations, such as a carbon tax or emissions trading scheme.

India in particular, has been a lively participant, in the carbon credit space since the inception of the Clean Development Mechanism (CDM) in 2005, and has the highest share of active credits in the voluntary carbon markets in the world. This makes the recent news of India’s move to establish a carbon market framework for the country an intriguing prospect to track.

A carbon market would broadly cover the ability for authorized carbon credits to be issued for climate positive projects, and also mandate emission limits for industries. Excess emissions beyond the limits will require the industries to purchase carbon credits, while savings can lead to credits being issued to them for trading. The setting of limits for industries has been stipulated in the Energy Conservation (Amendment) Bill 2022.

A carbon market for India has the potential to significantly galvanize climate positive action. It makes emission limits a legal requirement, and consequently offers greater incentives for climate positive solutions to be developed and adopted in the country.

How it shapes up will be closely watched, not just in India, but globally. Speaking after the launch of the amendment, the Union Power Minister stated, “Carbon credits are not going to be exported. No questions.”

At the global average of USD 3.82 per tonne of carbon dioxide equivalent, the value of India’s active voluntary carbon credits, as on date, comes to USD 420 million. Studies suggest that with more growth the country is expected to gain at least US$ 5-10 billions from carbon trading within a few years. While the cap and trade scheme will incentivize domestic buyers as part of the compliance market, it remains to be seen if this export ban stands for all carbon credits issued in India, even those issued under the voluntary market mechanisms. Details are yet to emerge, but we believe that the statement applies to compliance linked credits, and that voluntary credits will continue to be a separate market, at least in the near terms.

50%

The target percentage of non-fossil fuel energy in India’s installed energy capacity by 2030 as per its updated NDCs commitments

After India announced its 4 quite forward targets (side form the net-zero by 2070 goal) to push its climate action priorities in COP26, there has been a wait for the shift from talking points to policy. This has now come, at least in the announcement of 2 of these COP 26 targets being the main priorities for India’s updated Paris Agreement commitments by 2030: its 2nd Nationally Determined Contributions (NDCs).

reducing emissions intensity of its GDP by 45 percent by 2030, from 2005 level (the initial NDCs had this at 33 to 35 percent), and;
achieving about 50 percent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030

India’s 2nd NDCs in its full form are yet to be published and we do need to see in its full form to make a clearer judgement, but it does seem a case of more could be done.

Achieving the carbon intensity reduction by 45% is frankly easy, as this is more determined by the growth GDP than any emissions generation efficiency. Since 2005, India’s GDP, driven on the back of the more emission-efficient services sector, has grown from 386% from around USD 820 billion to 3.17 trillion in 2021. GHG emissions have grown from 1.64 gigatonnes of CO2 to 2.88 gigatonnes in the same time period.

Observers had hoped that the second priority would be a target for actual generation, rather than installed capacity. 50% of installed capacity does not equate to 50% of generation from non fossil-fuel based sources. For a reference, around 39% of our 403GW of installed power today, comes from non fossil-fuel sources, while accounting for only about 22% of generation.

The COP26 commitments that have been missed out are the 1 billion tonnes reduction target, which would only ever be effective with emissions caps being introduced, a stance that India has not committed to make citing the countries’ vast development needs; and the commitment to achieve 500GW through non-fossil fuel energy by 2030.

The omission of the latter was explained as providing flexibility based on the country’s generation needs. The disappointing part in this omission is that it leaves the gate open for more coal and thermal power plants to be set up to meet that 820GW target. There is more than 400GW of energy that is expected to be installed by 2030. If we are to go by that 50% non-fossil fuel number, we can expect almost 174GW of new fossil fuel power to be set up by 2030. This is more than our the total installed capacity of all our current non-fossil fuel power today.

Still, these are just broad points, and the government statement, does rightly again call for more action and support from developed economies to emerging countries, and, as mentioned above, the final NDC will shed more light on our direction towards that critical date of 2030.

USD 35

The peak discount per barrel offered to India from Russia in April 2022

At Climake HQ, we often look to understand what drives or supports clean or renewable energy transitions. These are often the result of national or international policy directions, corporate commitments, and even civil agitation and demands. However, the ongoing conflict between Ukraine and Russia has brought with it a new lens and conversation on how such transition may shape up across the world.

The conflict has brought to view the balance between near-term opportunities and demands and the long-term priorities for a renewable energy transition.

Europe’s reliance on Russian gas accounted for 40% of the region’s gas consumption in 2021, and dropped to 31% in April 2022, after EU countries looked to commit to reductions as a sanctions move, but struggled due to a lack of alternatives. Coupled with an expected 60% increase in gas prices, there has been a lot of call for a green energy transition in Europe as a way to create greater self-sufficiency and self-reliance. Germany, for example, has advanced its aim to have a 100% renewable energy electricity grid to be in place by 2035, instead of 2050, but has looked at expanding the obviously non-climate friendly coal production as a way to handle near-term energy demands.

In places like India, who have not looked at imposing sanctions, there has been an opportunity to access oil and other fossil-fuel materials at a subsidised cost; USD 35 per barrel was the peak discount for oil offered to India, which has reduced to about USD 12 per barrel in August. The Indian government’s defence of this purchase has been attributed to providing the best deal for its citizens, who have faced record high petrol and diesel prices in recent years, while pointing out the similarity in Europe purchasing Russian gas. Coal and fertilizers are items that India has purchased at a subsidised rate.

Renewables in India have also faced a consequent hit from the conflict. Solar panels are largely imported into India, and higher transportation costs and supply chain impacts attributed to the conflict, have had an effect in increasing the landed cost of panels in by almost 10%.

While the announcement of the updated NDCs and carbon markets are building blocks that speaks to a long-term net-zero and low carbon vision for India, the same question therefore has to be asked: how much of an impact will these near-term effects have on the longer-term renewable energy transition.

THE BIG READ

What are India’s Climate Investors Thinking?

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We are thrilled to announce our latest report, in partnership with Unitus Capital, on understanding the sentiment of climate-focused investors in India: Climate Finance in India, The Investor Survey.

In our previous report on The State of Climate Finance in India 2022 we had identified 200+ investors who had made at least 1 climate positive investment in the past 2 years. We reached out to them to better understand their priorities and outlooks for climate finance and investing in India.

Access the Report

The Survey provides insights, from the investors, on:

the prominent investment areas and sub-sectors for climate action, and what drives this interest;
what makes climate finance lucrative;
challenges faced by investors that need to be overcome;
and the steps we should take to strengthen investor and ecosystem understanding around climate action.

The Survey showed the bullishness and strength around climate positive investments, especially in more emerging and diverse areas outside of renewable energy and electric vehicles. In the State of Climate Finance in India, we covered the need for demand-side climate investments to grow. This has recognized by investors, reflected in the survey through the the focus areas and sub-sectors identified as having investor interest.

However the nascence of the climate action space was shown in how the majority approach to the climate space was opportunistic rather than significant with a clear thesis, and the belief of a lack of and limited deal pipeline mentioned as a key challenge to overcome.

We hope you find this useful, and we will be keen to have you reach out to us for any feedback or thoughts you may have on it.

That’s it for Edition #21 of our newsletter.

As always, send all feedback, compliments and brickbats our way. And of course, we do appreciate you spreading the word about this newsletter.

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Best,

Simmi Sareen and Shravan Shankar

Climake

The Climake Newsletter #21: What are India's…