India needs USD 467 bn climate finance by 2030 to decarbonise key sectors: Study

India will need to mobilise USD 467 billion in climate finance by 2030 to put four of its most carbon-intensive sectors — power, steel, cement and transport — on a low-carbon pathway, according to a new study.

The working paper, 'India’s Climate Finance Requirements: An Assessment', authored by economists Janak Raj and Rakesh Mohan for the Centre for Social and Economic Progress (CSEP) and the Task Force on Climate, Development and the IMF, was released on Thursday.

It departs from conventional top-down modelling approaches and instead uses a bottom-up methodology, estimating climate finance needs sector by sector to present what the authors described as a "granular understanding" of India's challenge.

The study found that decarbonising the four sectors, which together accounted for more than 50 per cent of the country's carbon dioxide emissions in 2023, would require an average of USD 54 billion a year between 2022 and 2030. This amounts to around 1.3 per cent of India's GDP.

"Contrary to the common narrative, the study finds that it is not the power sector, but the steel and cement sectors which need large climate finance," Raj said. "Both the steel and cement are hard to abate sectors, which require the use of an expensive carbon capture and storage (CCS) technology, but it is the only feasible option at this stage."

The report estimates that over 80 per cent of the USD 467 billion requirement will come from steel and cement alone. By contrast, decarbonising the power sector would need about USD 57 billion, significantly lower than prevailing assumptions, thanks to the declining capital costs of renewable energy.

The transport sector will also demand significant investment, particularly in accelerating the transition from internal combustion engine vehicles to electric mobility.

This, the report said, would require scaling up charging infrastructure, creating viable financing mechanisms and strengthening regulatory frameworks.

Mohan emphasised that while the numbers are substantial, they are achievable. "The incremental financial resources needed for climate change mitigation in India for four key emitting sectors — energy transition, steel, cement and road transport — at an annual average of 1.3 per cent of GDP up to 2030, are within reach," he said.

"Contrary to most astronomical estimates that are done top down, this estimate has been derived on a bottom-up granular basis. It provides a basis for optimism on our financial capacity to tackle climate change," he said.

The study highlights a financing gap that will need to be bridged through both domestic and external sources. It said that India may have to prudently expand its current fiscal deficit up to 2.5 per cent of GDP to absorb external climate finance, but stresses the importance of complementing this with domestic mobilisation.

Among the key policy recommendations are incentivising private investment in steel and cement through targeted subsidies, R&D support and international technology transfer.

The authors also called for a clear national framework to accelerate the adoption of electric vehicles and to strengthen the power grid for renewable integration by expanding battery storage and hydro-pump capacity.

The report argued that how India navigates this transition will be closely watched by other emerging and developing economies facing similar dilemmas.

"The bottom line: Steel and cement are the financial linchpin in India's decarbonisation efforts. With a carefully calibrated economic strategy, India can navigate the dual challenge of sustaining rapid growth while tackling climate vulnerabilities, offering lessons for other developing economies confronting similar challenges in financing ambitious climate transitions," the paper read.

The authors called for urgent action, given the long lead times associated with investments in heavy industry and energy infrastructure. The report warned that delays in mobilising finance could lock India into high-emission pathways that are costly to reverse.

Raj, who has previously worked with the Reserve Bank of India and the International Monetary Fund, and Mohan, a former deputy governor of the RBI and a member of the prime minister's Economic Advisory Council, said their findings aim to inform both domestic policymakers and the international community as India prepares for the UN climate conference (COP30) in Belem in Brazil in November this year.