Why India needs climate finance for industrial decarbonisation #IndiaFinance

Sangeeth Selvaraju is a policy fellow at the Grantham Research Institute at the London School of Economics, and Jesse Scott is a senior fellow at the Observer Research Foundation and adjunct faculty at the Hertie School in Berlin

Without external help, India will fail to decarbonise its massive coal-fired steel industry, with global consequences

Climate finance transfers between rich economies and developing countries are a painful subject for many reasons. At a recent discussion in New Delhi, we were challenged to justify and clarify the need, the legitimacy and the specific ask from large lower to middle-income countries such as India towards Europe and the UK.

Starting with the big picture, the global financial system has a total resource of around $500tn. This includes public budgets, central banks, commercial banks, equity markets and any other financial asset. Emerging markets have about 4 per cent of the total, and India has 1 per cent — $5tn in total assets. This is the scale of the fundamental challenge we are trying to address in an accelerated manner to attain decarbonisation goals.

We were asked what this means for clean energy finance. India’s recent success in deploying mature technologies such as utility-scale solar and onshore wind is deservedly applauded. Unfortunately, these success stories sometimes get simplified into questions on why the country still needs international public capital for further decarbonisation.

In 2023 and 2024, energy transition investments in India were around $31bn and $47bn, respectively. Most of this money comes from domestic sources, attracted by a good business case for mature technologies.

However, there are three problems. First, these capex-heavy investments are taking place despite the adverse underlying condition of the high cost of capital. Second, to be on track to meet India’s 2030 targets, annual investment needs to reach $200bn. Third, some of the most crucial 2030 technologies are immature.

Tackling the first and second of these issues is not fundamentally about transferring public resources from developed to developing countries. It is asking how we think about matching and linking the places where big money is concentrated, and the places where big emissions are concentrated and growing.

If we compare the cost components of the levelised cost of electricity for solar PV in Germany versus India, in Germany, less than 30 per cent is the cost of financing, while in India this part is almost 60 per cent. Even with this hurdle, the Indian market is generating sufficient returns to be increasingly attractive, including for foreign asset managers, pension funds and private equity.

The raw facts are that Europe can commit large sums of domestic climate finance to green steel, and India cannot

To accelerate such investments, we need regulatory action to disaggregate and accurately price the risk of investing in India to lower the cost of capital. But at a structural level, the opposite is happening: policymakers and investors openly acknowledge that the effect of European sustainable finance regulations has been to onshore capital to the EU and UK, with less going to emerging markets. The easiest way for asset managers in Europe to decarbonise their portfolio quickly is to sell assets in Johannesburg or Mumbai and buy in London.

Tackling the third issue is different: industrial decarbonisation is at an early stage. The question of how to finance pre-commercial technologies in a way that can avoid huge future emissions brings us to the case of steel.

In Europe, new low-carbon steelmaking technologies are being supported with vast public funds. The EU has given more than €10bn in capex subsidies to green steel projects in recent years, plus opex support using carbon contracts for difference, and new announcements are coming.

Exploding steel emissions

Without a doubt, it is good news that Europe is spending money on greening its industries. As proof of concept, this helps everyone.

From an emerging market point of view, however, the message from Europe is unclear. On the one hand, local subsidies and the EU Carbon Border Adjustment Mechanism have the potential to decarbonise the European steel industry successfully. On the other hand, these are climate policies, which might logically be expected to include an offer to help tackle the coming explosion of steel emissions in the developing world.

In the coming years, India will build up to 127mn tonnes of new coal-fired, blast furnace-based steel plants, creating by far the largest future steel emissions lock-in risk in the world. Globally, steel generates 8 per cent of carbon emissions. Indian steel is so emissions-intensive and such a fast-growing sector that it accounts for 12 per cent of the country’s emissions.

The raw fact is that Europe can commit large sums of domestic climate finance to green steel, and India cannot. India’s entire industrial policies budget in the form of its multipurpose, multisector production-linked incentive scheme is €20bn for 10 years.

And so we come to the centre of the question. Is there a way in which even a few million tonnes of India’s new steel capacity can be diverted on to a low-carbon pathway? Estimates suggest the premium to produce one tonne of low-carbon steel is in the range of €200–€300. A fund to cover the viability gap is needed, and that money needs to come from developed countries, probably as a combination of grants and sub-commercial loans. Given the scale of ambition in the EU and the allocations we are seeing, the money (for mitigation) in and of itself does not seem to be the issue.

We propose that the EU and India partner on a credible industrial decarbonisation path for the Indian steel sector. That discussion could be linked to trade talks or to the upcoming summit and its strategic road map.

The Indian climate finance ask is not for capital for everything. It is not purely about access to finance. It is about pricing risk in the context of sustainable finance regulations. In terms of public allocation, it is about doing urgent things that are not yet commercial but have massive emission-saving potential.

In short, let us get our facts straight and focus on where the money will be most effective.