By Dr Samar Verma*
Why Domestic Climate Finance is also an Export Strategy
Trade has become the transmission belt through which climate policy increasingly affects growth, often faster than it shapes emissions outcomes. In today’s global economy, climate policy increasingly reaches firms through market-access rules, carbon-linked compliance, and supply-chain standards, so domestic climate finance must be understood not only as a growth and resilience tool but also as an export competitiveness strategy.
The Economic Survey of India 2025–26 implicitly supports this pivot by framing climate action as a development and competitiveness project, and by emphasising the centrality of sub-national measures and domestic finance capacity (including the evidence that adaptation- and resilience-related domestic spending rose from 3.7 per cent of Gross Domestic Product in the Financial Year 2015–16 to 5.6 per cent in the Financial Year 2021–22). The Union Budget 2026–27, presented two days ago, reinforces the same economic logic from the other side. It speaks the language of capital expenditure, supply chains, critical minerals, customs rationalisation, and financial-market deepening — exactly the building blocks of an export-ready clean growth pathway.
Also read: Economic Survey Recasts Climate Action as a Growth Strategy
Trade Is Becoming Climate-Conditioned
The export challenge is no longer just price and quality. It is increasingly measurable — the ability to document embedded emissions, trace origin, and demonstrate compliance. The World Trade Organization (WTO) has been tracking the proliferation of climate-related trade measures, many of which operate through regulations and standards rather than classic tariff policy.
For India, this matters because large destination markets are big enough to move firm behaviour. The European Union is India’s largest goods trading partner, with bilateral goods trade around €120 billion in 2024 (about 11.5 per cent of India’s total trade). When such a market starts embedding climate-linked rules, exporters face a strategic choice: pay compliance costs reactively at the border, or invest upfront to reduce carbon intensity and compliance friction. Domestic climate finance is how a country makes that second choice feasible at scale.
CBAM Turns Carbon Intensity into a Price Signal
The most direct trade mechanism is the European Union’s Carbon Border Adjustment Mechanism (CBAM). The European Commission is explicit. CBAM’s transitional phase began on 1 October 2023 (reporting), and the definitive regime began on January 1, 2026 (financial obligation via certificates). The covered sectors — cement, iron and steel, aluminium, fertilisers, electricity, hydrogen — are “upstream” inputs embedded in a wide range of traded goods. Importers must be authorised, report annually, and purchase CBAM certificates for embedded emissions. By 2034, the CBAM will be fully phased in, matching the complete phase-out of free allowances for European Union industries under the Emissions Trading System (ETS), whereas the scope of products covered may expand to include more sectors that are part of the ETS by 2030.
This is where domestic climate finance becomes an export strategy in the strict economic sense. It can lower the unit cost of market access. Cleaner production reduces embedded emissions. Lower embedded emissions reduce CBAM exposure (or reduce the risk of being treated conservatively through default values or reporting constraints). The point is not political; it is commercial.
And because carbon pricing in the European Union has been materially high and expected to remain so, the signal is not trivial. For instance, Reuters has reported analyst forecasts placing average European Union carbon prices around €92.65 per tonne in 2026 and €107.29 per tonne in 2027 (forecasts vary, but they capture the market’s expectation of non-negligible carbon cost).
MRV Capacity as a New Export Requirement
A subtle but decisive issue is that reporting and verification are not optional frills. CBAM compliance hinges not just on being clean, but on being able to prove it. The European Commission has issued detailed guidance for the transitional phase, and the direction is towards tighter methodologies and reduced reliance on rough estimation over time. This creates a new kind of competitiveness gap. Firms with robust Measurement, Reporting and Verification (MRV) systems can demonstrate lower embedded emissions and avoid punitive defaults, whereas firms without MRV face a higher compliance burden, buyer distrust, or price discounts.
Therefore, domestic climate finance must fund more than capital expenditure. It must finance the enabling infrastructure of export credibility: digital MRV tools, accredited verifiers, testing and certification capacity, traceability systems, and interoperable data standards — especially for supply chains dominated by Micro, Small and Medium Enterprises (MSMEs).
The Survey’s climate finance section recognises this broader ecosystem requirement. It notes strengthened disclosure and confidence-building frameworks such as the Securities and Exchange Board of India (SEBI)’s Business Responsibility and Sustainability Reporting (BRSR) norms and green bond guidelines, the International Financial Services Centres Authority (IFSCA)’s sustainability-linked lending guidance, and the Reserve Bank of India (RBI)’s green deposit framework aimed at channelising institutional and household savings with guardrails against greenwashing. That is not merely “good environmental, social and governance hygiene”. It is the informational plumbing that allows exporters to transact in a standards-heavy trade regime.
Economic Survey and Budget Signal a Policy Pivot
The Union Budget 2026–27 is notable for placing trade disruption and supply-chain fragility at the centre of the macro narrative — explicitly referencing rising demands on water, energy and critical minerals, and the need to export more while attracting stable long-term investment.
More importantly, it announces specific instruments that are highly relevant to an export-oriented clean transition, including customs duty reductions and exemptions to lower clean-technology input costs (such as exemptions for monazite, sodium antimonate used in solar glass, lithium-ion cell capital goods for battery energy storage, and processing capital goods for critical minerals).
It also introduces a municipal bond incentive of one hundred crore rupees for a single issuance above one thousand crore rupees, while continuing support under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for smaller issuances — crucial for financing city-level infrastructure that underpins industrial competitiveness, including logistics, water, waste, transit and resilience.
The Budget further announces measures to improve corporate bond market liquidity through a market-making framework, access to funds and derivatives on corporate bond indices, and total return swaps on corporate bonds — steps aimed at deepening long-duration domestic finance.
For Carbon Capture, Utilisation and Storage (CCUS), the Budget provides an outlay of twenty thousand crore rupees over five years to raise readiness across hard-to-abate sectors such as power, steel, cement, refineries and chemicals that are precisely trade-exposed under carbon-linked measures.
Public capital expenditure is proposed at twelve point two lakh crore rupees, while pursuing fiscal consolidation, with the fiscal deficit estimated at 4.3 per cent of Gross Domestic Product in the Budget Estimates for Financial Year 2026–27.
Taken together, this is a credible export-plus-transition policy package: reduce input costs, build industrial capability, and deepen domestic finance so that compliance does not become a hidden tax on exports.
Energy Security and Sub-National Delivery
A complementary trade channel runs through energy security and sub-national delivery. When domestic climate finance accelerates renewables, storage, grid upgrades and efficiency, it reduces exposure to imported fossil-fuel volatility — lowering input-cost spikes and exchange-rate stress that ultimately show up in exporters’ unit costs and delivery reliability.
Equally, many trade frictions now arise below the border: state and city systems that govern power quality, water, waste, logistics, industrial clustering and land-use compliance. Financing robust sub-national pipelines — standardised projects with credible procurement and MRV — helps firms meet tightening market expectations on traceability and legality, including rising scrutiny of land-use change and deforestation risk in supply chains such as timber, rubber, leather and agro-commodities. In short, domestic finance that hardens local infrastructure and governance is not only climate policy; it is a competitiveness hedge against the new generation of non-tariff barriers.
Bond Markets and Municipal Finance as Trade Enablers
The Economic Survey is explicit that deep and liquid bond markets are crucial for financing climate infrastructure with long repayment horizons and large upfront capital needs. It also highlights that bond markets can help local bodies raise local-currency finance for climate-aligned functions such as water supply, waste management and green energy.
The Survey notes municipal green bond issuances by Indore, Ghaziabad, Ahmedabad and Vadodara, and estimates that municipal green bonds could unlock between 2.5 and 6.9 billion United States dollars for local bodies over the next five to ten years.
Why do these “finance” details belong in a trade article? Because cleaner export production often requires upgrades in shared systems — power quality, storage, water, logistics and urban services. Those upgrades are financed domestically, frequently at sub-national levels, and their financing cost ultimately appears in export unit costs.
Regulation and Catalytic Capital for Competitiveness
Even a well-designed trade response fails if firms cannot access finance in time and at workable prices. The Economic Survey notes that challenges persist: high cost of capital for climate projects, complexity in accessing some forms of finance, and underdeveloped risk-mitigation mechanisms — especially for emerging technologies and adaptation.
This is where regulation and catalytic capital play export-relevant roles. Regulation reduces buyer and lender uncertainty by improving disclosure quality, comparability and trust. This directly lowers risk premia, which lowers the cost of finance for exporters’ transition capital expenditure. Catalytic capital — philanthropic or public — is most powerful when used to fund MRV infrastructure, project preparation, aggregation platforms and targeted risk-sharing so that commercial finance can scale.
In trade terms, this is the difference between sporadic compliance and sustained market access. Domestic climate finance lowers the full cost of exporting.
Why Climate Finance Is Also Export Infrastructure
So, why is domestic climate finance also an export strategy? Because trade is increasingly governed by climate-linked conditions, and domestic finance is the instrument that enables firms and supply chains to decarbonise, measure and verify, and comply at scale — without losing price competitiveness.
The Economic Survey of India 2025–26 provides the intellectual framework by treating climate action as economic stability, resilience and development realism, with an emphasis on domestic mobilisation and sub-national execution. The Budget’s measures make it operational — through bond-market deepening, municipal finance incentives, strategic customs rationalisation for the energy transition, and targeted industrial decarbonisation support.
A country that finances clean capability at home is not merely “going green”. It is underwriting its exporters’ future licence to operate in the markets that matter.
(Writer’s note: Following my article published on this platform on January 31, 2026, titled “Economic Survey Recasts Climate Action as a Growth Strategy”, I received a broad set of comments on the linkage between climate finance and trade from fellow trade economists. As the earlier argument treated climate finance as macroeconomics- risk, pipelines, and domestic resource mobilisation- I write this follow-up as a separate piece because the trade linkage is now too consequential to sit as a footnote.)
*Samar Verma, PhD, is a senior economist, public policy professional and an institution-builder, with 28 years of experience in economic policy research, international development, grant management, and philanthropic leadership. Views are personal.
