India’s climate progress may end up too haphazard without a coherent institutional framework

Over the past year, policymakers have accelerated mitigation and adaptation initiatives, reinforced by climate-related provisions in the recent budget, which expanded allocations for renewable energy (RE), grid integration, storage, clean-technology deployment and climate-resilient infrastructure, alongside fiscal arrangements under the 16th Finance Commission (FC).

A draft Climate Finance Taxonomy was also prepared, aimed at mobilizing private capital for the energy transition; official documents stress that this must be treated not as a standalone climate agenda, but as an integrated strategy linking growth, energy security and institutional preparedness.

Progress is visible across several fronts. RE capacity continues to expand, supported by incentives for domestic manufacturing of solar modules and batteries, plus investments in grid integration and storage. The National Green Hydrogen Mission aims to decarbonize hard-to-abate industries, while electric mobility adoption is advancing, especially in two-wheelers. Climate adaptation is gaining urgency as heatwaves, floods, and cyclones impose rising costs.

At the fiscal level, the 16th FC strengthened local bodies and disaster management funding, increasing resources for water solutions, sanitation and urban infrastructure that are increasingly climate-sensitive. Yet climate spending remains dispersed across ministries and tiers of government, making investments difficult to track or prioritize. Climate initiatives must compete with other fiscal demands as consolidation efforts tighten state budgets.

Several states are innovating. Tamil Nadu is linking RE expansion with industrial competitiveness and employment. Gujarat and Rajasthan continue to lead in RE parks and grid integration. Kerala and Odisha have strengthened disaster preparedness, while other states are experimenting with climate budgeting and resilience planning.

These efforts remain fragmented, though. There is no systematic mechanism to scale successful state initiatives, harmonize reporting standards or align fiscal incentives with climate outcomes. Stronger states attract investment and build institutional capacity, while more vulnerable regions risk falling behind. Federal diversity encourages innovation, but without coordination, it also produces uneven results.

A critical institutional weakness lies in the power sector, which underpins nearly all decarbonization pathways. Financing gaps in renewables, storage and transmission stem not only from scarcity of capital, but from structural risks in electricity distribution. Many state-owned distribution companies (discoms) remain financially distressed, which creates payment uncertainty for generators and RE developers, raising risk premiums all across. Thus, fixing discom finances and enforcing power purchase agreements are essential for scaling climate finance. Without credible reforms—for which renewed efforts are being made—investor confidence in RE and grid investments will remain constrained.

This challenge reflects a broader institutional gap: climate finance mobilization depends on sectoral institutions operating largely at the state level, while financing strategies are formulated nationally. Without alignment between sector reforms, fiscal incentives and climate goals, financing flows will continue to fall short.

The finance ministry’s draft Climate Finance Taxonomy is a major step, offering a common vocabulary to guide green investment and reduce greenwashing. But this is a financial classification tool rather than a governance framework. It does not clarify who ensures consistent implementation, nor does it embed climate goals into fiscal systems.

International experience shows that climate transitions succeed when finance tools are supported by durable institutions. Countries with climate framework laws combined independent oversight, fiscal integration and long-term policy stability. India, by contrast, still relies on administrative coordination across ministries.

It is not enough to embed climate ambition in economic plans. Without stronger institutional foundations, implementation risks falling short as investment needs rise. To overcome this, India should prioritize the following institutional reforms:

One, enact a National Climate Framework Law clarifying responsibilities across the Centre and states while ensuring continuity across political cycles.

Two, create an intergovernmental climate coordination mechanism to scale state innovations nationally.

Three, adopt climate budget tagging, climate-screened infrastructure planning and performance-linked transfers.

Four, incentivize state-level climate performance so that vulnerable regions can catch up.

Five, strengthen climate data and accountability systems through standardized reporting and risk mapping.

Six, align financial and governance reforms so that the taxonomy functions within an operational framework.

Seven, restore financial and contractual discipline in the power sector, making viable electricity distribution central to climate finance mobilization.

While India has moved decisively on clean energy and climate finance, the next phase requires building the governance architecture that can deliver robust results.

The author is a distinguished fellow at the Centre for Social and Economic Progress (CSEP) and a former member of the 15th Finance Commission.