India’s path to net-zero: Bridging the $1 trillion funding gap while sustaining economic growth

India’s pledge to achieve net-zero emissions by 2070, which was set by the country itself at the COP26, is both ambitious and necessary, given its role as the world’s third-largest emitter of greenhouse gases.

However, this journey poses significant challenges, particularly in terms of funding.

To meet its interim climate goals by 2030, India faces an estimated $1 trillion funding gap, as outlined by the government and various industry experts.

This daunting financial requirement comes at a time when India’s economy is poised to grow rapidly, with aims to become a $5 trillion economy by the mid-2020s.

Balancing this economic growth with decarbonization goals will require innovative financing, structural reform, and collaborative investment strategies.

The South Asian major is actively exploring green bonds, blended finance, and other mechanisms to attract private capital while creating an enabling regulatory environment.

India’s net-zero commitment and funding gap

India’s net-zero target is structured around specific decarbonization milestones, including a 45 percent reduction in emissions intensity by 2030 and a push to install 500 GW of non-fossil fuel-based power capacity.

These goals require a massive transformation across sectors like energy, transportation, manufacturing, and agriculture.

The estimated $1 trillion funding gap reflects the scale of infrastructure investment, technological innovation, and skill development needed to transition to a low-carbon economy.

India’s current annual climate financing averages around $20 billion, far short of the annual requirement of approximately $100 billion to meet the 2030 target.

Given India’s developing economy status, a purely government-funded approach would be unsustainable.

Instead, a significant portion of this funding must come from international sources, private investors, and blended financing mechanisms.

Effective mobilization of funds, coupled with the right policy environment, can make India a sustainable investment destination while achieving net-zero goals.

Financing pathways to achieve net-zero

To bridge this gap, India is employing a multi-faceted approach to secure sustainable financing. Key pathways include:

Green bonds: Green bonds have gained popularity worldwide as a vehicle for financing climate-related projects, and India has embraced this trend.

The Indian government has issued sovereign green bonds aimed at raising funds for clean energy, energy efficiency, and pollution control projects.

In the first quarter of 2024, India raised around $2 billion through these green bonds, signaling growing investor confidence in the country's commitment to climate action.
Green bonds offer the advantage of attracting investors seeking environmentally responsible opportunities while maintaining competitive returns.

India’s green bond market is expected to grow rapidly as the government provides tax incentives and improves transparency in reporting and tracking bond proceeds.

In addition, state governments are beginning to issue green municipal bonds, which allow regional projects like sustainable transportation and waste management to attract local and foreign investments.

Blended finance: Blended finance, which combines concessional financing from public sources with commercial capital, can mitigate risks for private investors in high-impact sectors such as renewable energy and green infrastructure.

India has launched several blended finance initiatives in collaboration with international financial institutions like the World Bank and Asian Development Bank.

These initiatives aim to de-risk investments in emerging sectors, making them more appealing to private capital.

Attracting private capital through incentives and regulatory measures: Economists said private capital will play a crucial role in India’s decarbonization journey, given the scale and diversity of investment needed.

The Indian government has introduced various tax incentives, subsidies, and policies to encourage private sector involvement.

Regulatory changes are also creating a more conducive environment for green investment.

The Securities and Exchange Board of India (SEBI) has introduced guidelines for green bonds, aligning them with global standards.

Additionally, India’s National Infrastructure Pipeline (NIP) outlines over 7,500 infrastructure projects, with a significant portion dedicated to sustainable infrastructure, signaling the government’s commitment to creating a green investment landscape.

International climate finance: India has consistently advocated for international climate finance as a critical component in achieving its climate goals.

Developed nations have committed to mobilizing $100 billion annually in climate finance for developing nations, although this target remains unmet.

India continues to call for increased financial commitments from wealthier nations, emphasizing the principle of “common but differentiated responsibilities.”

Bilateral partnerships, such as those with the European Union and Japan, have also contributed to financing clean energy projects and technology transfer.

Strategic sector focus to maximize impact: Achieving net-zero targets requires a sectoral approach that focuses on high-emission areas with significant potential for decarbonization:

1. Renewable energy: India has already made significant strides in solar and wind energy. With the ambitious goal of achieving 500 GW of renewable capacity by 2030, the renewable energy sector will be the cornerstone of India’s decarbonization efforts.

Investment in grid infrastructure, battery storage, and offshore wind is needed to enhance capacity and reliability, with an estimated $300 billion required for renewable projects alone by 2030.

2. Sustainable transportation: India’s burgeoning transport sector is one of the largest sources of emissions.

Transitioning to electric mobility, expanding urban public transport, and developing hydrogen fuel technology are key elements in India’s transport decarbonization strategy.

To this end, the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme and incentives for hydrogen fuel technology have already generated momentum.

Collaboration with private automakers and battery manufacturers is essential to scale these initiatives.

3. Green hydrogen: Green hydrogen represents a promising solution for sectors like heavy industry and transportation that are difficult to decarbonize with renewable energy alone.

India recently unveiled its National Hydrogen Mission, aiming to make the country a global leader in green hydrogen production.

The government is exploring international collaborations and financial incentives to boost investment in hydrogen technology, which is projected to require over $150 billion by 2030.

4. Energy efficiency: Improving energy efficiency in buildings, industries, and household appliances can help India reduce emissions at a lower cost.

The Bureau of Energy Efficiency has set performance standards and launched programmes for industries, commercial buildings, and even agriculture, offering incentives for energy-efficient practices.

With a more streamlined regulatory framework, India could reduce energy demand by 25-30 percent, thereby cutting emissions without compromising growth.
India’s path to net-zero emissions, while challenging, is achievable with the right mix of finance, policy, and innovation.

Closing the $1 trillion funding gap requires a coordinated effort from government, industry, and the global community.

According to economists, with a multi-faceted financing strategy that includes green bonds, blended finance, and private capital incentives, India is positioning itself as a sustainable economy capable of meeting its climate goals while maintaining economic growth.