India's low carbon value chain, green debt, and global climate finance architecture

Abstract

The paper critically evaluates the bottlenecks inherent in India's low carbon value chain that is financed by green bonds and related debt securities. The paper identifies three cardinal limitations of the value chain viz. unviable carbon mitigation projects, insufficient market competitiveness of green bonds issued from India and the inability of refinancing institutions to securitise their liabilities and overcome the problem of asset-liability mismatch. It is argued that a climate financial architecture that overcomes these limitations provides important lessons to the ongoing global efforts to strengthen the financial mechanisms laid down by the Paris Agreement on Climate Change. The paper explores India's ‘low carbon value chain’ in the light of the developments that have taken place in India's climate finance landscape in the years following the adoption of the Paris Agreement on Climate Change. Shrinking budgetary resources, paucity of fiscal resources and the rise of non-performing assets in the debt portfolios of banks have compelled India's financial institutions to mobilise financial resources through debt markets. This trend has been accentuated by the advent of COVID-19. However, despite adhering to internationally laid down quality standards, the ‘on-shore’ and ‘off-shore’ green bonds issued by India's refinancing and development financial institutions suffer from insufficient liquidity in secondary markets. The yields clocked by these bonds compare unfavourably with Government Bonds of comparable maturities. The resultant tensions in the ‘low carbon value chain’ can be obviated if refinancing institutions finance bankable climate mitigation projects which enjoy auxiliary revenue streams from carbon and renewable energy credits generated from carbon markets. It is further argued that supportive policy measures that enable the country's Central Bank to conduct market support operations involving green bonds and empower lending institutions to securitise their loan assets, can go a long way to enlarge the scope of debt securities in India's climate financing plan. It is stated that the new climate finance architecture proposed for India holds vital lessons for the ongoing efforts of the global community to provide teeth to the climate finance and carbon market provisos of the Paris Agreement on Climate Change.

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