In recent years, India has been a leading participant in global efforts to improve forest cover and arrest climate change. These initiatives have also contributed to building resilience of communities and ecosystems. Conservation of standing forests and increasing forest cover density helps lock carbon underground contributing to mitigation of global warming.
Forest resources and their conservation directly impact the revenue capacities and expenditure needs of the states. However, the opportunity costs of conservation may be large, and in some cases prohibitive. That’s where fiscal federalism comes in. The Finance Commission (FC), responsible for fiscal federalism in the country, has in the past provided incentives to states to maintain and improve their forest cover.
The 12th FC (2005-10) dedicated Rs 1,000 crore for forest conservation across states; the 13th FC (2010-15) enhanced this allocation to Rs 5,000 crore. The 14th FC (2015 to 2020) considered several recommendations of a study conducted by the authors of this article and replaced the grants with a more prominent placement for the forestry sector — it dedicated 7.5 per cent of the divisible central tax pool for ecology and forests. The allocation was based on the forest cover in each state. The 15th FC (2021–22 to 2025–26) extended this share to 10 per cent. Having mobilised and distributed over Rs 4.5 lakh crore to states against not only their forest cover but also forest density, the 15th FC effectively became the largest payment for ecosystem services (PES) systems in the world. The Commission also gave grants to combat air pollution.
In November last year, the government appointed the 16th FC to discuss tax distribution principles for 2026-31. This comes at a critical time. India’s Paris Agreement commitment necessitates the reduction of GHG emissions by 33-35 per cent and building an additional carbon sink of 2.5 to 3 billion tonnes of CO2 by 2030. A National Carbon Market and a National Green Credit Market are also on the government’s anvil. The 16th FC can be pivotal in creating a basis for these market instruments to succeed.
It can do so in the following manner. First, by making climate vulnerability and emission intensity of states a key parameter of the tax devolution formula, the Commission can nudge action towards achieving India’s NDCs under the Paris Pact. Much will depend will how the panel can evolve a formula to ensure
incentive-based performance.
Second, the FC could look at the possibility of performance-based grants for different sectors: Sector-specific grants for key actions are critical towards achieving the objectives of India’s NDCs and SDG goals. Emissions reduction requires the decarbonisation of the energy and transport sectors, sustainable land and forest management, as well as nudging people to make lifestyle changes. Given the severity of the pollution challenge, clean energy should be amongst the FC’s priorities.
Innovations to tackle the seemingly intractable problem of crop burning will require funds. So will mangrove restoration, a key necessity given the weather vagary-induced floods in recent times. At the same time, increasing dry spells have led to forest fires in several states. Such incidences are not part of the forest’s regenerative cycle but a result of changing climate patterns. The FC has to find ways to become a part of the solution to this ecological challenge.
There is no dearth of studies that show the exact climate vulnerability of the different regions in India. Moreover, policymakers are equipped with pollution inventories at different levels. Remote sensing data helps assess the degradation of ecosystems and understand forest fires. The experts at 16th FC can therefore turn to science to ascertain both the vulnerability of states and how they are doing to mitigate them. This can help them design a performance-based system for fund apportioning.
The Commission needs to metamorphose from a conventional fiscal arbitrator to an orchestrator of India’s climate readiness. The country requires a fiscal blueprint that harmonises economic growth with environmental imperatives. The 16th FC is the best-placed institutional mechanism to fulfil this critical need.
Verma is Senior Economic Advisor and Mehra is Chief Executive Officer, Iora Ecological Solutions, New Delhi. The authors led the study to recommend environmental formula for the 14th and 15th Finance Commissions. Views are personal
