India must establish a comprehensive carbon pricing mechanism in line with current international standards and implement a carbon tax to accelerate the growth of green finance to achieve the climate objectives, a report by the Department of Economic and Policy Research said.

The ‘Report on Currency and Finance 2022-23’ said that a carbon tax might require supplementary redistributive policies due to its potentially disproportionate impact on vulnerable populations.

These policies would be necessary since individuals from lower-income groups may need help shifting towards environmentally friendly production and consumption methods.

The report also said that implementing an Emissions Trading System (ETS) linked to green taxonomy encompassing all sectors of the economy was required.

This system can partially counterbalance subsidies (which could be offered to industries with lower pollution levels in the form of carbon credits) and taxes (which could be imposed on industries with higher pollution levels by purchasing carbon certificates).

While a carbon tax may be more effective, the report noted that an ETS may be less controversial from a political perspective.

Sustainable Taxonomy

The report emphasized the urgent need for a ‘green taxonomy’ in India that clearly defines what qualifies as ‘green’ to channel investments through well-designed policies and enhance progress monitoring.

Furthermore, an effective green taxonomy can aid in identifying sustainable green assets and activities, as well as limit the risk of ‘greenwashing.’

The report recommended the creation of a climate budget report that supplements the annual budget, which would accurately document public expenditure related to climate change and related issues.

Expanding Manufacturing Capability

The report said it was essential for India to enhance domestic production capacity for rare earth elements through mining or long-term contracts and foreign direct investment.

It also suggests domestic production of essential equipment such as batteries, electrolyzers, and other related components.

Additionally, the report recommended advancing the application of artificial intelligence (AI) and machine learning (ML) to enhance resource management, as well as integrating Internet of Things (IoT) based monitoring and AI/ML to manage and reduce energy demand in compliance with green building standards.

Other recommendations include promoting climate-resilient agriculture, producing green hydrogen through renewable energy sources, and investing in carbon capture and storage technologies.

According to the report, India must acknowledge that protectionist policies of countries are becoming more mindful of the carbon content of imports, potentially impacting India’s medium-term export outlook unless exports comply with the green standards of importing countries.

Earlier in January, the government announced the sale of sovereign green bonds (SBG) worth ₹80 billion (~$986 million) through an auction by the Reserve Bank of India, Mumbai

Recently government-owned lender Indian Renewable Energy Development Agency (IREDA) has been granted an ‘Infrastructure Finance Company’ (IFC) status by the Reserve Bank of India (RBI), enabling better exposure to renewable energy sector financing.