Union Budget 2026: A Turning Point for Climate Action

Syllabus:

GS-2:

Parliament , Government Policies & Interventions , Indian Constitution

GS-3:

Inclusive Growth , Issues Relating to Development ,Growth & Development ,Renewable Energy , Environmental Pollution & Degradation

Focus:

The Union Budget 2026 is expected to introduce key measures for accelerating climate action, addressing green finance, supporting renewable energy growth, and preparing for global climate mechanisms like the EU’s Carbon Border Adjustment Mechanism (CBAM). It will also prioritize investments in circular economy and climate resilience.

Union Budget 2026: A Turning Point for Climate Action

Introduction: Union Budget and Climate Action

  • The Union Budget plays a pivotal role in setting the financial framework for India’s climate action agenda.
  • With increasing extreme weather events and the urgent need to meet climate commitments, the FY26 Budget has significant potential to drive climate resilience and sustainability.
  • The Budget must include decisive measures to achieve India’s Net-Zero target, promote renewable energy, and support climate-linked economic policies.

Promoting Green Finance and Renewable Energy:

a. Establishing Green Bonds and Circular Economy Financing

  • The Union Budget should prioritize a sovereign green bond framework to finance circular economy infrastructure, reducing the cost of renewable energy technologies by encouraging economies of scale.
  • Green finance products, particularly those aimed at promoting climate resilience, should be incentivized.
  • Providing tax incentives to insurance companies offering climate-linked policies and advocating for lower GST rates on premiums could further support this area.

b. Renewable Energy Infrastructure

  • India’s renewable energy capacity stands at 203.18 GW, which is far from the 500 GW target for 2030. The Budget must address this gap through increased allocations for renewable energy, particularly in solar and wind sectors.
  • The Budget should also focus on expanding public-private partnerships to harness untapped potential, such as India’s railway infrastructure, which can support up to 5 GW of solar and wind power installations.
  • Moreover, the Budget should focus on improving the efficiency and scalability of solar power through the production-linked incentive (PLI) scheme.

Addressing the EU’s Carbon Border Adjustment Mechanism (CBAM):

a. The Challenge of CBAM for Indian Exports

  • The European Union’s Carbon Border Adjustment Mechanism (CBAM) will levy carbon taxes on Indian exports, particularly from energy-intensive sectors. This will impact India’s $8.22 billion worth of exports annually.
  • The Budget must prioritize creating a “Climate Action Fund” to help industries, particularly MSMEs, decarbonize and comply with CBAM
  • This fund could take inspiration from Japan’s Green Transformation (GX) Fund, focusing on vulnerable sectors like steel, cement, and textiles.

b. Supporting MSMEs in the Transition

  • MSMEs contribute 30% to India’s GDP and 45% of exports, making them particularly vulnerable to CBAM’s impact. The Budget should focus on capacity-building initiatives for MSMEs to meet international climate standards and reporting frameworks.
  • Support for compliance under CBAM can be integrated into MSME policies, including access to credit and incentivized green technology adoption.

Accelerating the Transition to a Circular Economy:

a. Benefits of Circular Economy

  • A circular economy could yield significant benefits, including an estimated ₹40 lakh crore in profit by 2050 and a reduction of 44% in greenhouse gas emissions.
  • To capitalize on this, the Budget should provide incentives for investments in recycling and refurbishment technologies, including weighted deductions of 150% on such investments.

b. Strengthening Circular Economy Policies

  • The Budget must focus on reducing the dependence on raw material imports by encouraging recycling and sustainable manufacturing
  • Fiscal measures should incentivize businesses to adopt circular economy models, such as accelerated depreciation benefits for assets used in circular economy practices.

Expanding Existing Green Schemes and Scaling Up Efforts:

a. Enhancing PM Surya Ghar Muft Bijli Yojana

  • The PM Surya Ghar Muft Bijli Yojana has seen low implementation despite high registrations. The Budget should focus on scaling up its impact by reviewing its framework and enhancing fiscal allocations for better implementation.
  • A key strategy could be to prioritize the Renewable Energy Service Company (RESCO) model, turning upfront installation costs into manageable operational expenses for low-income households.

b. Production-Linked Incentives for Solar Manufacturing

  • The solar module supply chain needs urgent attention. With only 40% of domestic demand being met by Indian manufacturing, the Budget must address this supply-demand gap by expanding the scope of production-linked incentives.
  • Strengthening domestic manufacturing capacity will not only reduce dependence on imports but also create jobs and foster innovation in the renewable energy

c. Fostering Public-Private Partnerships

  • The Budget should encourage innovative public-private partnerships to unlock further renewable energy potential and climate-resilient infrastructure.
  • The use of India’s vast land banks, particularly in sectors like railways and defense, could support large-scale renewable energy projects, thus reducing dependency on imported energy resources.

Strengthening Insurance and Financial Infrastructure:

a. Expanding Climate Resilience Insurance

  • India’s insurance penetration remains low, posing a barrier to comprehensive climate resilience. The Budget should incentivize climate-linked insurance products by offering tax deductions for insurance companies on policies designed to protect against climate disasters.
  • A stronger regulatory framework for insurance products linked to climate resilience and disaster protection will increase market participation and expand the sector.

b. Building the Green Finance Taxonomy

  • The Budget must allocate resources to build a robust institutional and technical infrastructure for implementing green finance taxonomies.
  • Standardizing green finance definitions will help build investor confidence, enabling India to tap into the global pool of $2.5 trillion needed to meet its climate commitments by 2030.
  • The Budget should introduce differential tax treatment for investments aligned with green criteria, incentivizing the private sector to adopt climate-friendly business practices.

Conclusion:

  • The FY26 Union Budget holds the potential to act as a decisive turning point for climate action in India.
  • Through the adoption of innovative financial instruments, strengthened green policies, and targeted investments in renewable energy and climate resilience, the Budget can align India’s growth trajectory with its climate goals.
  • By prioritizing the integration of climate competitiveness into fiscal frameworks, India can enhance its position in global markets and foster sustainable, green growth for future generations.

Source: TH

Mains Practice Question:


How can the Union Budget 2026 drive India’s climate transition while ensuring economic growth? Discuss the role of green finance, renewable energy policies, and public-private partnerships in fostering climate resilience and achieving India’s Net-Zero and climate adaptation targets by 2030.