Financing Transitional Activities in the Iron and Steel Sector

The document argues that traditional green finance is insufficient for the Indian iron and steel sector because many necessary transitional technologies are not yet 'green' enough or are economically unviable. It identifies four core enablers for a transition finance (TF) market: sectoral roadmaps, climate finance taxonomies, credible corporate transition plans, and specialized TF instruments. To address high capex and cash flow constraints, the authors propose the Partial Deep Discount Carbon STRIPS (PDDCS) bond, which offers long-term debt (25-30 years) and allows investors to receive coupons in either cash or carbon credits generated by the project. The brief also suggests a flexible version (PDDB+C) to align with current Indian Carbon Credit Trading Scheme (CCTS) regulations, which currently limit carbon trading to registered entities.

• The Indian iron and steel sector is a major emitter, accounting for over 10% of the country's total greenhouse gas emissions, with an average emission intensity of 2.54 tCO2 per tonne of steel, which exceeds the global average of 1.91.
• Planned capacity additions in India's steel sector are heavily reliant on the emission-intensive Blast Furnace-Basic Oxygen Furnace (BF-BOF) route, with 66% of new capacity expected from this route, potentially doubling annual emissions from 260 MtCO2 in 2023 to 560 MtCO2 by 2030.
• Traditional green finance instruments, such as green bonds, are inadequate for hard-to-abate sectors because they require projects to be environmentally sustainable and deliver zero or near-zero emissions from the start, whereas transitional activities are not yet fully green.
• The development of a transition finance market in India requires four core enablers: sectoral and technology roadmaps, a climate finance taxonomy, credible corporate transition plans with assessment frameworks, and specific transition finance instruments.
• The proposed Partial Deep Discount Carbon STRIPS (PDDCS) bond is designed for 25-30 year tenors to match the long life cycles of steel plants, utilizing a partial deep discount structure to reduce upfront costs and offering coupons in either cash or carbon credits.
• To mitigate carbon price volatility for PDDCS investors, the document proposes a price-support mechanism involving an 'emission offset buyer of last resort' who guarantees the purchase of a minimum number of carbon credits at a mutually agreed price.
• Due to current Indian Carbon Credit Trading Scheme (CCTS) restrictions that limit carbon permit trading to registered entities, a flexible 'Partial Deep Discount Bond + Carbon (PDDB+C)' version is proposed where carbon revenue is used to fund cash coupons for private investors.
• Stakeholder consultations revealed that the uptake of novel instruments like PDDCS is hindered by a lack of secondary market liquidity, bank restrictions on investing in deep-discount bonds without sinking funds, and strict credit rating requirements (often AA or higher) for institutional investors.

APA

Khurana, S., Habib, T., & Farhan, Z. (2025). Financing Transitional Activities in the Iron and Steel Sector. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2025/12/Financing-Transitional-Activities_final.pdf

Chicago

Khurana, Saarthak, Tariq Habib, and Zeya Farhan. Financing Transitional Activities in the Iron and Steel Sector. Climate Policy Initiative, 2025. https://www.climatepolicyinitiative.org/wp-content/uploads/2025/12/Financing-Transitional-Activities_final.pdf.

Wikipedia

{{cite report |last1=Khurana |first1=Saarthak |last2=Habib |first2=Tariq |last3=Farhan |first3=Zeya |title=Financing Transitional Activities in the Iron and Steel Sector |publisher=Climate Policy Initiative |date=December 2025 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2025/12/Financing-Transitional-Activities_final.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{khurana2025financing, author = {Khurana, Saarthak and Habib, Tariq and Farhan, Zeya}, title = {{Financing Transitional Activities in the Iron and Steel Sector}}, institution = {Climate Policy Initiative}, year = {2025}, month = dec, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2025/12/Financing-Transitional-Activities_final.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }