Introduction
In the previous blog, we discussed the existing issues of climate finance from an Indian perspective. In this blog, we extend our discussion and look at how climate finance can be leveraged to promote the adoption of electric vehicles (EVs) in India.
The benefits of moving to electric mobility include a reduction in greenhouse gas emissions and noise pollution, improvement in public health and air quality, energy security and grid balancing. The transition to EVs can reduce India’s burgeoning oil import bill and create new employment opportunities contingent on indigenization and automation of the manufacturing process. Some cities and states in countries like Mexico and the USA who are importers of automobiles and auto component parts from India have set 100% EV targets by 2030 at a sub-national level (CEEW, 2019). Missing the chance to develop manufacturing capabilities would entail opportunity costs in failing to capture the global EV market as the automobile industry accounts for 7.1% of India’s GDP.
There is a significant policy level push for EVs in India both at the national and sub-national levels with NITI Aayog, the Central Government’s premier think tank, at the forefront. Twelve states have also released their respective EV policies. Even so, the challenge for the EV industry in India is to create an entire ecosystem for the sector, considering it is still at a nascent stage. This would require developing the manufacturing capability of the EV industry through augmenting an efficient supply chain, increasing consumer demand, building robust charging/battery swapping infrastructure, and investing in research and development (R&D). While most state EV policies concentrate on each component of the ecosystem, implementation has proven to be a major challenge, compounded by a rapidly evolving EV technology, high cost of imported batteries and poor public charging infrastructure which account for 40-50% of the cost of an EV (CEEW, 2019).
Over the past few months, we have been researching on the potential of leveraging climate finance to promote electric mobility in India. We have conducted secondary research as well as held discussions with various civil society organizations (CSOs) working on climate finance and EVs. We see this as an area where we can contribute in terms of understanding the different risks that are perceived by both the manufacturers and investors, the active stakeholders for an EV manufacturing hub. We see significant potential in working with the Government and allied agencies, the regulatory stakeholder, to design innovative investment solutions to ease the flow of capital to manufacturers.
In the next section, we examine the EV policies of different states and highlight their key thrust areas in promoting electric mobility.
State policies for EV manufacturing
We have analysed EV policies of eight states, namely Andhra Pradesh, Uttar Pradesh, Bihar, Maharashtra, Kerala, Delhi, Telangana and Tamil Nadu, to understand the priorities of different governments. The focus areas of different states can be divided into four categories:
- Manufacturing
- Charging infrastructure,
- Demand creation, and
- R&D
State Governments have announced that they will develop EV clusters/parks in their states to promote manufacturing. For example, the Government of Uttar Pradesh will provide 100 acres for EV parks in districts of NCR and Kanpur and 150 acres in other districts. Additionally, the State Government will also incentivise industries by providing capital subsidies. Other fiscal incentives being provided by states to promote manufacturing include SGST reimbursement, concession on electricity and water tariffs and subsidy on stamp duty and cost of land.
State governments have also committed to developing a robust charging/battery swapping infrastructure by providing more fiscal incentives. One underlying theme in all EV policies was the emphasis on creating charging points in commercial areas and apartments by amending the existing building codes. Some policies have also directed state public sector undertakings (PSU) to take the lead in developing public charging infrastructure. For example, the Kerala State Electricity Board is responsible for setting up a charging infrastructure while also transparently choosing independent players for swapping functions. Similarly, in Tamil Nadu, TANGEDCO will be one of the investors in public charging infrastructure. States are also providing other fiscal incentives such as concession on GST for fast charging equipment/machinery, special electricity tariff rates, and capital subsidy.
To create demand for EVs, state governments are focusing on 2-wheeler, 3-wheeler, and public transport segments. They are targeting non-private forms of transport like state transport buses, auto-rickshaws, taxis, institutional transport of government and transport used by logistics and e-commerce industry for a transition to EVs. Different governments are supporting this transition by providing a slew of fiscal incentives such as subsidy on purchase of vehicles in Bihar, Maharashtra, Kerala and Delhi and road tax exemption in Kerala, Telangana, Bihar, Maharashtra and Tamil Nadu. The latter four states are also providing exemptions on registration fees. Additionally, some states are providing guarantees to buy the EV buses to boost demand. Kerala State Road Transport Corporation committed to buying 6000 plus EV buses by 2020 through Government of India funding. Kerala is the first state to formalize their draft EV policy by providing fiscal incentives for electric vehicles while at the same time withdrawing fiscal incentives for petrol and diesel auto-rickshaws in their latest budget. In Tamil Nadu, state transport undertakings (STU) operating more than 21000 buses will replace 5% of buses with EV each year. The focus on public transport transition to EVs is not surprising as the auto-industry is still reluctant to manufacture 4-wheeler EVs. Further, some states have also committed to enhancing R&D facilities by establishing centres of excellence and incubation centres for start-ups, updating curriculums and introducing short-term courses in technical schools, and starting skill training programs for the EV industry.
State Governments have adopted a comprehensive approach to transition to electric mobility by covering all aspects of its ecosystem. They are relying on fiscal incentives to promote manufacturing and create demand. Moreover, they are also committing to buying EVs through STUs to boost demand and developing a robust charging/battery swapping infrastructure. The measures announced by State governments have been used successfully in other countries to stimulate demand. Norway successfully increased the demand for electric vehicles by providing fiscal incentives and improving the public charging infrastructure. The incentives reduced the initial cost of EVs making them cheaper than conventional vehicles. Additionally, the car owners benefited from the lower total cost of ownership of EVs as a result of decreased expenditure on fuel and maintenance.
The transition to EVs would require enormous financing as state governments are foregoing substantial revenues by providing subsidies and concessions while at the same time committing to large public expenditure. Traditional financing institutions are reluctant to finance commercial EVs “due to perceived risk associated with emerging business models” and lack of confidence in the technology (CEEW, 2019). Moreover, the financial sector in India is reeling under severe crisis due to rising non-performing assets (NPA) with Yes Bank- the first private institution in India to launch a green bond-being the latest victim of the crisis. The current scenario makes it clear that different state governments will have to rely on alternative forms of financing to promote electric mobility in India.
Climate finance for EV manufacturing
Accessing global climate funds complemented by national and private funds could potentially provide a solution. For instance, Colombia used the Clean Technology Fund (CTF) to finance concessional loans provided by financial intermediaries to bus service operators to purchase hybrid-electric buses (WRI, 2019). Since the financial sector in India is under stress and the Central Government is already fiscally constrained, the role of global climate funds becomes even more critical.
However, as highlighted in the previous article, multilateral funds are woefully short of achieving their intended contribution of $100 billion, which can prove to be a challenge to fund large-scale projects like creating an ecosystem for the EV sector in India. The respective State Governments can also blend global climate funds with private funds through green bonds. India has now emerged as the second-largest market for green bonds in the world, although, significantly behind the leader, China. Currently, public entities like Indian Renewable Energy Development Agency (IREDA), Indian Railway Finance Corporation (IRC) and State Bank of India, as well as private banks such as Yes Bank, have issued green bonds. China has shown that green bonds can be an effective tool to leverage private finance for climate action. The Tianjin Public Transportation Group purchased more than 500 buses by leveraging financing from green bonds (WRI, 2019). State Governments in India can follow a similar path by issuing green bonds. It will increase the creditworthiness of green bonds as it will be backed by a sovereign guarantee (CEEW, 2019). However, debt financing instruments such as green bonds are generally used to refinance already operational projects and have to be blended with other forms of financing, such as public funds (WRI, 2019).
Conclusion
EVs have the potential to significantly reduce the environmental impact of the transportation sector, one of the main contributors to greenhouse gas emissions. While the initial cost of EVs are presently higher than traditional vehicles, the total cost of ownership is predicted to decrease below traditional vehicles attributed to improvement in technology and lower maintenance and fuel costs. Several studies in Europe, here, here and here, show that a transition to EV mobility will result in job losses due to a simpler and automated manufacturing process for EVs. But these studies also show that the impact on employment is also contingent on the indigenization of the manufacturing process especially battery manufacturing. Moreover, while direct employment in the automotive industry will decrease, electric mobility will create new jobs along the value chain such as in connection to grid operation, maintenance and battery and charger manufacturing. Current predictions for India also show a loss in jobs with the transition to EVs but a smaller negative impact attributed to lower levels of automation in the manufacturing process. This clearly shows that countries will need to focus on manufacturing and R&D to realize the full economic benefits of electric mobility and minimize the negative impact on employment.
For a successful transition to EVs, India will require extensive financing. Different states have designed ambitious EV policies which provide multiple fiscal incentives and set grand targets to promote electric mobility. Moreover, we have discussed above that fiscal incentives, improving public charging infrastructure and developing manufacturing capabilities are key to increasing demand and realizing the full economic benefits of electric mobility. With the financial sector dealing with rising NPAs and the automobile industry reluctant to commit to the transition, India will have to explore other financing options. Learning from other developing countries, India can use alternative sources of financing such as multilateral funds and private financing through green bonds. India can also adopt blended financing as was done in the case of Colombia and Tianjin.
References
CEEW. (2019). India’s Electric Vehicle Transition. CEEW. Retrieved from
https://www.ceew.in/publications/india%E2%80%99s-electric-vehicle-transition
WRI. (2019). Financing electric and hybrid-electric buses: 10 questions city decision-makers should ask. WRI. Retrieved from
https://wrirosscities.org/sites/default/files/financing-electric-hybrid-electric-buses.pdf
About the Authors
Arjun Malhotra is currently working as a Research Associate at LEAD at Krea University. He has worked on projects related to digital financial inclusion and repayment flexibility. He has field experience in both urban and rural areas with extensive fieldwork in Karnataka and Uttar Pradesh.
Soumyajit Bhar is currently a final stage PhD scholar of Sustainability Studies at Ashoka Trust for Research in Ecology and the Environment (ATREE), Bangalore and Research Fellow at LEAD at Krea University. His dissertation attempts to understand drivers as well as environmental impacts of the luxury consumption basket in India. He is also interested in larger questions of philosophy and ethics particularly pertaining to environmental issues.
Rahul Muralidharan is a Research Fellow with LEAD at Krea University and aims to bring focus on coastal environments, sustainable livelihoods, climate change and its associated social justice concerns. His research interests broadly lie in using interdisciplinary political ecology approach to address pressing concerns over environmental justice and social equity issues.