Climate finance: Who will bear the cost of climate transition

India's external debt
India must harness its demographic dividend, channel investments into technology and infrastructure, and maintain a judicious mix of internal and external debt.

The cost of climate finance: The classic example of a steel plant polluting a river and escaping accountability is etched into our understanding of environmental economics. It is a scenario that vividly illustrates the conflict between profit and environmental stewardship. In recent times, the climate conversation has evolved, demanding that companies responsible for pollution bear the cost of their actions. But who will ultimately pay for this transition? The answer lies in a complex interplay of economic strategies, government interventions, and global cooperation for climate finance.

Companies, faced with new regulations and taxes aimed at mitigating their environmental impact, are likely to pass these costs on to consumers. For instance, the European Union’s carbon border tax mechanism, taxing exports from polluting countries, will indirectly affect us all, not just those within Europe. As our economy transitions, who will step in to help us bear this burden?

The transition toward electric vehicles (EVs) is another prime example. Despite initial hesitance, EVs are poised to become the future of mobility. However, financing this shift remains a challenge. In times of economic transformation, the government plays a pivotal role in acquiring the necessary resources. Our economic budgets should reflect a keen interest in resource mobilisation. One proposed solution is taxing emissions, a step already taken with fossil fuels. This not only holds companies accountable but also provides the government with funds to support this critical transition.

READGreen bonds and India’s climate ambitions: Challenges and opportunities

Cost of climate finance

The conflict between profit and environmental responsibility also extends to investors. Today, investors are increasingly scrutinising companies’ environmental practices, pressuring them to adopt sustainable measures. This pressure comes with its own set of costs. Companies that fail to align with these expectations may find it difficult to secure investment, pushing them toward sustainability as a means to survive in the market.

Banks, the backbone of our economy, have a significant role to play in aligning with environmental goals. By evaluating and disclosing their portfolios’ environmental impact, they can drive changes in lending practices. Implementing environmental costs within the financial system will incentivise a shift toward more sustainable investments, benefiting both our environment and economy.

However, the climate crisis extends beyond borders, raising questions about historical emissions and responsibility. India, historically a lower emitter due to its unique economic structure, now faces the dilemma of financing its own climate transition. The issue of who should pay for historical emissions and how countries can access climate finance is a recurring topic at international forums like COP. As the numbers grow, the concept of financing climate action expands beyond consumers and companies to include entire nations.

Historically, countries have looked to institutions like the World Bank for loans. Yet, reforming institutions like the Bretton Woods system, as proposed by the G20, could be a game-changer. It might be the right time to reconsider how climate finance is accessed and distributed. Developed nations are also exploring partnerships with countries like India, offering financial support in exchange for climate commitments. Tailoring these agreements to fit the capabilities and responsibilities of each nation could be a path forward.

Furthermore, the concept of a “just transition” must be a central part of the discussion. This idea emphasises that as we move toward a greener economy, we must ensure that workers and communities dependent on industries that will be impacted are not left behind. Providing support for reskilling, job transitions, and sustainable economic opportunities is essential for social equity in the midst of this transformation.

The climate crisis is reshaping our economic landscape. The burden of this transition falls on all of us, but it is an opportunity to redefine our economic systems and priorities. By adopting strategies such as emission taxes, sustainable investments, equitable international partnerships, and a commitment to a “just transition,” we can navigate the economic challenges of a greener future. In doing so, we not only safeguard our planet but also ensure a more sustainable and prosperous future for all. This transition may be complex and require careful planning, but it is a path toward a better and more resilient world for generations to come.

Suranjali Tandon is Assistant Professor at the National Institute of Public Finance and Policy, New Delhi. This article is the edited excerpt of her presentation at the India Sustainability Summit, organised by Policy Circle.