CONTENT

Concept
Taxonomy of Economic Instruments
Environment Policy in Karnataka
Economic Instruments in Key Areas
Air and Water Pollution
Transport
Solid Waste Management
Energy
Agriculture
Forest and Biodiversity
Mining and Quarrying
International and National Efforts towards Climate Change
Efforts by the state of Karnataka

Climate Finance

Evolving National and Global Economic Instruments

Domestic Fund flows

Public Climate Finance
Private Climate Finance
Global Climate Finance flow to India
Future Suggestions and Recommendations
 TABLE

Table 1: Consent Fee levied for regulating air and water pollution

Table 2: Consent fee under Air Act for organization having DG Set

as the only source of air pollution

Table 3: Consent fee for local bodies

Table 4: Schemes and projects implemented in the water sector in Karnataka

Table 5: Financial incentive provided to MSMEs for encouraging green practices

Table 6: Direct economic instruments applied in transport sector

Table 7: Schemes and projects implemented in the transport sector in Karnataka:

Table 8: SWM cess for residential buildings

Table 9: Rates of Maximum cess Payable (Category-wise)

Table 10: Schemes and projects implemented in the energy sector in Karnataka

Table 11: Schemes and projects implemented in the agricultural

sector in Karnataka

Table 12: Economic instruments for Forests and Biodiversity Protection

and Conversation

FIGURE

Figure 1: Taxonomy of economic instruments for environmental

protection of natural resources
Figure 2: Types of Financial Instruments
Figure 3: Incentives for Encouraging Solar Power
Figure 4: Responses to address Climate Change
 Chapter 16

ECONOMIC INSTRUMENTS
Concept
16.1. Regulations through exclusive policy instruments cannot be monitored easily and hence,
economic instruments come into play. Economic Instruments are ‘Those policy instruments
which may influence environmental outcomes by changing the cost and benefits of alternative
actions open to economic agents. They aim to do so by making the environmentally preferred
action financially more attractive.’1They function by raising or lowering of relative prices of
specific goods and services mainly in order to encourage or discourage specific activities.
16.2. Economic Instruments are also used as policy instruments to protect environmental
resources and their exploitation and/or to restore and conserve them. They take their effect
through the impact they have on price structures of environmental goods, services, and activities
affecting the environmental resources. The idea behind this is to internalise the economic
externalities including the costs of the environmental and health effects reflecting from the use of
the item in question. The basic purposes served by the economic instruments in the
environmental field are:
a. Incorporating the cost of environmental services and environmental degradation, in the
form of pollution or exploitation, directly into the costs of goods, services and activities;
b. Encourage behavioural changes by taxing and/or providing incentives to consumers and
producers;
c. Economic efficiency and equitable distribution of associated costs and benefits going by
the ‘polluter pays principle’ and ‘beneficiary pays principle;
d. Raise revenues for environmental expenditures.

Taxonomy of Economic Instruments

16.3. Economic instruments are generally applied through fiscal tools of taxes or subsidies. In
addition, there exist a number of other economic instruments used in environmental protection.
Figure 1 depicts the various categories of Economic instruments and of the specific types within
each category.

1
OECD 1997, p.20
 •Change in ownership rights
•Land titles
PROPERTY •Water rights
•Mining rights
RIGHTS •Use and development rights
•Stewardship
•Licencing

•Marketable emission permits

•Marketable catch quotas
MARKET •Marketable development quotas

CREATION •Marketable water shares

•Marketable resource shares
•Tradable land rights

•Pollution taxes
•Effluent taxes
•Emission taxes
FISCAL •Input taxes
•Product taxes
INSTRUMENTS •Export taxes
•Import tariffs
•Tax differentiation

•Pollution charges
•User charges

CHARGE •Betterment charges

•Impact fees
•Access fees
SYSTEMS •Road tolls
•Administrative charges
•Non-compliance fees

•Legal liability
LIABILITY •Non-compliance liability
•Natural resource damage liability
SYSTEMS •Liability insurance
•Enforcement incentives
•Joint and several liability

BONDS AND •Environmental performance bonds (e.g.

•forest management)

DEPOSIT REFUND •Land reclamation bonds (e.g. mining)

•Waste delivery bonds
•Environmental accident bonds (e.g. oil spills)
SYSTEMS •Deposit refund for recycling
•Buy-back schemes

Figure 5: Taxonomy of economic instruments for environmental protection of natural resources

16.4. Economic Instruments on the environmental front in the state of Karnataka also utilise
Financial Instruments, the types of which can be seen in Figure 2. These types of economic
instruments provide indirect economic incentives through their effect on prices paid for the input
or received for the outputs of a production process. Financial instruments are different from
fiscal instruments mainly because of their extra-budgetary nature. These instruments provide
permanent incentives for environment friendly behaviour. These instruments are also used as the
second best responses to distorted or inefficient markets, internalising externalities through the
willingness of people to invest in environmental conservation and mobilising additional financial
resources for conservation, environmental protection and sustainable development. Subsidies and
soft loans are the opposite of environmental taxes mainly because they are created to assist firms
to reduce pollution. Subsidies can be extended in proportion to the reduction in pollution or
could be offered for the purchase of pollution abatement equipment. These incentives help in the
advancement of technical change through research and development which provide double
dividends to firms in terms of savings in both abatements cost and tax payments which result in
cleaner production processes and thus cleaner products (SoER 2011, Gok 2011).

Revolving funds
Subsidised
Sectoral funds
interest

Location/reloca Financial
tion incentives subsidies

FINANCIAL
Soft loans INSTRUMENTS Grants

Figure 6: Types of Financial Instruments

Environment Policy in Karnataka

16.5. The State is constitutionally duty bound to ensure environment protection in all walks of
life. With this objective, the Department of Ecology and Environment was established in the year
1981 in the state. The Ecology and Environment Department is functioning with the principal
objectives of protection of the ecology and environment, conservation of natural resources,
ensuring adoption of pollution control measures for the sustainable development in the state. The
Department looks after policy formulation and ensuring implementation of the rules, regulations,
guidelines, and instructions for the protection of environment and ecology. Inter-departmental
environmental issues leading to conservation and protection of the environment are also being
coordinated. The Department of Ecology and Environment is at the secretariat level and is
assisted by the following institutions in discharging its functions.

1. Karnataka State Pollution Control Board (KSPCB)

2. Karnataka Bio-diversity Board (KBB)
3. Karnataka Lake Conservation and Development Authority (KLCDA)
4. Environment Management & Policy Research Institute (EMPRI)
5. Karnataka State Coastal Zone Management Authority (KSCZMA)
6. State Environment Impact Assessment Authority (SEIAA)

16.6. The department administers the following acts and rules through its field offices and
organisations:
 Karnataka Lake conservation and Development Authority Act, 2014
 Biological Diversity Act, 2002;
 The National Environment Appellate Authority Act,1997;
 The National Environment Tribunal Act, 1995;
 The Public Liability Insurance Act, 1991;
 Environment (Protection) Act, 1986, and Rules and Regulations framed under it;
 Air (Prevention and Control of Pollution) Act, 1981;
 Forest (Conservation) Act, 1980;
 Water (Prevention and Control of Pollution) Cess Act, 1977;
 Water (Prevention and Control of Pollution) Act, 1974;
 Wildlife (Protection) Act, 1972;
 Karnataka Preservation of Trees Act, 1976;
 Karnataka Forest Act, 1963;
 The Prevention of Cruelty to Animals Act, 1960;

Economic Instruments in Key Areas

16.7. Rapid urbanisation and development pressure is posing a great risk to the livelihoods and
biodiversity including forests and wild animals in the state of Karnataka. Industrial pollution,
overexploitation of groundwater, unregulated discharge of effluents into water bodies,
injudicious use of pesticides and chemical fertilisers in agriculture, mining, unscientific use of
water for irrigation and ill management of solid waste have worsened the situation. Climate
change in terms of variation in rainfall and increasing temperature is aggravating the problems,
risks, and threats faced by the state. Economic instruments play an important role in assisting to
finance and regulate possible responses for environmental protection and tackling climate change
issues.
16.8. The following section provides an outline of the present arrangements in terms of the
current economic instruments in place for key sectors with recommended areas of interventions
in future. The following section also provides a global overview of actions both by international
and national actors (in terms of economic instruments) dealing with climate change issues in
Karnataka. This was done to obtain a brief idea of the channels through which investment is
realised in Karnataka in terms of climate change actions. However, this process is complicated
due to low information availability concerning programs, funders or implementing agencies,
localisation of the projects, absence of precision on money allocation in Karnataka within an
international or national program/funding or simply lack of updated data/information about one
project; the list presented is non-exhaustive. The list of schemes and programs clearly identified
as implemented and funded in Karnataka state in the period 2010-2015 are briefly summarized in
the tables provided with few sectors.
Air and Water Pollution
16.9. Any person who is likely to establish or take any steps to establish any Industrial Plant or
process or any treatment and disposal system or any extension or addition which is likely to
discharge sewage or trade effluent into any stream or well or sewer or on land has to obtain
consent of the KSPCB and pay an amount for the same. The relevant details are provided in
Tables 1, 2 and 3. Consent fees contribute towards a major share of revenue for KSPCB
increasing from Rs 4072 lakh and Rs 4077.04 lakh in 2013-14 and 2014-15 respectively to Rs
5162.43 lakh in 2015-16 comprising almost 50 % of the total annual revenue of KSPCB.
Similarly, any person who is likely to establish or operate any industrial plant in any air pollution
control area (Entire Karnataka is declared as air pollution control area) is not permitted to
discharge or cause or discharge the emission of any air pollutant in excess of the standards laid
down by the State Board.
Table 1:Consent Fee levied for regulating air and water pollution

Consent fee in Rs. for different

Sl. Capital investments by categories of Industries
No Industries
RED ORANGE GREEN
1 Exceeding Rupees.1000 Crores 2,00,000 1,75,000 1,50,000
2 Exceeding Rupees 500 Crores but 1,50,000 1,25,000 1,00,000
not exceeding Rupees 1000 Crores
3 Exceeding Rupees 250 Crores but 1,00,000 90,000 75,000
not exceeding Rupees 500 Crores
4 Exceeding Rupees 50 Crores but 75,000 60,000 50,000
not exceeding Rupees 250 Crores
5 Exceeding Rupees.25 Crores but 50,000 40,000 30,000
not exceeding Rupees 50 Crores
6 Exceeding Rupees 10 Crores but 30,000 25,000 20,000
not exceeding Rupees 25 Crores
7 Exceeding Rupees 5 Crores but 20,000 17,500 15,000
not exceeding Rupees 10 Crores
8 Exceeding Rupees 1 Crore but not 15,000 12,500 10,000
exceeding Rupees 5 Crores
9 Exceeding Rupees 50 Lakhs but 6,000 5,000 4,000
not exceeding Rupees 1 Crore
10 Exceeding Rupees 25 Lakhs but 3,000 2,500 2,000
not exceeding Rupees 50 Lakhs
 11 Exceeding Rupees 10 Lakhs but 2,000 1,750 1,500
not exceeding Rupees 25 Lakhs
12 Exceeding Rupees 5 Lakhs but not 1,500 1,250 1,000
exceeding Rupees 10 Lakhs
13 Exceeding Rupees 1 Lakh but not 500 250 200
exceeding Rupees 5 Lakhs
14 Rupees one Lakh and below 200 150 100

Table 2: Consent fee under Air Act for organization

having DG Set as the only source of air pollution

KVA
Consent fee per
Sl. No Rating of
DG Set
DG Set
1 1 To 50 Rs. 100
2 51 To 100 Rs. 1000
3 101 To 500 Rs. 2000
4 501 To 1000 Rs. 3000
5 More Than Rs. 4000
1001

Table 3: Consent fee for local bodies

Population of Local
Sl. No Fees in Rs.
Authority
1 Not exceeding 50,000 Rs. 250
2 Exceeding 50,000 but not Rs. 500
exceeding 1,00,000
3 Exceeding 1,00,000 but not Rs. 1500
exceeding 5 lakhs
4 Exceeding 5 lakhs but not Rs. 2500
exceeding 10 lakhs
5 Exceeding 10 lakhs Rs. 5000

16.10. The next section on transport provides an outline of some more economic instruments
that help towards curbing air pollution.
16.11. Key intervention areas for curbing Air Pollution are:
a. Issuing tradable emission permits to industries and encourage tradable carbon credits.
b. Pollution taxes on vehicles and industries emitting GHGs, CO2, sulphur.
c. User charges on polluting vehicles and industries.
d. Road tolls for highly polluting vehicles inside national parks.
e. Increase in parking fees.
 f. Levy of Effluent charges apart from consent fees.

16.12. If an entity liable to pay the cess installs any plant for the treatment of sewage, it would
be entitled to a rebate of 25% of the cess payable, provided it does not consume water in excess
of the maximum quantity specified for it or violate any provisions of section 25 of the Water
(Prevention and Control of Pollution) Act, 1974 or any of the standards laid down by the Central
Government under the Environment Protection Act, 1986. However, the effectiveness of this
instrument is hindered as water cess does not cover the consumption of water from private bore
wells or private supply sources. Water cess is the second major source of revenue for KSPCB.
16.13. Several schemes/programs/projects have also been realized under the Karnataka Water
Policy 2002 guidelines. Adaptation methods have been proposed to conserve water and promote
sustainable practices so as to offset climate change effects as mentioned in Table-4.

Table-4: Schemes and projects implemented in the water sector in Karnataka

Table 4: Schemes and projects implemented in the water sector in Karnataka

Year of Economic
Scheme/Project title Source of funding
implementation instrument
Integrated Watershed Department of Land
2009 Grant
Management Program Resources (GoI)
Government of
Karnataka Watershed Karnataka &
Grant &
Development Project II 2012 International Bank for
Loan
(Sujala Project) Reconstruction and
Development
Subsidy:
GoK bears
Government of 80% of the
Krishi Bhagya Scheme 2014
Karnataka cost of
construction
of ponds
Karnataka Integrated
Asian Development
and Sustainable Water
2014 Bank & KwF Loan
Resources Management
Bankengruppe
Investment Program
Ministry of Agriculture,
Pradhan Mantri Krishi Water Resources &
2015 Grant
Sinchayee Yojana Rural Development
(GoI)
Total
 Table-5: Financial incentive provided to MSMEs for encouraging green practices

Table 5: Financial incentive provided to MSMEs for encouraging green practices

Sl.
No. Incentive Level of Benefit provided
One time capital subsidy up to 50% of the cost
of ETPs, subject to a ceiling of f 50 lakh in
respect of HK Zone 1 & 2, other than Hyderabad
Subsidy for Setting up Effluent Treatment Karnataka Zone 1,2,3 and 25 lakh in other than
1 Plant (ETP) Manufacturing MSMEs Hyderabad Karnataka Zone 4.
Additional investment promotion subsidy of 5%
Recycling of electronic waste andplastic with a ceiling limit of IO Iakh in Zone 1,2,3 and
2 waste HKZone 1 &2
Water Harvesting / Conservation Measures Small and Medium Manufacturing Enterprises in
3 Zone 1,2,3 & HKZone 1& 2
3a Rainwater harvesting 50% of cost of equipment (max. Z I .00lakh)
3b Wastewater recycling 50% of cost of equipment (max. Z 5.00 lakh)
3c Zero discharge process 50% of cost of equipment (max.Z 5.00 lakh)
4 Energy Conservation Micro, Small & Medium Manufacturing Enterprises in all Zones
Practicing Energy Conservation measures
resulting in reduction of Energy Consumption
4a of at least 10% of earlier consumption 10% of capital cost (max Z 5.00 lakh).
10% of capital cost (max. 5.00 lakh)
Subsidy of T 0.50 per unit of Captive Power
4b Use of non-conventional energy sources
Generated and consumed through Solar & Wind
Energy sources only.

16.14. Key Intervention areas for curbing Water Pollution and encouraging judicious use of
water are:
a. Non-compliance and legal liability on polluting industries. Enforcement incentives for
farmers to grow crops suitable for agro-climatic conditions and nature of soil and status
of water availability
b. Impose water pollution charges on industries.
c. User or betterment charges for domestic wastewater treatment.
d. Clarifying water rights.
e. Application of principles of marginal cost pricing and full-cost recovery (including a
return to inverted capital) in the provision of water supply and sewage collection in urban
areas.
f. Water tariffs can be divided into fixed charges (for connection) and variable charges
based on the volume of water consumed and wastewater collected.
 Transport
16.15. As per the Green Growth Strategy for Karnataka (2014), the major contributor to carbon
emissions in Bengaluru has been the transport sector. As of now, no policy has been developed
in Karnataka for the transport sector. The Government of Karnataka follows the National Urban
Transport Policy (NUTP) drafted in 2006 by the Ministry of Road Transport and Highways
(MoRTH).
Table 6 : Direct economic instruments applied in transport sector
Sr
No. Type of Tax Amount/ % of tax
Green Tax (Both for Transport & Non Transport Vehicles)
1 collected during renewal of registration certificate
Class and age of the vehicle Rate of Cess in Rupees
Non-transport vehicle completed 15 years from the date of its
registration, at the time of renewal of certificate of registration as 250
per sub-section (10) of Section 41 of Motor Vehicles Act, 1988
1.a.
(a) Two Wheelers 500
(b) Other than two wheelers
Transport vehicle completed 7 years from the date of its
1.b. registration, at the time of renewal of fitness certificate as per 200.00 Per annum.
Section 56 of the Motor Vehicles Act, 1988
Life Time Tax on on two wheelers, three wheelers and Light goods vehicles including
Auto rickshaws carrying passengers and goods having weight in laden not exceeding
3000 kgs, Tractors -Trailers (used for agricultural purpose), Motor Cars, Jeeps, Omni
Buses and Private Service Vehicles having floor area not exceeding 5 sq. mts
13 % of the cost of the
Cost of the vehicle which does not exceed Rs.5 lakhs vehicle
exceeding Rs.5 lakhs but doesnot exceed Rs 10 lakhs 14%
exceeds Rs 10 lakhs but does not exceed Rs 20 lakhs 17%
which exceeds Rs 20 lakhs 18%
For two wheelers
Motor cycles cost of which does not exceed Rs 50,000 10%
Motor cycles cost of which exceeds Rs.50,000/- but does not
exceed Rs.1 lakh 12%
Cost of the vehicle which exceeds Rs.1 lakh 18%

16.16. Some steps towards development and encouragement of eco-friendly alternative fuels in
vehicles with a view to reducing vehicular air pollution have been taken. In order to encourage
bio-fuel system in Bangalore, subsidy of Rs.2000/- was given to each Auto rickshaw owner, for
use of authorized LPG kits fitted through approved retro fitment centres. The scheme of subsidy
of Rs 2000/ - has been extended to other 11 places in the state under Government order No.
SARIE/33/SAEPA/2007 Bangalore.13.08.2008 where re-filling stations have been opened and
authorised retro fitment facilities have been made available. In continuation to this, during the
year 2013-14, for the vehicles fitted with LPG kits and converted into Bi-fuel mode prior to 31-
12-2011, a subsidy amount of Rs 2000/- was granted to each of the Auto rickshaw owners.
Totally an amount of Rs.26,96,000/ has been sanctioned against 1,348 applications received in
the RTO Offices of Mysore (East, West),Tumkur and Davanagere also. This scheme has been
closed in the year 2014-15 as the Government has not extended the said scheme. The
Government of Karnataka vide Notification No SRE:04:SEP/2010 Bangalore dated 08-07-2011
has ordered to grant subsidy of Rs. 15,000/- each to those who have valid auto rickshaw cab
permits covered with 2 stroke vehicles registered prior to 01 -04-2000 in Bangalore and other 11
places in the state and replace the same with New 4 Stroke LPG Auto rickshaw cabs. During the
financial year 2012-13, 202 such beneficiaries have been granted and a sum of 29,00,000/-
subsidy amount for purchase of 4 stroke LPG Auto rickshaw cabs has been released. The said
scheme was closed on 31-03-2013 Further, the Government vide order No SARIE 63 SAEPA
2013, dated 4-2-2014 has accorded permission to continue the said scheme for 2014-15 and also
revising the subsidy amount from Rs 15,000/- to Rs 30,000/- by extending the scheme to the
owners of Auto rickshaws registered prior to 1-04-2003.
16.17. Karnataka State has also undertaken projects in conformity with the NUTP in order to
improve transport management in its territory. These actions aim mainly at developing
sustainable public transport for promoting eco-friendly means of transport and for mitigating the
effects induced by traffic jams and pollution. Some of the projects according to their source of
funding or economic instrument used for their implementation are mentioned in Table-7.The
development of the metro reunites the essential part of the funds allocated. It is exclusively
financed by international cooperation agencies through loans. It is also noteworthy that the
transport sector benefits from international funds provided by GEF and the World Bank as well.

Table 7: Schemes and projects implemented in the transport sector in Karnataka:

Year of Source of Economic
Scheme/project title
implementation funding instrument
Japan
International
Bangalore Metro Rail Project 2006-2016 Loan
Cooperation
Agency
A metro to relieve congestion in the Agence
city and reduce carbon emissions in 2012 & 2015 Française de Loan
Bangalore Dévelopement
Global
Environment
Intelligent Transport System (ITS) for
2012 Facility & Grant
Mysore
Government of
India
World Bank &
Hubli - Dharwad Bus Rapid Transit Loan &
2016 Government of
System Project Grant
India
Total
16.18. Electric vehicles are found to be the most effective alternative initiative to reduce
emissions in transportation sector among other initiatives like CNG and promotion of non-
motorized transport (NMT). Under the National Electric Mobility Mission Plan (NEMMP 2020),
a comprehensive plan has been undertaken by the Government of India in order to accelerate
adoption of electric vehicles in the Indian market. Karnataka is best positioned to take lead in
introducing electric buses in their public transport system. With a fleet of over 6,000 buses, it
could thus focus on electrification of its state fleet of buses and government vehicles. In this
regard, the BMTC (Bengaluru Metrpolitan Transport Corporation) has conducted a successful
pilot study by introducing electric bus for 3 months. It is estimated that an amount of about Rs
60-70 lacs per bus is required as subsidy for adoption of electric buses under the Total Cost of
Ownership (TCO) approach. 2 This subsidy gap can be bridged by a combination of direct
incentives, waiver of import duty and taxes and low-cost interest loans from Clean Technology
Fund. Through this initiative, BMTC can bring in electric buses and initiate to develop the
enabling infrastructure accordingly.
Solid Waste Management
16.19. Solid Waste Management cess is applicable for all buildings based on Plinth Area as
detailed in Table-8 and Table-9. The problem with the current arrangement is that the buildings
having a plinth area of more than 5 to 20 times the limit of 5,000/50,000 square feet are also
paying the same rate of cess. As the quantum of waste generation has relatively a direct bearing
on the area of operation, the cess levied is disproportionate to the quantum of waste generation.
Also, SWM cess is not paid by places of worship as they were exempt from payment of property
- tax and service charges. Adequate efforts to mobilise revenue resources through user charges
are not made to meet the cost of operation and maintenance of waste management.

Table 8: SWM cess for residential buildings

Cess Payable per
Plinth Areas month
Area up to 1000 sq.
ft. Rs 10
1001 sq. ft. to
3000 sq. ft. Rs 30
Above 3000 sq. ft. Rs 50

Table 9: Rates of Maximum Cess Payable (Category-wise)

Cess Payable per
Category Plinth Areas month
5,000 sq ft &
Commercial Buildings above Rs. 200
5,000 sq ft &
Industrial buildings above Rs. 300
Hotels, kalyana mantapas and nursing 50,000 sq ft &
homes above Rs. 600

2
Green Growth Strategy for Karnataka 2014
 Source: KMC Act

16.20. Potential intervention areas in terms of Economic instruments in solid waste

management (SWM) are:
a. User charges or cess waste generation based on type and quantity and recyclable
capacity.
b. Subsidies, soft loans, grants, revolving funds for waste recycling and land filling and
biomedical waste treatment and also encourage converting waste into manure and
reusable of waste.
c. Pollution taxes on waste which produces disagreeable odours or methane.
d. Tax incentive for apartments to take up segregation and composting.
e. Waiving off SWM cess for compliant apartments.

Energy
16.21. In order to facilitate Renewable Energy project financing and Energy Conservation and
Efficiency Measures, Green Energy Fund or “AkshayaShakthiNidhi” was announced in the
Karnataka Renewable Energy Policy 2009-2014. An amount of about Rs 55 crore is estimated to
be generated annually for this purpose by levying ‘Green Energy Cess’ of INR 0.05 (five paise)
per unit on the electricity supplied to commercial and industrial consumers. Ten per cent of this
fund will be set apart as a contribution to Energy Conservation Fund for Energy Conservation
activities. The balance will be set apart for Renewable Energy project financing. The
AkshayaShakthiNidhi will be administered by KREDL for the promotion of Renewable Energy
particularly in Public Private Participation (PPP) mode, decentralized generation, and
distribution Renewable Energy projects for the benefit of the rural sector. The funds may also be
utilized for land acquisition and land development activity for Renewable Energy projects
including compensatory afforestation, soil moisture conservation, etc. for forest land clearance.
A detailed framework for its implementation will be announced separately.
16.22. Fiscal Incentives from GoK to promote Renewable projects3 are as follows:
• Projects implemented under the Karnataka Renewable Energy Policy 2014-2020 shall
receive the status of the industry and shall be eligible for all the incentives provided under
“Karnataka Industrial Policy 2014” of state government as amended from time to time.
• Tax concessions in respect of entry tax, stamp duty and registration charges shall be as per
Karnataka Industrial Policy as amended by GoK from time to time.
• The Industrial Consumers opting to procure power from Project set up under this policy,
through Captive/Group captive route or Independent Power Producer route shall be allowed
corresponding pro-rata reduction in Contract Demand on a permanent basis but subject to the
decision of KERC in this regard.
• No green energy cess is applicable on the power procured from renewable energy power
projects in the State.

3
KREDL
 Incentives for Solar Roof Top Grid Connected Systems
1. Custom duty concessions and excise duty exemptions.
2. Accelerated depreciation benefits for industrial and commercial buildings.
3. 30% Government subsidy for non-commercial and non-industrial categories for using
domestic solar panels.
4. Avail Bank Loan as a part of Home loan/Home improvement loan.
5. System Aggregators can avail loan from IREDA at concessional interest rate (9.9% to
10.75%).
6. Avail loans under priority sector lending upto Rs. 10 lakhs for individuals.
Figure 7: Incentives for Encouraging Solar Power

16.23. To promote and encourage the use of renewable energy so as to augment the share of
renewable energy in its energy-mix, the state of Karnataka gave the responsibility to Karnataka
Renewable Energy Development Limited (KREDL) and Karnataka State Bio-fuel Development
Board (KSBDB) to draft policies and develop projects in this sector. The objective is to orientate
the private sector towards wind, mini hydro, biomass, and solar energy through incentives and
programs, some of which are mentioned in Table 10

Table 10: Schemes and projects implemented in the energy sector in Karnataka
Year of Source of Economic
Scheme/project title
implementation funding instrument
KfW/DEG,
Wind farm in Karnataka 2010 Proparco & Loan/Private
BPCL
Subsidy of INR 15
per Compact Fluo-
Hosa Belaku Scheme 2011 GoK
rescent Lamps
(CFLs)
Biogas Power (Off-grid)
2011-2015 GoI Grant
Programme
Partnership to Advance
Clean
2012 USAID Grant
Energy - Deployment
(PACE-D)
Surya Raitha Scheme - Solar
Irrigation Pumpsets to 2013 GoK Subsidy
Farmers
Solar Park at Pavagada NAPCC
2014-2018 Grant
Taluk (GoI)/Private
Karnataka Wind Power
2014 IBRD & ACWPL Loan/Private
Carbon Finance
 Subsidy: Rs. 3
crore/MW or 30% of
the project cost is
Pilot-cum-Demonstration
provided for Canal
Project for Development of
Top SPV projects
Grid Connected Solar PV 2015 NAPCC (GoI)
and Rs. 1.5
Power Plants on Canal
crore/MW or 30% of
Banks and Canal Tops
the project cost is
provided for Canal
Bank SPV projects

16.24. The recently launched Solar Policy 2014-21 has given a significant push towards
achieving renewable energy share to more than 30% in the state. The comprehensive policy has
ambitious targets and its relaxation of Floor Area Ratio (FAR) for setting up solar rooftop is
revolutionary. Sites identified for solar parks as per the state policy can be aggregated, designed,
built with transmission connectivity and leased to the developers and capacity under JNNSM can
be set up. With a funding of Rs 14,800 crore,4 the Solar Park at Pavagada taluk represents the
major part of the funds granted or subsidized, underlining the Government of India and
Government of Karnataka’s will to accelerate the development of solar energy.
16.25. By providing a better assistance to private companies, which have shown great interest to
the wind and solar energy, more projects could be implemented. This would allow Karnataka
state to increase the share of new and renewable energy in its energy-mix. More subsidies or
grants from public decision-makers are necessary to develop this sector. Wind power and solar
power require high investments as they remain the most expensive energy sources in terms of Rs
7-8 crore per MW compared to other energy sources (nuclear, thermal or gas) owing to imported
technology from foreign countries. Investing in technology could reduce these costs and generate
more economic activities and employment. Financial assistance is required by multilateral
agencies also and a greater interaction with these agencies could raise the allocation of funds
through their loans in the renewable energy sector. Further, wind and solar energy need to
respond to the issues induced by the lack of land availability and lack of transmission capacity.
This implies a process of identification of suitable lands and new investments in transmission
infrastructures. All of this would help the state reduce its dependence on thermal power and
fossil fuels, which undermine Karnataka’s green growth.
16.26. Generation Based Incentive (GBI) is largely supported mechanism from financial
institutions to support the development of wind energy due to the certainty of revenues and it has
a longer track record. Harnessing wind energy in Karnataka is an effective and affordable way
to meet 18% (share) of its electricity demand by renewable energy by 2030 and is completely
dependent on the subsidy given by the state. The central incentive currently provides Re 0.50/
kWh for all wind projects and Karnataka has set wind tariffs at Rs 4.20/kWh5. A market-based
mechanism, Renewable Energy Certificate (REC) is the second mechanism to support the

4
Ministry of New and Renewable Energy, Government of India
5
Green Growth Strategy for Karnataka 2014
development of wind energy. Funds at a Domestic level for developing wind forecasting tools
and gird integration pilots can be sourced under the National Clean Energy Fund which allows
up to 40% Viability Gap Funding (VGF) and has a corpus of Rs 15,000 crore.
16.27. Industries in Karnataka consume over 50% share of total energy consumption and Green
House Gas (GHG) emissions in Karnataka and this trend is predicted to increase to excess of
50% by 2030. Although cement, iron and steel plants account for over 70% of the total energy-
related emissions in the organized industry sector, Karnataka is one among the few states not
allowing captive consumers to offset their Renewable Power Obligations (RPOs) from Waste
Heat Recovery (WHR) generation. Karnataka Green Growth Strategy has recognized that WHR
potential of 500 MW of generation capacity with an investment of about Rs 3,500 crore can be
deployed in Iron, Steel and Cement Industries in Karnataka by 2030. WHR Energy projects in
Karnataka can be supported through a multipronged approach. Allowing captive WHR projects
to qualify towards RPOs would be one option. Providing generation-based incentive for WHR
projects to encourage companies to prioritize investment into WHR plants would be another
option. A preferential tariff by State Government to buy electricity generated from WHR system
can be implemented. Funding sources like Clean Technology Fund (CTF) administered by
World Bank and Climate Investment Fund (CIF) can be pursued to raise concessional finance for
investing in WHR system as India has already received USD 100 Million through these funds.
16.28. Additional intervention areas in the Energy sector are:
a. Creation of a State Clean Energy Fund (SCEF) could facilitate all demand-side measures
in the power sector
b. As to the wind sector, it is mainly driven by the private sector, which nevertheless relies
on loans from international cooperation agencies. Funds from Asian Development Bank
(ADB) Clean Energy Financing Partnership Facility (CEFPF) of USD 250 million can
also be targeted and accessed for the development of solar farms and wind farms
infrastructure.
c. Necessary amendments to sections 79(a), 79(b) and 80 of the Karnataka Land Reforms
Act are to be made to enable the Renewable Energy project developers to purchase
suitable private land directly from the owners of the land.
d. Ad valorem tax on energy products, carbon or pollution taxes per unit of emission by
industries and vehicles particularly GHGs and sulphur.
e. Subsidies on CNG, wind mills, hydropower plants, electric vehicles, solar energy
equipment, energy efficient lighting (CFLs), and energy saving technology;

Agriculture
16.29. Unlike the energy sector, where actions are taken to mitigate climate change issues, the
agricultural sector oversees actions which aim at adapting to climate change. Karnataka spent
about Rs 4,577 crore 6 in 2012- 13 under the Government of India development programs. These
programs also help improve the adaptive capacity in the state. Karnataka has taken a lead
initiative in developing sustainable agribusiness enabled through an ‘Integrated Agribusiness
Development Policy’ 2011 covering agriculture and allied sectors (like horticulture, fisheries,
animal husbandry, sericulture and food processing) both in infrastructure and industrial segments
on an end to end concept.
6
‘Transitioning towards Climate Resilient Development in Karnataka’ (IISc, 2014)
16.30. Special Fiscal Incentives for farmers are:
a. Farmers who lose land for the agro-based industry will be waived off the registration fee to
purchase land at other locations for agriculture-related activities
b. Farmers are entitled to convert their land free of charge to agribusiness purpose through self-
declaration.
16.31. Karnataka has emerged as top performing state in terms of adoption and promotion of
Minor Irrigation (MI) in the agricultural sector and the State Budget of 2014 emphasised this by
distributing sprinkler and drip irrigation sets for 28,000 hectares area with 90% subsidies to all
groups of farmers. Central and state schemes to bridge the subsidy gap can help to finance the
adoption of MI systems. The new Solar Policy offers guidelines for various types of subsidies
and incentives for encouraging and facilitating the use of SPV-MI pump sets.
16.32. It has been observed in the field setting that transition to organic farming is difficult for
the farmers to manage without timely and adequate financial support. There is need for input
incentives and soil fertility enhancement in the agriculture land.
a. The GoK, under an arrangement with the Corporation Bank, will provide credit to those
taking up organic farming with the GoK bearing the subsidy. The interest rate extended
by nationalised banks for crop loans is 11 % over which the Centre provides a 4 %
subsidy. GoK will provide an additional subsidy of 4 % for farmers taking up organic
farming providing crop loan at 3 % interest.
b. As per the State Policy on Organic Farming, level of assistance to different
programmes will be offered. Apart from availing subsidy under the Ministry of Food
Processing, Government of India, the State Government would also extend suitable
incentives and concessions for farm processing activities taken up by individual farmers
or groups of farmers.
c. Organic Processing Industry shall be declared as a seasonal industry for the purpose of
Labour Act. These units shall be exempted from payment of minimum demand charges to
the power utility supplier during closure period of 30 days at a time. The power supply
company will offer power at a concessional rate than normal tariff applicable. This would
be applicable for a period of initial three years. Similarly, Organic Processing Industries
would be exempted from payment of electricity tax.
d. A Capital Investment Subsidy Scheme for Commercial Production Units of Organic
Inputs under National Project on Organic Farming under which each unit of Bio
fertilisers-Bio pesticides will be provided with a subsidy @ 25% of the capital cost of the
project subject to a ceiling of Rs 40 lakhs. Also, each unit of fruit and vegetable waste
compost production unit will be provided with a subsidy @ 33% of the capital cost of the
project subject to a ceiling of Rs 60 lakhs. The remaining cost will be met through term
loan from banks and margin money. The subsidy will be credit linked and back ended.
16.33. Although Karnataka state has not drafted a recent agricultural policy taking fully into
account climate change issues, many actions have been undertaken so as to respond to them.
These are listed in Table-11. PMFBY (Pradhan Mantri Fasal Beema Yojana) reunites majority of
the funds subsidized to the farmers in Karnataka, underscoring the priority given to crop loss
compensations by national public authorities.
 Table 11: Schemes and projects implemented in the agricultural sector in Karnataka
Year of Economic
Scheme/project title Source of funding
implementation instrument
National Agricultural
Government of India &
Insurance Scheme 2000 Subsidy
Karnataka
(PMFBY)
Weather Based Crop
Government of India &
Insurance Scheme 2007 Subsidy
Karnataka
(PMFBY
Modified National
Government of India &
Agricultural Insurance 2010 Subsidy
Karnataka
Scheme (PMFBY)
National Food Security
2007 Government of India Grant
Mission
Additional Fodder
Production Programme 2008 Government of India Grant
(RKVY)
Crop Diversification
2008 Government of India Grant
Program (RKVY)
Rainfed Area
Development 2008 Government of India Grant
Programme (RKVY)
RKVY – Support to
2008 Government of India Grant
other programs
Government of
Krishi Bhagya 2014 Grant
Karnataka
Rainfed Area
2014 Government of India Grant
Development (NMSA)
On Farm Water
2014 Government of India Grant
Management
Soil Health
2014 Government of India Grant
Management
Conservation and
management of
indigenous varieties of
Government of
livestock (Cattle and
2016 Karnataka & Grant & Loan
Sheep) in the wake of
NABARD
climate change in
Karnataka (NABARD
& DAHVS)
16.34. Proposed interventions for encouraging sustainable agriculture practices are as
follows:
a. Lease/ Rental arrangements for SPV pumps can be implemented as short-term
mechanisms for marginal farmers with low affordability and high willingness to pay. The
option of AMPC sponsored loans or a blend of APMC and State sponsored loan
financing can be pursued to encourage higher adoption of SPV-MI systems among
farmers of different categories.
b. Land pollution taxes, effluent taxes on wastewater, input taxes on chemical fertilisers and
pesticides.
c. Subsidies on organic manure, watershed, sprinkler, drip irrigation, soil conservation,
afforestation, agro-forestry, social forestry.

16.35. As per National Food Security Mission (NFSM) 12th Five Year Plan, for promoting the
production of pulses and millets, it is proposed that marketing support would be provided to
growers in the form of insurance cover, Dal mill and millet processing unit to
individual/communities, incentives to processing agencies, etc. Assistance will be limited to 50%
of the cost of the items. Funds will be allocated to SFAC and similar organizations at
central/state levels against specific proposals approved by National Food Security Mission
Executive Committee (NFSMEC). NFSM with an outlay of Rs 15-20 crore per year, Accelerated
Irrigation Benefits Program (AIBP) with an outlay of about Rs 650-700 crore per year and
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with an outlay of
about Rs 1,307 crore per year are three programs that may be explored for proposed
recommendations. Adaptation for Smallholder Agriculture Program (ASAP) by International
Fund for Agricultural Development (IFAD) with a pool of USD 240 million is a promising fund
for livelihood diversification which should be pursued by Karnataka. This fund is already active
in India and is working with states of Jharkhand and Orissa.7

Forest and Biodiversity

16.36. Conversation and protection of forests and biodiversity are very important to restore the
ecological balance and the state has a key role to play in it. Rapid industrialisation and
urbanization have put a lot of pressure on these resources leading to their overexploitation. Some
of the existing measures taken by the state of Karnataka in the form of different schemes and
taxes are explained in Table-12.

Table 12: Economic instruments for Forests and Biodiversity Protection and Conversation
Krushi Aranya The farmers, public and NGOs may obtain the seedlings at subsidized
Prothsaha Yojane, rates at nearest nurseries of the department and incentives are given to
2011 farmers to encourage them to grow native tree species on their lands.
The department provided Rs. 10 as incentive for each seedling that
survived.. A sum of Rs. 15 and Rs. 20 per seedling was paid as

7
Green Growth Strategy for Karnataka 2014
 incentive to farmers in the second and third year respectively.

Kuduremukh to support for rehabilitation of families from Kuduremukh National

National Park for Park. The Central Planning Commission has released Rs 35 crore to
Rehabilitation, 2011 rehabilitate 350 families from Kudremukh National Park (KNP) area,
and it was declared that each family will get Rs 10 lakh compensation
after working out a detailed proposal.
Voluntary As per the provisions of the Wildlife (Protection) Act -1972 areas of
Rehabilitation of Tiger Reserves (comprising of National Park & Wildlife sanctuary) are
families from Tiger inviolate. The families residing within National Parks and Wildlife
Reserve and Sanctuaries are required to be voluntarily relocated outside the
National Parks Protected Areas (National Parks and Wildlife sanctuaries) by providing
a rehabilitation package as well as payment of amount as per the
valuation fixed by the Revenue Department for revenue lands (towards
the land acquisition). Under this scheme Rehabilitation of SC & ST
families are also being taken up.
Karnataka Forest This includes the tax levied under Forest Development Tax, money
Development Fund recovered for raising compensatory plantation in lieu of the forest area
made over for non-forestry purposes;sandal surcharges collected for the
development of sandalwood resources;
Penalties:
Penalty for offence As per THE KARNATAKA FOREST ACT, 1963 In any case of a
in regard to forest offence having reference to the cutting, uprooting, or removal or
sandalwood damage to, a sandal tree or any part of a sandal tree belonging to
Government, or to an occupant or holder of land, the offender shall, on
conviction, be punishable with imprisonment for a term which may
extend to 10 years and with fine which may extend to Rs. 1,00,000
Forest Development Karnataka Forest Act levies 12% on the disposal of forest produce to a
Tax list of pre-decided industries
Protection of forests As per Karnataka Forest Act, any person breaking up or cleaning of any
for special purposes land or are involved in pasturing of cattle; firing or cleaning of
vegetation; lopping or pollarding trees; cutting, sawing, conversion or
removal of trees and timber; or quarrying of stones or the burning of
lime or charcoal or collection or removal of any forest produce or its
subjection to any manufacturing process will be punished with
imprisonment which may extent to six months or with fine or with both

16.37. Most countries have started imposing a system of private or state ownership disregarding
customary community-based rights to forest resources. Papua New Guinea is one of a few
countries that have formally recognized customary community rights over land and forest
resources.8 This effort and the resultant effect had proven that if an entitlement and secure tenure
is provided to a group through communal tenure benefitting from a forest’s sustainable use, this
may lead to more effective prevention of deforestation than either state or private ownership. A
25-year communal forest lease through a Community Forest Stewardship Agreement between
communities and the Forest Management Bureau granted in the Philippines is another great
example.
16.39. 378 Village Forest Committees (VFCs) were formed under DFID assisted Western Ghats
Forestry and Environment Development Programme and JBIC assisted Eastern Karnataka
Afforestation Programme in 2013-14. The VFC shall access the funds from government, Forest
Development Agency (FDA) and other development agencies for implementation of
Management Plan. Due to non-availability of funds owing to closure of these schemes and
projects these VFCs have become unviable in Karnataka. An effort should be made to revive
them or any other form of community ownership over forest resources following the example of
Papua New Guinea.
16.40. Forest fees and taxes are generally too low to capture timber rents and to internalize the
negative externalities of logging. Economic incentives may also be introduced to support the
regulation and management of concessions. For example, pre-payment of forest fees or deposit
of refundable performance bonds may help avoid logging damage and encourage regeneration.
Concession bidding, forest fees, timber taxes, and environmental bonds are some other
instruments that can be implemented.
Mining and Quarrying
16.41. The state had introduced environmental protection fees of Rs 84,000 per hectare in
respect of mines located on revenue or patta lands for compensatory afforestation. With
retrospective effect from 2008, private iron ore mine lessees, who until now paid no more than
Rs 27 per tonne of iron ore as royalty to the Government, while selling it at Rs. 2,000 a tonne,
will now come under the ambit of the Forest Development Tax. At present, the Government
collects the tax only from public sector undertakings. The move is expected to bring in additional

8
Panayotou and Ashton, 1992
 revenue of Rs 150 crore to the state and aims to bring about parity between the private and public
sector mining and quarrying companies. The tax has been levied under powers given to the State
Government by the Karnataka Forest Act, 1963.Some of the efficient economic instruments that
can be enforced for regulating mining and quarrying in the state are mentioned below.
a. Charge System- User charges on tailings and other wastes. Road tolls, impact fees and
betterment charges on mining.
b. Industries Quota for limiting mining of exhaustible resources.
c. Tradable land rights for the greening of mined areas.
d. Land reclamation bond for mining industries, waste delivery bonds, deposit refund
system, deposit refund shares can be made compulsory

International and National Efforts towards Climate Change

16.42. On June 30, 2008, Prime Minister Manmohan Singh released India’s first National
Action Plan on Climate Change (NAPCC) outlining existing and future policies and programs
addressing climate mitigation and adaptation. The plan identifies eight core “national missions”
running through 2017 and directs ministries to submit detailed implementation plans to the Prime
Minister’s Council on Climate Change by December 2008. Emphasizing the overriding priority
of maintaining high economic growth rates to raise living standards, the plan “identifies
measures that promote our development objectives while also yielding co-benefits for addressing
climate change effectively.” It says these national measures would be more successful with
assistance from developed countries, and pledges that India’s per capita greenhouse gas
emissions “will at no point exceed that of developed countries even as we pursue our
development objectives.” For the realization of NAPCC actions at the sub-national level, in
August 2009 the Prime Minister of India called upon State Governments to prepare their own
State Action Plans on Climate Change (SAPCC) consistent with strategies in the NAPCC.

Table 13: Eight Missions under NAPCC, India

National Missions Activity Focus Implementing agencies
National solar mission Mitigation Ministry of New and Renewable Energy
National mission for enhanced energy Ministry of Power/Bureau of Energy
Mitigation
efficiency Efficiency
Ministry of Urban Development and
National mission on sustainable habit Mitigation Ministry of Housing and Urban Poverty
Alleviation
National water mission Mitigation Ministry of Water Resources
National mission for sustaining
Mitigation Ministry of Science and Technology
Himalayan ecosystem
National mission for a Green India Mitigation Ministry of Environment and Forests
Ministry of Agriculture and
National mission for sustainable Adaptation Cooperation/ Department of
agriculture centered Agricultural Research and Education
(DARE)
Both
National mission on strategic knowledge
Mitigation and Ministry of Science and Technology
for climate change
Adaption
16.43. The Parties to the United Nations Framework Convention on Climate Change (UNFCC)
known as Conference of Parties or COP meet annually to assess the progress of various actions
adopted to fight against Climate Change. Under the COP21 Paris agreement adopted in
December 2015, the submitted Intentionally Nationally Determined Contributions (INDCs)
became Nationally Determined Contributions (NDCs) upon ratification of the Agreement. The
Paris Climate, the new treaty adopted in the COP 21 brought an end to the differentiation
between developed and developing countries and replaced it with a common framework that
commits all countries to put forward their best efforts and to strengthen them in the years ahead.

Efforts by the state of Karnataka

16.44. The state’s ‘Committee on Climate Change’ was formed to address the Centre’s request
for preparation of a SAPCC, charged EMPRI with the task. EMPRI in collaboration with the
Energy and Resources Institute (TERI), Bangalore prepared a1st Assessment report on Karnataka
state action plan on climate change and submitted to the Ministry of Environment, Forests and
Climate Change (MoEF&CC) March 2012.The Expert Committee of the MoEF&CC, GoI after
re-viewing suggested to furnish an estimate of the incremental budget requirement for
implementation of the KSAPCC. EMPRI sought responses from almost all the relevant
departments, compiled and submitted to Government of India on July 2015.The state action plan
has identified over 200 action items including 31 categorized as priority actions. The estimated
total budget proposed for the action plan is Rs 10, 500 crore out of which Rs 5,100 crore is
requested from GOI.

16.45. Karnataka has also been a pioneer by becoming the first state to get a green growth
strategy. The strategy was made with a consortium of institutions led by the Bangalore Climate
Change Initiative – Karnataka (BCCI-K) in partnership with Seoul-based Global Green Growth
Institute (GGGI) and with contributions from the Centre for Study of Science, Technology and
Policy (CSTEP), Bengaluru, London School of Economics (LSE), Integrated Natural Resources
Management Consultants, New Delhi and Indian Institute of Technology, Delhi. The strategy is
a roadmap for the state in mainstreaming climate change adaptation and state’s role in reducing
carbon emissions. It aims to meet both short term and long term objectives of economic growth
but by recognizing climate change as an emerging environmental challenge that Karnataka is
facing today.

Climate Finance

16.46. Climate finance attained its due attention in Economic Survey 2011-12, which contained
for the first time a chapter on ‘Sustainable Development and Climate Change’ and a dedicated
section on ‘Climate Change Finance’. The Economic Survey 2011-12 provided an overview of
various domestic and international sources of finance, as well as private finance sources. The
following year, the Economic Survey 2012-13 estimated Rs. 230,000 crore needed for NAPCC.
The UNFCCC highlights two fundamental response strategies to address climate change (Figure
4).
A. Adaptation
16.47. “Adaptation refers to adjustments in ecological, social, or economic systems in response
to actual or expected climatic stimuli and their effects or impacts. It refers to changes in
processes, practices, and structures to moderate potential damages or to benefit from
opportunities associated with climate change". (IPCC 2001, Third Assessment Report) 9
“Adaptation” refers to efforts by society or ecosystems to adjust to climate change. These
adjustments can be protective (i.e., guarding against negative impacts of climate change), or
opportunistic (i.e., taking advantage of any beneficial effects of climate change). The ability to
adapt is not equal in all people, states. For example, developing nations with limited resources
that are already dealing high poverty rates are less able to adapt to climate change. There are
limits to how much we can adapt. There are often technological and financial limits that prevent
the scale of adaptation that we would need. Thus, the role of economic instruments becomes
more important to internalise adaptation practices.
B. Mitigation

16.48. Mitigation refers to the policies and measures designed to reduce GHG emissions.
Measures can include reducing demand for emission-intensive goods and services, boosting
efficiency gains, and increasing the use of low-carbon technologies. Another way to mitigate the
impacts of climate change is by enhancing sink reservoirs that absorb CO2, such as forests or
peat bogs10. In the current scenario, reduction in carbon emissions is a must for India and all its
states for achieving the INDCs and to move towards a sustainable development path. There lies a
huge potential for economic instruments especially for mitigation purposes.

9
http://unfccc.int/adaptation/items/7021.php
10
a type of wetland where decomposition is slowed down and dead plant matter accumulates as
peat
 Figure 8: Responses to address Climate Change

Evolving National and Global Economic Instruments

16.49. Mobilizing finance is fundamental to the success of any mitigation or adaptation strategy.
There are many global funds which have a mandate to work in India out of which some are
active in the country. For instance, India receives soft loans and occasional grants from World
Bank, United Nations Environment Programme and Japan for afforestation, wildlife
conservation, and watershed development. The different sources of funding both domestic and
international and the economic instruments through which they are utilised are detailed in the
section below. The state of Karnataka should leverage green investments available at the national
and global level by targeting the following.
Domestic Fund flows
Public Climate Finance

A. Budgetary support
16.50. It is the main source of public finance. Additional budgetary allocations had also been
made from the 13th Finance Commission (FC) for the period 2010-15. In view of the urgent
need for action for combating climate change, the 13th FC had recommended three types of
grants to state governments of Rs.5000 crore each, viz. for forest cover, renewable and water
sector.
16.51. Financing of SAPCCs is a major concern as the estimates produced by many of the states
are not robust or credible. The present situation is that, financial resources are made available
through donor funds and additional funds are being diverted from other central schemes. For
instance, Sikkim deployed funds from the Mahatma Gandhi National Rural Employment
Guarantee Act (MGNREGA) to implement actions in the water sector.
B. Tax
16.52. The Finance Bill 2010-11 created a corpus called the National Clean Energy Fund
(NCEF) out of a cess at the rate of Rs.50 per tonne of coal to invest in entrepreneurial ventures
and research in the field of clean energy technologies. The clean energy cess was hiked to Rs.100
per tonne of coal during the Budget 2014-15. The main purpose of the NCEF is to fund research
and innovative projects in clean energy technology. An Inter-Ministerial Group had been
constituted to approve the projects/schemes eligible for financing under the Fund, which
comprises of a Chairperson [the Finance Secretary], two Members [Secretary (Expenditure) and
Secretary (Revenue)] and representatives from Ministries of Power, Coal, Chemicals &
Fertilizers, Petroleum & Natural Gas, New & Renewable and Environment & Forests.

16.53. One of the demerits observed was that the money hardly used to go into “new” or
“innovative” projects relating to clean energy technologies and is mostly being used to overcome
budgetary shortfalls in the MoEF or the Ministry of New and Renewable Energy. In the 2013-14
interim budget speech by the then Finance Minister, P. Chidambaram (2014), the government
decided to launch a five-year-long scheme that would provide low interest bearing funds from
the NCEF to the Indian Renewable Energy Development Agency (IREDA) to lend to viable
renewable energy projects. This can be seen as one of the first steps towards operationalizing the
NCEF specifically for climate-related projects.

C. Subsidies
16.54. The government supports the renewable energy sector through generation-based
incentives (GBI), direct subsidies, tax exemptions, cheap credits or reduced import duties. Under
the first phase of the National Solar Mission, India unveiled a Rs 86, 700 crore plan to produce
20 GW of solar power by 2020. The National Solar Mission employs different policies to support
grid-connected solar power projects and to encourage the domestic manufacture of solar cells
and modules, such as feed-in tariffs, solar purchase obligations, and power purchase agreements
for grid-connected projects. Soft loans and capital subsidies are also provided for off-grid
projects.

16.55. By the 2010-2011 budget, the government increased the funds available to the MNRE by
61% from Rs 620 crore to Rs 990 crore. The Government of India had also introduced
Renewable Purchase Obligations (RPOs) with tradable Renewable Energy Certificates (RECs)
that are helping drive the expansion of the solar and wind sectors. In 2013-14, the government
has decided to reintroduce ‘generation-based incentive’ for wind energy projects and provide Rs
800 crore to the MNRE.

D. Market Mechanisms
16.56. The Bureau of Energy and Efficiency (BEE) is responsible for monitoring the market
mechanisms for monitoring National Mission for Enhanced Energy Efficiency (NMEEE), which
is carried out through the following schemes.

a) Perform, Achieve and Trade (PAT)

16.57. PAT is a market-based mechanism that enhances the cost-effectiveness of improvements
in energy efficiency in energy-intensive large industries and facilities through certification on
energy savings that could be traded. In the 12th Five Year Plan, the PAT scheme is likely to
achieve about 15 million tonnes oil equivalent of annual savings in coal, oil, gas, and electricity
(including 6.686 million ton of oil equivalent energy savings of the first phase)

b) Energy Efficiency Financing Platform (EEFP)

16.58. EEFP helps stimulate necessary funding for Energy Service Company (ESCO) based
delivery mechanisms for energy efficiency. The costs are to be recovered from the energy
savings, which also reduce the subsidy bill of the state government.

c) Market Transformation For Energy Efficiency (MTEE)

16.59. MTEE aims to accelerate the shift to energy efficient appliances in designated sectors
through innovative measures to make the products more affordable with focus on leveraging
international financial instruments, including Clean Development Mechanism (CDM) to make
energy efficient appliances affordable and increase their levels of penetration.
d) Framework for Energy Efficiency Economic Development (FEEED)
16.60. FEEED has developed two innovative fiscal instruments to leverage private capital,
namely, the Partial Risk Guarantee Fund (PRGF) and Venture Capital Fund for Energy
Efficiency (VCFEE). PRGF is a risk-sharing mechanism that provides commercial banks with
partial coverage of risk exposure against loans made for energy efficiency projects, while the
VCFEE, set up with initial seed capital from the government under the NMEEE, looks to secure
venture capital investment as equity in energy efficiency projects.

16.61. There are various standards like National Building Code (NBC), Energy Conservation
Building Codes (ECBC) and BEE rating program for appliances that were made mandatory in
eight Indian states from FY 12, Karnataka being one of them. These market-driven voluntary
programs have significant potential to save energy and reduce emissions.
Private Climate Finance
16.62. In addition to the government spending, the role of the private sector (both domestic and
international) and development institutions is critical. The different sources of private finance
and the economic instruments used to fund the same are detailed below.

A. Clean Development Mechanism (CDM) Finance

16.63. The CDM according to Kyoto Protocol allows a country with an emission-reduction
commitment to implement emission-reduction projects in developing countries, to earn saleable
certified emission reduction (CER) credits that can be traded in carbon markets. India is the
second largest recipient of CDM projects after China, with a total of 563 projects till date,
representing almost 33% of CDM projects in Asia and 22% of CDM projects worldwide. The
Central Government constituted the National Clean Development Mechanism Authority
(NCDMA) for the purpose of evaluating and approving CDM projects in the country.

B. Debt Instruments
16.64. Almost 70 per cent of the total project costs is through conventional term loans which is
the most common debt instruments. Domestic banks-both private and public- and non banking
financial companies (NBFCs) are the major sources. IREDA and Power Finance Corporation
(PFC), two government-backed NBFCs, lead debt financing of RE projects in India.
Interestingly, IREDA, a public limited government company established in 1987, is under the
administrative control of the MNRE for providing term loans for renewable energy and energy
efficiency projects. As of March 2012, IREDA and PFC have financed over 4 GW, which
represents roughly 15 percent of the total 29.8 GW RE capacity installed in the country.

16.65. The other kind of debt instrument is a foreign currency loan, which is provided to RE
project by development banks, export-import (EXIM) banks and international banks. These loans
carry low-interest rates ranging between three and six percent, with tenures between 10 and 18
years. Major players providing foreign currency loans to RE projects in India are development
finance institutions, such as the International Finance Corporation (IFC), Deutsche Investitions-
und Entwicklungsgesellschaft (DEG), Overseas Private Investment Corporation (OPIC) and
Asian Development Bank (ADB) and EXIM Banks, such as the EXIM Bank of the U.S., and
China, and the Japan Bank for International Cooperation (JBIC).
C. Private equity
16.66. Private equity usually comprises 30 to 40 percent of the total project cost, with the rest of
the project financed through debt. One of the notable trends is that most equity investments in
Indian RE companies have been made at the parent company level, and not at the project level.
In addition, development finance institutions, such as International Finance Corporation (IFC),
have also recently started providing equity funds to large and small-scale RE projects. For
instance, IFC has also provided funds to private equity funds like Nereus Capital (a RE-focused
private equity fund) and SBI Macquarie Infrastructure Trust.
D. Partial Risk Guarantee Facility
16.67. Partial risk guarantee facilities assume the lender’s default risk on a part amount of the
debt provided to the project, thereby improving the project’s credit rating and reducing the
perceived investment risk. The Indian RE, however, have seen a limited presence of partial risk
guarantee facilities. One of the first partial risk guarantee facilities in India was ADB’s India
Solar generation Guarantee Facility. ADB has a 150 Million USD partial risk guarantee program
for solar projects with government-backed power purchase agreements, and as of June 2012, two
solar projects with capacities of 25 MW and 10 MW have been funded using ADB’s guarantee
facility.
16.68. The World Bank Group’s Partial Risk Sharing Program (PRSP) also provides partial risk
and credit guarantee products to support projects taken up by governments and private investors
in developing countries. The objective of these products is to promote capital inflow into
infrastructure development. PRSP has also provided support internationally for clean energy
projects through these guarantee instruments.

Global Climate Finance flow to India

16.69. The financial mechanism on an international scale has taken many forms in different
COPs. Different kinds of funds and financial instruments were introduced in due course. Out of
these, the ones important for India are as mentioned below:
  Global Environment Facility (GEF)
 Special Climate Change Fund (SCCF)
 Adaptation Fund (AF)
 Clean Technology Fund (CTF)

16.70. As directed by MoEF&CC, EMPRI is coordinating with the state departments to prepare
and submit proposals under National Adaptation Fund for climate change. An introductory
workshop with GIZ was also organized on September 8, 2015, for the stakeholders to inform
them about the detail funding mechanism available under climate change. As per the
implementation guidelines provided by MoEF&CC State Government has setup State Level
Steering Committee (SLSC) under the Chairmanship of Chief Secretary, relevant stakeholder
departments, and NABARD where Director General, EMPRI is a Member Secretary. A
comprehensive proposal from Animal Husbandry department is under scrutiny.
16.71. The CTF aims to provide middle-income countries with highly concessional resources to
explore options to scale up the demonstration, deployment and transfer of low carbon
technologies in renewable energy, energy efficiency and sustainable transport. With the Indian
leadership already committed to sustainably addressing the country’s energy challenges and
reducing 2020 GHG emissions by 20–25% compared to 2005 levels, the Government of India
(GoI) drafted the India Investment Plan to tap USD 775 million from the CTF for transformative
investments to improve and expand India’s hydropower operations, develop untapped solar
resources, and improve energy efficiency. Currently, about USD 288 million of India’s total
resource envelope is available which Karnataka should try to leverage.

Table 14: Actors involved in Regulating Climate Finance in India

Key Institutions or Role in Climate Co-ordination with other
Actors agencies Finance actors
Ministries/Departments PM Council on Climate MoF, Finance Inter-ministry
within the government Change, Commission Multilateral/bilateral
Planning Commission, responsible agencies, DFIs ,Private
NAPCC for budgetary CDM actors
Nodal Ministries: support,
MoEF, BEE manages
MNRE, MoP: BEE, market
MoWR, MoA, DST Mechanisms,
MoF: CCFU, NCEF NCDMA under
MoEF
approves CDM
projects
Local and sub-national State Governments Operate on the basis MoEF
entities SAPCC of MoF
allocations from the Multilateral/bilateral
central and state agencies
budgets Stakeholder consultation
Project-based with civil society, local
international funding communities

Development Finance NABARD, SIDBI NABARD is the MoEF

Institutions (DFI) National NGOs, civil soceity
Implementing Entity
(NIE) for
the Adaptation Fund
Public Sector Banks SBI, Canara Bank, Financing With private players/project
Central renewables, developers (mostly) IREDA
Bank of India, PNB, energy efficiency operates under the
Andhra Bank Soft loans, co- administrative control of
Government backed financing. MNRE
NBFCs: IREDA, Power
Finance Corp., Power
Trading Corp., etc.
Private Sector Banks ICICI, Axis Bank, Loans, co-financing, With private
HDFC, Infrastructure players/project developers
IDFC, Standard financing, project (mostly)
Chartered finance for low
NBFCs: L&T carbon investment
Infrastructure
Finance, Tata Capital
Civil society/NGOs TERI, CSE (major Consultations Central and state
players), several other Capacity building governments
small, grassroot level No role in direct Multilateral/bilateral
NGOs financing agencies
DFIs
Private actors Industry conglomerate: Investment signals Inter-industry or intra-
CII, FICCI for industry
Business groups: industry
Godrej, ITC, Tata “Green” capability
Group of
Etc. companies, market
leaders
International climate GEF, CTF, SCCF, AF Grants, concessional Project-to-project, focal
funds loans, public-private points in ministries (if
partnerships. any), stakeholder
participation
Bilateral Agencies GIZ, DFID, USAID, Grants, concessional Central and state
CIDA, loans, public-private governments, NGOs, civil
IDRC, SDC, SIDA, partnerships society
NORAD etc.
Multilateral Agencies WB, UNDP, IFC, ABD, Grants, concessional Central and state
UNIDO loans, public-private governments
partnerships NGOs, civil society

Future Suggestions and Recommendations

16.72. The current efforts undertaken by the state are not sufficient regarding the increased
threat induced by climate change issues and the current policies do not fully address climate
change issues yet. This section aims at identifying the barriers undermining climate change
actions to identify opportunities and propose recommendations for better utilisation of economic
instruments for the same.
a. Strengthening Policies and Programmes
16.73. At the state level, an important drawback is the lack of commitment to climate change
related issues and accountability and transparency. Climate change is not considered as a special
entity even in the state’s economic survey or budget. It is high time to come up with a
consolidated, climate change action plan by strengthening KSAPCC. The National Missions
under the NAPCC will not have the funds to support all the SAPCCs and their budgetary
estimates for implementation. It is important for Karnataka to begin a process of reviewing its
SAPCC and mainstreaming climate change responsiveness and resilience. This means that all
state policies and programmes for sectors that might be or are at risk from climate change must
be reviewed, and climate change concerns must be explicitly articulated into them. Obviously,
this will then entail also a process of making realistic estimates of budgets for various sectors
based on scientific evidence of risk from and vulnerability to climate change impacts. Once this
approach is systematically undertaken by the state, finding funds from both existing government
and future budgets and other external sources will not really be an issue.
b. Sector-specific policies for most vulnerable sectors
16.74. It has been around 11 years since the Agricultural Policy 2006 was drafted, years
during which many factors evolved and rose to prominence. Therefore, there is a need to draft a
new policy in the agricultural sector which takes fully into account the effects of climate change
and foresees actions to tackle them. New targets have to be set along with new and updated
guidelines for the next few years. Also, new funds have to be allocated to projects dealing with
climate change issues. A new policy mentioning clearly the threats induced by climate change
and the need to face them would demonstrate a real public will from the GoK to battle against
climate change issues in the agricultural sector both on mitigation and adaptation fronts.
c. Harnessing the potential of bioenergy
16.75. Concerning the bio-energy sector (biogas and bio-fuel), it reunites the lowest amount of
investment globally vested in the renewable energy sector within the state. Indeed, bio-fuel
seems disregarded by the GoK as well providing peanuts to KSBDB, solely granted by the GoK.
On the contrary, the biggest opportunity for developing renewable energy in Karnataka remains
bio-energy as it presents many advantages which should draw more attention and should be
highly promoted to public decision-makers. The development of bio-energy is a relevant
alternative to fossil energy which could help the state extricate from its petrol dependency. If
biogas is well-promoted through diverse schemes and programs, many opportunities exist
concerning bio-fuel. Karnataka has the advantage to possess naturally several bio-fuel species
within its territory eliminating the need to import foreign species. It is note-worthy that
Karnataka State Biofuel Development Board (KSBDB), through its research activities, has
already identified the best species to be harnessed in the state. These species being mainly trees,
their exploitation would increase the forest cover through the plantation and would attract
rainfall.
16.76. Bio-fuel provides a sustainable and clean energy for the society. The sector which could
make the most of this energy is the transport sector. Biodiesel is the most viable way for
developing the transport sector in an eco-friendly manner in Karnataka than electric means of
transport as proposed by the National Electric Mobility Mission (NEMM) put forward by the
GoI. Bio-fuel could be economically viable if efforts are done to develop bio-fuel market. New
incentives are necessary to spur farmers to harvest biofuel species. If bio-fuel species are
financially more attractive than other crops, it would boost agricultural activities and generate
employment and new incomes to farmers in rural areas. For this, biofuel has to be considered as
a priority sector by the GoK, so as to increase the funds allocated to its development. The current
situation is detrimental to Karnataka’s economy, for bio-fuel represents an economic windfall
and encompasses four sectors: forestry (through plantation), agriculture (through new activities
and incomes), rural development (through job creation) and energy (through the provision of
sustainable and eco-friendly fuel for the transport sector).
d. Assessment of economic instruments
16.77. It is very important that before introducing any economic instrument, it should be
assessed based on its Environmental Effectiveness, Cost Effectiveness, Flexibility, Equity, Ease
of Introduction, Monitoring and Enforcement, and acceptability. This kind of assessment will
help in identifying which instruments will produce better results. However, tax incidence
analysis is very important before imposition from distributional and equity point of view.

e. Need for more economic instruments and dedicated funds:

16.78. The budgetary support (grants) seems to be privileged by the Governments of
India and Karnataka, compared to other economic instruments such as taxes or subsidies. As to
the international funds and international cooperation agencies, they provide essentially loans to
agencies or private companies managing the projects. It is very much required to use more and
more tax/subsidy based approach for instigating efforts at the individual level as well to tackle
climate change. It is important to raise public awareness in order to prompt the development of
sustainable and eco-friendly activities. Pro-poor cess should be in place by earmarking the
revenues for a specific purpose, for example, the Green Energy Fund.

f. Encouraging and Incentivising private sector

16.79. India and most of its states face significant barriers for integrating the private sector in
climate change initiatives. The incentives for promoting the private sector to undertake more
individual initiatives in this domain have been limited during the recent years. It also has no
commitment or engagement with the GoI and the GoK for reducing its impacts on the
environment and for developing sustainable activities. This could be responded by reducing the
risks induced by the high investment costs required for developing these activities through the
implementation of risk guarantees. Banks and insurances would be more willing to provide funds
or financial guarantees to the private sector if their apprehensions are eased.