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Bond Markets Seen as Critical to Closing $4 Trillion Global Climate Finance Gap: Economic Survey

The Economic Survey 2025–26 has flagged a widening gap between global climate and sustainable development goals and the financing available to achieve them, estimating the shortfall at $4 trillion, with developing economies facing the sharpest constraints.

The survey pointed to structural biases in the international financial architecture that continue to favour advanced economies, limiting access to affordable and long-term climate finance for emerging markets.

India’s climate finance skewed toward mature sectors

For India, the survey noted that climate finance remains concentrated in mature segments such as solar and wind power, and energy efficiency, while several priority areas remain underfunded. These include climate adaptation, MSMEs, urban infrastructure, and hard-to-abate sectors such as steel, cement, chemicals, aviation and shipping, where decarbonisation is challenging due to high energy intensity.

Currently, around 83% of India’s mitigation finance and 98% of adaptation finance is sourced from domestic resources, underscoring limited access to international capital.

Energy transition faces execution challenges

The call to bridge the climate finance gap comes amid mounting challenges in India’s energy transition, despite rapid capacity addition and growth in domestic manufacturing. The survey highlighted issues such as around 43 GW of unsigned power purchase agreements (PPAs) and curtailment of renewable energy in solar-rich states like Rajasthan and Gujarat.

Earlier reports have indicated that the Ministry of New and Renewable Energy is exploring alternative financing and contracting structures, including contracts for difference (CFDs), as an alternative to conventional long-term PPAs of up to 25 years. Under the CFD mechanism, either party compensates the other for the difference between the contracted price and the actual market price.

Clean energy investment rising, led by solar

Citing the International Energy Agency’s World Energy Investment 2025 report, the survey noted that global investment in renewables has surged amid rising power demand, with solar accounting for more than half of total non-fossil fuel investment over the past five years. In 2024, clean energy attracted 83% of total power sector investment, the report said.

Bond markets key to mobilising long-term capital

To close the climate finance gap, the survey underscored the importance of well-functioning bond markets, particularly for funding climate infrastructure that requires large upfront investment and long repayment periods.

According to a government assessment cited in the survey, developed bond markets can provide stable, predictable long-term financing, attract institutional investors, and enable urban local bodies to raise local-currency funds for climate-aligned projects.

“In India, cities such as Indore, Ahmedabad, Ghaziabad and Vadodara have issued municipal green bonds under Sebi’s green bond framework. These issuances could unlock $2.5–6.9 billion for locally driven climate action over the next five to ten years,” the survey said.

At the national level, the government has issued sovereign green bonds worth Rs1.15 lakh crore in FY26, taking the cumulative issuance since FY23 to Rs1.73 lakh crore.