ESI Answer Bank Part 5: Climate Change and Climate Finance (5 Model Answers for RBI Grade B)

This is Part 5 of our ESI answer bank. Climate finance has become a favourite of RBI because it links economics, banking regulation and global negotiations. With COP31 under way in Antalya (November 2026), expect it in 2027.

Q1. What is climate finance? Explain India’s position in global climate negotiations. (175 words)

Answer: Climate finance is money spent to reduce emissions (mitigation) and to cope with climate impacts (adaptation). It comes from public, private and international sources.

India’s position:

1. Common But Differentiated Responsibilities (CBDR-RC): developed countries caused most historical emissions, so they must lead and pay.
2. Developed countries must provide predictable public finance under Article 9.1 of the Paris Agreement.
3. The New Collective Quantified Goal (NCQG) agreed at COP29 (Baku, 2024) of $300 billion a year by 2035 is too small; India called it inadequate and seeks the larger $1.3 trillion roadmap.
4. India opposes unilateral trade measures like the EU’s CBAM (carbon border tax).
5. A just transition that protects jobs and development.

India’s own action: net zero by 2070, 500 GW of non-fossil capacity by 2030, the International Solar Alliance and CDRI.

Conclusion: India argues for climate justice: ambitious action, but with fair sharing of costs and access to technology and finance.

Teacher’s note: Use the terms CBDR-RC, NCQG, CBAM, just transition. They show you follow the debate.

Q2. Discuss the role of sovereign green bonds and green deposits in financing India’s transition. (170 words)

Answer: Sovereign Green Bonds (SGrBs) are government bonds whose money is used only for green projects like solar, wind, metro rail and afforestation. India issued its first SGrBs in January–February 2023 (₹16,000 crore in two tranches), under a framework vetted by an independent reviewer (CICERO).

Green deposits: RBI’s framework (April 2023) lets banks and NBFCs raise deposits earmarked for green projects, with third-party verification.

Benefits:

1. Mobilise dedicated, long-term funds for clean energy.
2. Build a green yield curve for corporate green bonds.
3. Attract ESG-focused foreign investors.

Challenges:

• Small “greenium” (investors accept only a slightly lower yield).
• Risk of greenwashing without strict reporting.
• Limited size compared with India’s needs (estimated at over $10 trillion to reach net zero, approx).

Way forward: A clear green taxonomy (India released a draft climate finance taxonomy in 2025, approx), regular impact reports and larger issuances.

Q3. What is India’s Carbon Credit Trading Scheme? How will it help? (165 words)

Answer: The Carbon Credit Trading Scheme (CCTS) was notified in 2023 under the Energy Conservation (Amendment) Act, 2022. It creates an Indian Carbon Market (ICM) regulated by the Bureau of Energy Efficiency (BEE) and the power ministry.

How it works:

1. Compliance market: energy-intensive industries (aluminium, cement, steel, refineries, etc.) get emission-intensity targets.
2. Firms that beat their targets earn carbon credit certificates; those that miss must buy them.
3. Offset (voluntary) market: projects such as renewables or afforestation can generate credits.
4. Trading on power exchanges once the system is fully operational.

Benefits:

• Puts a price on carbon, rewarding clean technology.
• Helps meet India’s NDC of reducing emission intensity by 45% by 2030 (from 2005 levels).
• Prepares industry for EU CBAM.

Challenges: credible monitoring, reporting and verification (MRV), setting fair targets, avoiding double counting.

Conclusion: CCTS can make emission cuts market-driven and cost-effective.

Q4. How can climate change threaten financial stability? What is RBI doing? (175 words)

Answer: Climate change creates financial risks for banks and investors.

Types of risk:

1. Physical risk: floods, heatwaves and cyclones damage borrowers’ assets; farm and MSME loans turn bad.
2. Transition risk: as the world moves to clean energy, coal and polluting industries lose value (stranded assets), hurting lenders.
3. Insurance gaps and higher claims.

RBI’s steps:

• Joined the Network for Greening the Financial System (NGFS) in 2021.
• Green deposit framework (2023).
• Draft disclosure framework on climate-related financial risks (2024) for governance, strategy, risk management and metrics, to be phased in for large banks.
• Climate scenario analysis and stress testing in its Financial Stability Reports.
• Treating some renewable energy loans as priority sector.

Way forward: Banks should map their exposure to carbon-intensive sectors, price climate risk in lending and build green portfolios.

Conclusion: Climate risk is financial risk. Early regulation prevents future shocks to the banking system.

Q5. Evaluate India’s progress in its energy transition. (170 words)

Answer: India’s targets include 500 GW of non-fossil capacity by 2030, 50% of installed capacity from non-fossil sources by 2030 and net zero by 2070 (the “Panchamrit” pledges at COP26).

Progress:

1. India reached 50% non-fossil installed capacity in 2025, five years ahead of target (as reported).
2. Solar capacity has grown many times since 2015; India is among the top solar markets.
3. PM Surya Ghar (rooftop solar for 1 crore homes), PM-KUSUM (solar pumps) and the National Green Hydrogen Mission (5 MMT by 2030).
4. PLI for solar modules and batteries; E20 ethanol blending achieved in 2025.

Challenges:

• Coal still produces most electricity.
• Storage and grid integration for intermittent solar.
• Financing costs and DISCOM health.
• Critical minerals dependence.

Way forward: Battery and pumped storage, green hydrogen hubs, grid investment and blended finance.

Conclusion: India’s transition is fast and credible, but it must be managed so that energy stays affordable and jobs are protected.

Practise next

1. “What is CBAM? Discuss its impact on Indian exports.” (150 words)
2. “Explain the concept of ‘loss and damage’ in climate negotiations.” (150 words)

Related reading

• ESI answer bank: all parts
• Government schemes A to Z
• India’s rank in global indices 2026

Model answers by the SyllabusBox Team. Climate negotiations change every year; update facts after each COP.