By Rajnish Gupta
Budget 2023: Governments around the world are actively using fiscal tools to transition their countries toward net zero. A recent example is the Inflation Reduction Act in the United States, where the US government has committed $370 billion. Tax credits for rooftop solar power, energy-efficient improvements while replacing home appliances or making home repairs by individuals and tax rebates for businesses generating renewable energy are all examples of tools being employed.
In the last Budget, the government announced a slew of measures to encourage the transition towards a greener economy. On the policy front, the government announced an increase in outlay for solar PLI, the introduction of the battery swapping policy as well as digitally enabled single window green clearances. The government recently announced the Green Hydrogen Mission, so one of the things to be watched out for would be the allocations made for the coming year under this policy, including the announcement of the PLI schemes for the sector.
One of the biggest challenges for energy transition is the huge investment required and how would it be funded. In the strategy paper submitted at UNFCC (United Nations Framework Convention on Climate Change), funding requirement was estimated in the order of “tens of trillions of dollars” by 2050. In the last Budget, the government announced financing measures of which the issuance of the first Sovereign Green Bond (SRGB) in FY23 took centerstage. In November 2022, the finance ministry approved India’s first green bonds framework in line with the International Capital Market Association (ICMA) Green Bond Principles (2021) where eligible green expenditure can be undertaken by the government and its agencies in form of investments, subsidies, grant-in aids, R&D expenditure, or taxes foregone.
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The framework, however, doesn’t mention any pre-defined targets for the project output or lays any pre-qualification criteria in terms of emission reduction for any green project under consideration. There is only post-facto reporting on the project outcome and the benefits generated. The framework does underline certain energy resources that would be excluded from its ambit which includes nuclear power generation, hydropower plants larger than 25 MW, projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based. To reduce project-related risk, payment of principal and interest on the green bonds will not depend on the performance of the eligible projects. By putting in criteria for deployment, it brings greater transparency in how money is deployed.
The Reserve Bank of India has notified for issuance of SRGB worth Rs 16,000 crore of five-year and ten-year maturity over the next few weeks. SRGBs are eligible to be invested in by non-residents, can be traded in the secondary market, and are eligible for repurchase transactions.
One of the things to be watched out for would be the amount of money the government wishes to raise in the next fiscal years through this instrument. SGRBs can serve as a model for other players seeking to raise green bonds and can lead to the creation of a robust green finance market, especially given that “tens of trillions of dollars” are required. In line with this, we hope that the FY24 Budget should lay down a clear taxonomy for green bonds to be raised by the private sector. This would prevent greenwashing and help potential investors with a comprehensive evaluation of green projects.
While the US has chosen to subsidize green consumerism and production, taxation is another key tool that governments across the world have used in the past. To incentivize the use of green technology and fuels, the government can either introduce an emission trading system or create a mechanism for levying carbon taxes. Currently, India doesn’t have a formal code on either. However, a recent amendment to the Energy Conservation Bill enables the government to set up a carbon credits trading scheme. There has been no definitive framework on carbon pricing yet. Carbon taxes are therefore unlikely, given that the government proposes to introduce carbon credits trading scheme.
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To conclude, the Budget would address green issues, especially regarding fundraising and budgetary allocations for green initiatives.
(The writer is associate partner, tax and economic policy group, EY India. Views expressed are personal)