India needs carbon tax and pricing to reach net zero by 2070, RBI study finds

​​Transitioning to a net-zero economy in India will require putting in carbon pricing and introducing a carbon tax, among other green policies, a report from the Reserve Bank of India (RBI) has found.

“India’s goal of becoming an advanced economy by 2047 and achieving the net-zero target by 2070 would require accelerated efforts in terms of reducing the energy intensity of output as well as improving the energy mix in favour of renewables,” the currency and finance report found.

Released on 3 May, the report also noted that central banks have a role to play in climate change and that “even if governments are the most influential agency for climate change, all institutions, including central banks and financial sector regulators, are stakeholders, especially in view of the existential threat to their central mandates”.

The report also found that India will need to spend an estimated 85.6tn rupees by 2030 to ensure its industries adapt to climate change. The country will also need to introduce a broad-based carbon pricing system, as well as a carbon tax, and reduce the energy intensity of its GDP by 5% per year to reach net zero by 2070.

According to the report, a carbon tax is more effective than other types of green regulation and should be used along with complementary measures such as an emissions trading scheme (ETS), freebates and regulations.

“While the manifestation of climate change has become evident, its impact on the Indian economy could be manifold, by denting the supply potential of the economy as well as by altering demand conditions,” the report stated.

As such, the researchers advised a sector-specific approach to climate risk mitigation, especially given policy trade-offs between near-term adverse output impact against larger output losses due to no policy action.

Without any policy action, carbon dioxide emission levels could rise to 3.9 gigatonnes by 2030, the report found.

In addition, India’s green financing requirement is estimated to be at least 2.5% of GDP annually until 2030 to address the infrastructure gaps caused by climate change.

Researchers found that the results of a climate stress test showed Indian public sector banks were more vulnerable to climate change than private sector banks but that globally, “measurement of climate-related financial risks remains a work in progress”.

There is also a need for a green taxonomy in India, or framework, to define what can be considered environmentally sustainable investments in order to limit risks from greenwashing and make it easier to identify green assets.

The RBI noted that the report does not reflect its official views but is based on research from the central bank’s Department of Economic and Policy Research.

In April, the RBI announced a framework for banks to accept green deposits. The central bank is expected to release frameworks around disclosing climate-related financial risks, as well as conducting climate scenario analysis and stress tests, in the coming weeks. The policies come nearly a year after the RBI issued a discussion paper around climate risk and sustainable finance.

India has a D rating on the Green Central Bank Scorecard due to poor ratings in monetary and financial policy.