Strengthening the Role of Fiscal Federalism for Climate Change in India

India is facing mounting physical and transitional risks from climate change, which are already exerting significant socio-economic impacts. Meeting its climate commitments will require unprecedented financial resources, approximately US$ 2.5 trillion by 2030 to achieve the Nationally Determined Contributions (NDCs) and US$ 10.1 trillion to reach net-zero by 2070. For adaptation interventions alone, investment needs are estimated between US$ 14 billion and US$ 67 billion for the period 2015–2030. Despite numerous pledges, progress has been slow, leaving India to mobilize substantial resources domestically.

Climate change is primarily a subnational issue in India, with states being the main contributors to public expenditure for climate-related interventions, particularly climate adaptation. State governments account for over 60% of general government expenditure, compared to the global average of around 30%. Additionally, they are responsible for expenditures in key sectors relevant to climate adaptation, such as agriculture, water, health, and urban development. The role of state governments in financing climate interventions assumes further importance as SAPCCs are now expected to be financed entirely from state budgets. It is therefore important to understand how India’s fiscal federal structure makes finance available to state governments, and the role that intergovernmental fiscal transfers can play to fund climate action in India.

As India grapples with climate challenges, fiscal federalism, particularly through the Finance Commission (FC) has become vital in incentivizing states to prioritize climate action. Within the frameworks of fiscal federalism, there is a growing recognition of the need to integrate climate change commitments into intergovernmental fiscal transfers. The FC’s constitutional mandate to divide taxes between the Centre and states, and its goal of enhancing the public value of state expenditure, not only enhances its role as a fiscal arbitrator but also positions it as a key player in India’s fiscal federalism and climate response.

Given the context, the Observer Research Foundation is organizing a roundtable discussion to explore how inter-governmental fiscal transfers can be designed as an effective instrument for climate action and environmental stewardship in India. The discussion will focus on how India’s fiscal federal architecture and transfers can be leveraged to promote sustainable development and advance India’s climate goals.

• How can intergovernmental fiscal transfers be structured to incentivize climate action by states?
• How can climate priorities be integrated into the tax devolution and grant-in-aid framework?
• How can Finance Commission transfers be leveraged to be both efficient and equitable, considering the diverse resilience needs and constraints of different states, based on their climate vulnerability and emission profiles?
• What lessons can India draw from international models of climate-related intergovernmental transfers?