How India Budgets For Changing Climate

The energy sector alone accounts for around 75% of India’s total emissions, followed by agriculture (14%), industrial processes and product use (8%), and waste (3%), as reported in India’s Fourth Biennial Update Report (BUR-4). These sectors should, therefore, see targeted climate action.

Addressing climate change requires two strategies: mitigation and adaptation. While mitigation focuses on reducing greenhouse gas emissions, adaptation helps communities adjust to the unavoidable effects of climate change. In 2015, ahead of COP21 in Paris, India announced its first Nationally Determined Contributions (NDCs)--a climate action plan. These commitments included reducing the emissions intensity of its gross domestic product (GDP), increasing non-fossil fuel-based energy capacity, and creating additional carbon sinks through afforestation.

Over the last decade, India’s Union budgets have increasingly reflected its intent to integrate these strategies, aligning fiscal measures with national and international climate commitments. Ahead of the 2025-26 budget presentation, we look at how India’s budgets have advanced the country’s climate agenda over the years.

Taxing coal and promoting EVs

The 2015-16 budget introduced the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme to promote electric and hybrid vehicles. Additionally, it increased the Clean Energy Cess (CEC) on coal from Rs 100 per tonne to Rs 200 per tonne, which was further doubled to Rs 400 per tonne in the 2016-17 budget.

The cess was intended to fund clean energy and environmental initiatives. This move signalled India’s commitment to taxing fossil fuels and promoting clean energy alternatives.

However, the proceeds from the CEC remained largely underutilised, with 71% of the revenue generated during 2010-11 to 2016-17 not being transferred to the earmarked fund. Furthermore, with the introduction of the goods and services tax (GST) in 2017, the CEC was subsumed into the GST compensation cess, which is now used to compensate states for revenue shortfalls due to the GST transition, rather than supporting environmental initiatives.

Addressing Air Pollution

Air pollution emerged as a critical concern since 2016, particularly in urban centres and the National Capital Region (NCR). South Asia remains the world’s most polluted region, accounting for 45% of the total life years lost globally due to high pollution. The average resident of Bangladesh, India, Nepal and Pakistan is exposed to particulate pollution levels that are 22.3% higher than at the turn of the century. This led to an additional 0.7 years lost in life expectancy, a report by Energy Policy Institute at the University of Chicago (EPIC) had estimated.

Despite a 19.3% drop in particulate levels in 2022 compared to 2021, an average resident in India is likely to lose 3.4 years of life expectancy if pollution levels persist. In particular, the average resident of the northern plains is still likely to lose about 5.4 years of life expectancy, the report found.

The 2018-19 budget introduced a special scheme to combat air pollution in Haryana, Punjab, Uttar Pradesh and Delhi, including subsidies for crop residue management to reduce stubble burning.

Building on these efforts, the 2020-21 budget allocated Rs 4,400 crore for the Ministry of Environment, Forest and Climate Change (MoEFCC) to support clean air initiatives in cities with populations exceeding one million. The 2021-22 budget further allocated Rs 2,217 crore for clean air programmes across 42 urban centres, and provided additional capital support for clean energy in the country.

While these allocations underscored the government’s focus on improving air quality, recent budgets have shown a decline in attention to air quality, despite its continued significance as a public health issue.

India has a goal to reduce air pollution levels across the country by 40% by 2026 as part of the National Clean Air Programme which covers 131 non-attainment cities. If India were to meet this target, the residents in the non-attainment cities will see their life expectancy increase by two years compared to 2017. India’s national average life expectancy will also increase by an additional 7.8 months as a result. Otherwise, India could see an epidemic of lung cancer from air pollution.

Scaling renewable energy and green infrastructure

The renewable energy sector has been pivotal in India’s climate strategy. To support this, the 2019-20 budget reduced the GST on biodiesel and other bio-energy sources and lowered customs duties on renewable energy equipment.

With the Paris Agreement commitments officially starting in 2021, to boost the non-conventional energy sector, the 2021-22 budget announced a capital infusion of Rs 1,000 crore for the Solar Energy Corporation of India and Rs 1,500 crore for the Indian Renewable Energy Development Agency.

Despite many steps being taken by the government, India is still far behind on its renewables capacity addition as per its own targets. If India is to contribute to limiting global warming under 1.5°C, it is far behind in adding to its solar and wind energy capacity. At the current pace of rollout, India will fall short of the needed capacity in 2030 by 140 GW of solar and 70 GW of wind.

Panchamrit goals and the focus on green growth

At COP26 in 2021, India announced its Panchamrit goals, which include

• Achieving 500 GW of non-fossil fuel energy capacity by 2030
• Sourcing 50% of energy from renewable sources by 2030
• Reducing projected carbon emissions by one billion tonnes by 2030
• Lowering the carbon intensity of GDP by 45% by 2030 from 2005 level
• Achieving net-zero emissions by 2070

To align with these goals, the 2022-23 budget introduced several near-to-long-term measures. These include issuance of sovereign green bonds to fund public sector projects aimed at reducing carbon intensity, promotion of a circular economy and energy efficiency initiatives like co-firing biomass pellets in thermal power plants and boosting solar energy adoption.

The 2023-24 budget positioned “green growth” as one of its seven priorities, allocating Rs 35,000 crore for energy transition and net-zero objectives. This included investments in green hydrogen, renewable energy evacuation, and energy storage projects. Excise duty exemptions for blended compressed natural gas (CNG) and ethanol signalled a further push for cleaner fuels.

The 2024-25 interim budget expanded on these initiatives, focusing on green energy through measures such as viability gap funding for wind energy projects, coal gasification and liquefaction, and mandatory blending of compressed biogas in CNG. It also emphasised financial support for biomass collection and for strengthening the electric vehicle ecosystem through investments in manufacturing and charging infrastructure. Additionally, the budget highlighted bio-manufacturing and bio-foundries as solutions for creating sustainable alternatives like biodegradable polymers, bio-plastics, bio-pharmaceuticals and bio-agri inputs which will help transform consumptive manufacturing paradigm.

Expanding adaptation and climate resilience

While earlier budgets primarily focused on mitigation, the 2024-25 full budget acknowledged the growing need for adaptation. Among its nine priorities, three were focused on climate change. Key initiatives included promoting climate-resilient crop varieties to safeguard agriculture, a sector that is highly vulnerable to climate change, and developing a taxonomy for climate finance to enhance funding for both mitigation and adaptation projects.

To decarbonise the hard-to-abate sectors, the budget also set the groundwork for a national carbon market framework by 2026, transitioning from energy efficiency targets under the Perform, Achieve, and Trade (PAT) scheme to emission-based targets under the Indian Carbon Market.

Gaps and opportunities

Though recent budgets have taken significant strides in addressing climate change, critical gaps remain. Air pollution, for instance, remained largely unaddressed in the budgets of the latest years. In 2024, Delhi, India’s capital, did not experience a single day of good air quality. Instead it faced 157 days of poor to severe air quality, with an increase in very poor and severe air quality days (Figure below).

In addition to having serious health impacts, air pollution has a serious impact on the Indian economy as well. Estimates show that air pollution costs Indian businesses around Rs 7 lakh crore annually (around 3% of India’s GDP).

While budgets have focussed on decarbonisation strategies, including for hard-to-abate sectors, they have fallen short in supporting research and development (R&D) for advanced low-carbon technologies. BUR4 highlights the critical role of scaling technologies including Carbon Capture, Utilization, and Storage (CCUS), energy storage systems and green hydrogen production technologies in achieving long-term sustainability goals. These technologies are important for mitigating emissions and adapting to climate change. However, scaling them requires increased R&D, significant investments and capacity-building programmes.

Adaptation measures too demand greater attention and investment. India’s Initial Adaptation Communication to UNFCCC highlights that agriculture, forestry, health, water resources, coastal and Himalayan regions are amongst the sectors most vulnerable to climate change. These sectors require targeted adaptation actions and significant resources. According to DEA (2020), India will need approximately Rs 85.6 lakh crore in cumulative expenditure by 2030 for climate adaptation, emphasising the critical need for substantial domestic and international financing.

“We have seen budgetary allocation to sectors such as green hydrogen, green steel and clean transport. In order to make sure that public and private finance flow to sectors and schemes that are aligned with transition goals, announcement of progress on comprehensive green taxonomy will be useful. Moreover, it may be useful to align India’s net zero planning with fiscal goals,” said Suranjali Tandon, Assistant Professor, National Institute of Public Finance and Policy.

The views expressed are the writer’s own and not those of CSEP.

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