blog theme: Climate finance

From Budget Announcements to Outcomes: Why Instrument Choice and Design Will Decide What Scales

India’s Union Budget announcements are an important annual signal of where the Union government is committing its scarce on-budget1 resources, such as subsidies, grants, and public investment, revealing the priorities and trade-offs it is willing to make. In particular, the 2026–27 announcement signals what the government intends to support domestically in the clean energy transition. Four announcements stand out. First, a $2.2bn push for carbon capture, utilisation and storage (CCUS), positioned as support for industrial decarbonisation and intended to reach multiple hard-to-abate sectors. Second, a renewed focus on critical and rare earth minerals, including a proposal to establish dedicated rare-earth corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to promote mining, processing, research, and manufacturing. Third, customs-duty relief on imports of nuclear power equipment, with the exemption extended through 2035. Fourth, duty cuts for lithium-ion cells for battery storage and inputs for solar-panel glass manufacturing, thereby lowering input costs in key clean-tech supply chains. Alongside these, power-sector spending continues to point toward grid and integration enablers, including efforts often discussed through programmes like the Green Energy Corridor.

Taken together, these measures signal a push to strengthen domestic supply chains and the backbone needed for the clean energy transition. They may lower input costs, support domestic value chains, and invest in infrastructure that must carry a higher share of clean power. Realising this ambition will require an increase in overall funding; the key question, then, is what form that support would take and whether it is suited to addressing the relevant bottlenecks.

A Technology Diffusion and Finance Framework

Our research on clean technology diffusion begins with the premise that financing barriers and the types of financial support required vary across stages of their diffusion. What hinders a technology early is often not what holds it back later. To study this, we draw on the innovation systems approach, which assumes that any technology needs a supporting ecosystem to diffuse. It focuses on the ecosystem of actors (firms, researchers, financiers, government) and the rules and infrastructure (standards, regulation, procurement, networks) that together determine whether a new technology can develop, prove itself, and scale. Using this approach, we then map the range of policy instruments (fiscal and non-fiscal, as well as financial and non-financial) that governments use to support diffusion. 

Existing literature commonly organises diffusion into five stages along an S-curve, from early research to market saturation. The innovation process typically begins with a Solution Search phase, when there are significant uncertainties about the technology’s future market potential. Private capital is hard to attract at this stage. Public support, therefore, tends to focus on early research and development – through grants and subsidies – to explore options and identify potential new solutions. Once viable options emerge, they proceed to the Proof of Concept stage, in which pilot projects are implemented to test feasibility in real-world conditions. If those efforts succeed, technologies enter the Early Adoption phase. At this stage, they have cleared major technical hurdles but are not yet commercially established. Policy support often focuses on enabling first-market entry and encouraging initial uptake. As deployment grows, System Integration becomes critical, a phase when the projects become attractive to institutional investors. The priority shifts to building enabling infrastructure and market frameworks so projects can scale reliably and attract larger pools of private capital. Public support typically shifts from broad deployment incentives to targeted de-risking and system enablers, as markets deepen. Finally, technologies enter Market Expansion, where adoption becomes widespread, and the innovation is embedded as a mainstream option. 

Figure 1 summarises this five-stage framework. We use it to interpret what types of support the budget’s priority areas are likely to require at their current stage of diffusion. Source: Authors’ analysis

This stage-based framing also helps contextualise this year’s budget signals on strategic technologies. CCUS, for example, appears to be at an early stage of the diffusion curve in India, as deployment remains limited and there are no commercial-scale dedicated CCUS projects. One of the main impediments to investment in CCUS projects is the absence of policy incentives and framework(s). That is why, in early-stage settings, support usually requires more than funding. It also needs clear frameworks that reduce uncertainty and enable first-of-a-kind projects. 

The proposed rare-earth corridors and the focus on critical minerals indicate an emphasis on building the front end of clean-tech supply chains. This entails strengthening the mining, processing, and manufacturing of key inputs that underpin batteries, solar panels, and other clean technologies. If these inputs are cheaper and more reliably available in India, downstream technologies can scale faster. 

Customs-duty relief for nuclear equipment also works mainly through costs. It can reduce the upfront price of key components. However, nuclear expansion is typically a slow process because projects take years and require strong delivery capacity and institutions. Duty cuts for lithium-ion cells and inputs for solar-panel glass support technologies and supply chains that are already scaling. Here, the constraints are different. The priority is to further reduce costs, scale manufacturing quickly, and ensure the power system can absorb higher volumes. This includes adequate transmission, reliable distribution utilities, and the flexibility needed to integrate more solar and storage.

Why Instrument Choice Matters as Much as the Budget Amount

This year’s budget announcements show which technologies and supply chains the government is prioritising. The harder question is how to design instruments that translate that priority into scale. Diffusion outcomes depend not only on the instrument chosen, but on how it is designed and applied. Weisbach also argues that, in the context of climate policy, many apparent differences between instruments come from design assumptions, and the gains from getting design right can outweigh the gains from debating instrument labels. Put simply, it is less important whether something is called a subsidy, a tax break, or a regulation, and more important what it actually does on the ground; who it targets, what conditions apply, how long it lasts, and how predictable it is.

For clean technology diffusion, this means that policy must start with diagnosis. It needs to identify the most limiting bottlenecks at a technology’s current stage and then choose instruments that directly address them. For instance, if the constraint is early-stage uncertainty, support that builds proof and capability matters more. If the constraint is bankability, the priority shifts to reducing risk and improving revenue certainty. If the constraint is integration, the focus shifts to system readiness and enabling infrastructure. When budgetary allocations are aligned with stage-specific barriers, they are more likely to translate into faster and more effective diffusion.

Conclusion

Budget 2026-27 sets a direction of travel towards strategic technologies, domestic supply chains, and integration capacity. The next step is policy design; therefore, it must ensure that the instruments are appropriate for the stage each technology is in, and at the right scale, to relax the constraint that is holding it back. Achieving this alignment at an early stage improves the chances of faster diffusion and more durable outcomes.

Endnotes

  1. On-budget support means government support that is explicitly recorded in the government’s Budget documents and authorised through Parliament. That means, it shows up as a line item of expenditure in official budget papers. ↩︎

Unpacking COP29’s NCQG: What Happened, Why, and What Now?

The much-anticipated New Collective Quantified Goal (NCQG) for climate finance took centre stage at COP29, the outcome of a three-year process to determine an update to the $100 billion that developed countries had committed to provide annually by 2020 in 2009. The final text set a goal of at least $300 billion per year by 2035, with developed countries taking the lead, from a wide array of public and private sources, and encouraging voluntary contributions from developing countries. This $300 billion goal is part of a broader stated ambition to scale up climate finance to $1.3 trillion per year by 2035 from all sources.

The outcome has drawn sharp criticism from developing countries – including India – which see it as insufficient to meet their climate finance needs and as shifting responsibility away from developed countries. Civil society groups and experts have widely echoed these sentiments, relying on the overused “COP-out” label.

Amid all the widespread criticism, this blog examines where the NCQG outcome falls short, explores whether developed countries have a defence, and looks ahead to how future COPs – and India specifically – can work to enhance climate finance and accountability.

Why the NCQG outcome is disappointing for developing countries

Developing countries have unanimously expressed disappointment with the NCQG outcome for three principal reasons.

It doesn’t take needs into account at all: The UNFCCC’s Standing Committee on Finance notes that the costed needs alone of just 98 developing countries amount to about $5.0–6.8 trillion by 2030, or on average $455–584 billion annually. Broader estimates indicate needs of about $1 trillion annually by 2030. In this context, the pledge of $300 billion – set as it is five years beyond these estimates – falls significantly short of the scale of support required for adequate climate action.

It also reflects a lack of ambition by developed countries when considering that finance flows will have to increase annually only by 7.6% between 2022 and 2035 to reach this amount, whereas they had increased by 9.2% per year between 2013 and 2022. Further, adjusting for global inflation between 2009 and 2024, the real increase of the quantum is only 1.86 times the $100 billion annual target for 2020.

With this, the urgent need for rapidly and comprehensively scaling up funding clearly remains unmet.

It offers no clarity on – or accountability from – funding sources: The phrasing of the broader goal in the decision text weakens accountability and leaves significant room for interpretation. For instance, it “Calls on all actors…to enable the scaling up of financing… from all public and private sources to at least USD 1.3 trillion per year.”

This framing is comparatively less stringent in tone, limits the expectations from concessional public finance (thereby risking over-reliance on private finance, which is often unaligned with developing countries’ priorities), and does not assign specific responsibilities to any particular groups, such as developed countries or MDBs. Even for the more concrete $300 billion target, developed countries are only tasked with “taking the lead,” while the text simultaneously encourages developing countries to “to make contributions…on a voluntary basis1,” which would appear to go against the developed country obligations outlined in Article 9 of the Paris Agreement. Lastly, there appears to be a voluntary agreement that the “alternative sources” that will count towards these goals will include all MDB climate finance to developing countries, rather than just the portion attributable to developed countries.

Put this way, the decision text presents a clear risk of shifting responsibility away from developed countries, undermining the principle of equity enshrined in the UNFCCC and the Paris Agreement.

It does not sufficiently prioritise adaptation: While the NCQG aims to balance the allocation of finance between mitigation and adaptation, it offers no clarity on how to achieve this balance. Least Developed Countries (LDCs) and Small Island Developing States (SIDS), already grappling with disproportionate climate impacts, are left with vague assurances rather than actionable pathways towards meeting their real and immediate adaptation needs. Some developing countries have also expressed unhappiness with the exclusion of loss and damage (L&D) as a category from the intended allocations of this quantum.

On these grounds – an inadequate quantum, limited accountability, and poor reflection of their priorities – developing countries have credible reasons to voice discontent. When we consider that developed countries only proposed a first concrete quantum on the penultimate day of negotiations, this does seem like a bad faith exercise that has once again kicked real action further down the road.

Do developed countries have a valid counterpoint?

A few factors – typically put forth by developed countries – may have contributed to limiting the NCQG quantum and determining its framing.

Developed countries are dealing with new and old pressures: Advanced economies are grappling with slowing growth, projected at 1.8% in 2025, well below the 2000–2019 average of 3.8%, which is exacerbated by rising inflation, declining investments, a shrinking labour force and ageing populations, and elevated debt levels2. Additionally, growing concerns about the socioeconomic consequences of climate policies have led to pushback from domestic interest groups, particularly in fossil fuel-dependent regions.

National security considerations may have also diverted resources from climate action. For instance, the Russia-Ukraine war has led to ramped-up funding for short-term energy security, reducing the focus on climate goals. Developed countries have also faced fiscal constraints due to Brexit, the Covid-19 pandemic, and illegal immigration, among other challenges.

These internal and external pressures mean that many developed countries may have – somewhat understandably – prioritised domestic challenges over international climate commitments. On the other hand, it is notable that 2023 U.S. federal spending alone was $6.3 trillion, while its international climate finance contributions were only $9.5 billion, less than 0.15% of this total. This illustrates that climate finance allocations remain extremely modest compared to these countries’ substantial spending abilities, with limited justification for their crowding out.

The US may exit the Paris Agreement: There is a clear likelihood of the United States, which is responsible for the largest share of historical emissions, of once again leaving the Paris Agreement under its incoming presidency. As a consequence, the European Union (EU) and other developed countries may end up having to shoulder a proportionately larger share of the climate action agenda. The possibility of US withdrawal will almost certainly have limited the quantum of the NCQG, and the EU’s ability to lead the delivery of even this modest quantum – as comparatively lower historical emitters and with their internal constraints – would be a laudable achievement that should go some way towards earning them global trust and credibility.

Present and future emissions trends cannot be ignored: Developed countries highlight the importance of also addressing present and future emissions. China is now by far the largest producer and consumer of coal, followed by India. Some experts note that the binary distinction between developed and developing countries is no longer helpful due to the diversity in incomes and emissions across countries, and that some large developing countries should also start becoming providers of climate finance. These calls are based on data that suggests that 42 percent of all greenhouse gas emissions since 1850 have been emitted in the last 30 years, and more than two-third of that has come from developing countries.

These arguments however sidestep the fact that the US is currently the largest oil producer the world has ever seen, that per capita emissions in developing countries continue to be very low, and that their large and rising absolute emissions reflect a continued failure of developed countries to provide meaningful climate finance thus far.

There is historical precedence to the framing of the NCQG: While the NCQG has been criticised for its loose framing, the Copenhagen Accord in which developed countries had committed to the 2020 $100 billion target had used very similar text: “…developed countries commit to a goal of mobilizing jointly $100 billion dollars a year by 2020…from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources.” Similarly, paragraph 3 of Article 9 of the Paris Agreement states that “developed country Parties should continue to take the lead in mobilizing climate finance from a wide variety of sources…” By these yardsticks, the framing of the NCQG cannot be considered to be watered down, although equally, it also doesn’t increase accountability above the historical floors and risks including pre-existing and/or marginally climate-relevant finance within developed country contributions.

Similarly, developed countries argue that calls to include allocations for loss and damage within the NCQG quantum go beyond the Paris Agreement, the objectives of which are limited to mitigation, adaptation, and realigning finance towards consistency with these.

What does this all mean?

The NCQG outcome reflects the divide between developed and developing country perspectives on climate finance. Developing countries’ justifiable disappointment stems from the glaring gap between the quantum and actual needs, the lack of accountability from developed countries, and insufficient attention to adaptation and loss and damage. Developed countries – grappling with domestic constraints – emphasise the need for shared responsibilities that reflect future realities, even as their constraints fail to justify the inadequacy of the goal. The precedents in historical COP outcomes present a weak defence; the NCQG text reflects the framing of previous decisions but risks diluting the quality and concessionality of finance.

Climate negotiations are political processes, in which developed countries aim to limit their liabilities, while developing countries have an incentive to overstate their needs, reach agreement, and then voice dissatisfaction with outcomes. The extent to which the NCQG quantum falls short of the true additional amounts that are required remains to be seen. But it seems as though the open-endedness that was essential to securing consensus for previous decisions such as the Paris Agreement has also provided a ‘get out of jail free’ card to developed countries in the NCQG.

In this context, the NCQG represents a compromise, yet again, for developing countries. Perhaps a foreseeable one, seeing how developed countries had struggled to deliver even their $100 billion promise. But progress in future negotiations will now require greater understanding of each country’s domestic challenges, and working around them to revisit and ratchet both the quantum and the accountability. This will need to happen rapidly, to ensure that multilateralism retains its trust and effectiveness in meaningfully addressing climate change.

What does it mean for India? As a climate leader and a voice of the global South, India should continue to push for greater collective ambition and responsibility, particularly from developed nations, through successive COPs. At the same time, given the inadequacy of current multilateral progress, it is in India’s interests to increasingly rely on domestic (or minilateral) finance arrangements and thereby increase resilience to future COP failures. This will require strengthening and reorienting its financial system, using a careful mix of complementary policies and regulations, and aligning it more closely with industrial policy. It is critical to constructively and speedily navigate the path beyond this disappointing outcome. Our climate and economic futures might hang in the balance.

Endnotes

  1. Notably, some large developing countries have already been significant providers of climate finance, and this clause in the decision text may allow for this climate finance to be formally counted ↩︎
  2. The U.S. faces challenges including a projected current account deficit of 2.5% of GDP and high inflation. The EU struggles with low GDP growth (0.8% in 2024), declining inflation, and labor market weaknesses, particularly in Germany, the UK, and France ↩︎