Font size:
Print
Union Budget 2025 and India’s Climate Commitments
Context:
As Union Finance Minister Nirmala Sitharaman takes centre stage to present the Union Budget, the nation will look to her for decisive action on urgent climate priorities.
More on News
- With extreme weather events becoming more frequent and India’s climate commitments under scrutiny, the FY26 Budget carries both the urgency to act and the opportunity to drive transformative change.
- With just five years left to achieve India’s first interim Net-Zero target, the government’s actions must prioritise those most vulnerable to climate change.
A Track Record of Climate Initiatives
- India’s recent Budgets have demonstrated a commitment to addressing climate challenges.
- Notable initiatives include the PM Surya Ghar Muft Bijlee Yojana, support for electric vehicle charging infrastructure, viability gap funding for offshore wind energy, and increased allocations for the National Green Hydrogen Mission.
- Despite these efforts, India’s renewable energy capacity stands at 203.18 GW—far short of the 2030 target of 500 GW.
- Accelerated policy measures and investments are imperative to bridge this gap.
Accelerating Renewable Energy Adoption
- The Budget must prioritise key policies to strengthen India’s green energy transition.
- The PM Surya Ghar Muft Bijlee Yojana, despite 1.45 crore registrations, has seen a low completion rate of only 6.34 lakh installations (4.37%).
- Addressing these gaps requires a multi-pronged approach:
- RESCO Model for Accessibility: Fiscal allocations should prioritise the Renewable Energy Service Company (RESCO) model, which transforms prohibitive upfront costs into manageable operational expenses for low-income households through innovative financial instruments and credit guarantees.
- Boosting Domestic Manufacturing: Expanding production-linked incentives (PLI) across the solar module supply chain is crucial.
- Currently, domestic manufacturing meets only 40% of demand, with costs for locally produced panels 65% higher than imports.
- Leveraging Railways for Renewable Energy: India’s railway network offers untapped potential for solar and wind energy generation.
- Estimates suggest up to 5 GW of renewable energy capacity can be developed using railway land and track corridors.
Tackling EU’s Carbon Border Adjustment Mechanism (CBAM)
- The European Union’s Carbon Border Adjustment Mechanism (CBAM), set to take effect on January 1, 2026, presents a significant challenge for India’s export competitiveness.
- CBAM products exported from India to the EU total $8.22 billion annually and could face levies of 20% to 50%.
- This poses a substantial threat to India’s Micro, Small, and Medium Enterprises (MSMEs), which contribute 30% to GDP and 45% to exports.
- To mitigate this, the Budget should establish a dedicated ‘Climate Action Fund’, modeled on Japan’s Green Transformation (GX) Fund, to support industrial decarbonisation.
- This fund can also provide capacity-building initiatives for MSMEs to meet compliance requirements under CBAM.
Advancing the Circular Economy
- According to the Council on Energy, Environment, and Water, transitioning to a circular economy could generate ₹40 lakh crore ($624 billion) in annual profits by 2050 while reducing greenhouse gas emissions by 44%.
- The Budget should encourage this transition by:
- Offering a weighted deduction of 150% on investments in recycling infrastructure and refurbishment technologies.
- Providing accelerated depreciation benefits for circular economy assets.
- Establishing a sovereign green bond framework specifically for financing circular economy infrastructure.
Strengthening Climate Resilience
- India’s low insurance penetration, which declined from 4% in FY23 to 3.7% in FY24, highlights a critical gap in climate resilience. The Budget could address this by:
- Offering tax deductions to insurance companies for income from climate-linked policies.
- Lowering GST rates on premiums for insurance products designed for disaster protection and climate resilience.
Promoting Green Finance
- Standardising green finance definitions is essential to mobilise the ₹162.5 trillion ($2.5 trillion) required to meet India’s climate targets by 2030.
- The Budget should allocate funds to build institutional and technical infrastructure for implementing a climate finance taxonomy, including market readiness programs, verification systems, and capacity-building initiatives for financial institutions.
- Additionally, differential tax treatment for taxonomy-aligned investments and classifying government expenditure according to green criteria can boost investor confidence and attract international capital.
The upcoming Union Budget is an opportunity for India to reaffirm its commitment to climate action while addressing critical gaps in renewable energy, industrial decarbonisation, and resilience-building.
