Tech Gaps, Policy Uncertainty Stalling India Inc's Decarbonisation Plans

India Inc is staring at a rabbit hole. A deep rabbit hole. A hole that is spouting words such as ‘decarbonisation’, ‘green hydrogen’, ‘fossil fuel’, ‘CBAM’...

Manufacturers—especially those in the MSME sector—and policymakers have to tread carefully as the transition to green energy gathers pace across the globe.

Take for instance, the European Union’s (EU’s) Carbon Border Adjustment Mechanism (CBAM) which is reshaping global trade. Effective from January 1, CBAM is a tax on carbon-intensive imports such as steel, cement and aluminium among other products at the border equivalent to the embedded carbon emission during production.

The steel sector illustrates the scale of the challenge. According to analytics firm S&P Global Commodities at Sea data, India exported about 6.9mn metric tonnes of steel products in 2024, with over 60% exports headed to Europe. This heavy dependence on EU markets poses a financial risk to Indian companies as Indian steel is predominantly produced through the blast-furnace route, which is a highly carbon-intensive production process.

Industrial decarbonisation, therefore, is no longer just a climate imperative for India but is also a competitiveness imperative. “In a world where major economies are imposing carbon-linked trade measures, there is little scope for reversal. ‘Dirty steel’, aluminium and other high-emission products will face growing resistance,” says Abhishek Saxena, former public policy expert at government think tank Niti Aayog.

However, shifting to cleaner technologies will not be plain sailing for these companies as it remains constrained due to various challenges. According to the Teri-Outlook Business survey among sustainability leaders, technology-readiness gaps, policy uncertainty, limited access to green finance and lack of green demand remain the biggest challenge for companies to decarbonise. This is most visible in hard-to-abate sectors like cement, steel and aluminium.

Tech That

For many Indian companies, technology gaps have emerged as one of the biggest roadblocks to decarbonisation, especially in hard-to-abate sectors. Technologies like green hydrogen is widely seen as critical to cutting industrial emissions but its impact depends on the cost and industrial readiness. At present, the economics remain the primary constraint.

While the cost of green hydrogen in India is declining and is already lower than in many other countries but this alone does not make it commercially viable for large-scale industrial use. In the steel sector, for instance, conventional production through the blast furnace remains significantly cheaper. Current cost assessments suggest that shifting to hydrogen-based steelmaking could raise production costs by nearly two and half times.

“Sectors such as steel and aluminium operate on thin margins with little capacity to absorb the added cost of decarbonisation,” says Agamoni Ghosh, managing editor, carbon pricing, Asia-Pacific, S&P Global Energy.

Yet technological innovation could begin to shift the economics. Scientists have recently developed a scalable next-generation device that produces green hydrogen using only solar energy, a major breakthrough that could bring costs closer to $1 per kg, a level widely seen as commercially transformative for industry.

India’s solar sector, meanwhile, offers a built-in advantage that remains underutilised. “Persistently low solar plant load factors of 22–27% risk becoming a structural weakness as much of the installed capacity remains underutilised. Producing green hydrogen during periods of surplus generation offers a low-cost outlet, allowing developers to monetise excess power by co-locating hydrogen facilities with solar plants instead of relying solely on grid demand,” says Saxena.

Apart from the energy consumed by these sectors, a significant share of industrial emission arises from chemical processes inherent to production itself and here carbon capture, utilisation and storage (CCUS) can play a very critical role.

However, CCUS involves an entire value chain, including capture, transport, utilisation and long-term storage. Each step comes with costs, risks and unresolved questions.

This is why commercial deployment has been slow, not just in India but globally.

“The challenge is that we still do not fully understand which technologies will scale faster and which will take longer. Therefore, our approach is not to rely on a single solution, but to identify a combination of technologies that can work together,” says Prabodha Acharya, group chief sustainability officer, JSW group, which has interests in steel and cement among others.

To increase the commercial deployment of CCUS, Union Finance Minister Nirmala Sitharaman in her recent Budget speech announced ₹20,000 crore outlay over the next five years through a dedicated scheme. This scheme will support CCUS initiatives to aid the decarbonisation goals of five industrial sectors of the economy—power, steel, cement, refineries and chemicals.

Policy Paralysis

Policy uncertainty is another major hurdle slowing corporate decarbonisation as companies struggle to plan long-term investment without clear and stable regulatory signals.

Consider the case of the steel sector where the government despite being one of the largest buyers, has not exerted sufficient regulatory pressure to reduce carbon intensity. While there have been some discussions around green procurement, the overall push remains weak.

A key challenge lies in the structure of India’s steel industry where 80% of India’s steel units are MSMEs where they rely on the direct reduced iron or sponge iron route, where carbon intensity can reach nearly 4.5–5 tonnes of carbon dioxide per tonne of steel.

“Most of these units do not have a defined transition plans for decarbonisation. Access to affordable finance is limited, making it difficult for them to adopt cleaner technologies even if they are available,” says Saxena.

If the government were to mandate green steel procurement or impose strict emissions regulations without transitional support, it would likely force many of these smaller players to shut down. The result would be further industry consolidation, benefitting large corporations.

Where’s the Money?

Budget constraints play a significant role in slowing progress toward net zero. Technologies such as CCUS, green hydrogen, electrification and fuel switching all require high upfront capital expenditure. Payback periods are long and uncertain, which does not align well with the investment cycles of most companies operating in a cost-sensitive market like India.

The government’s Economic Survey 2025–26 has also flagged a widening gap between global climate and sustainable development ambitions and the financing available to achieve them, estimating the shortfall at nearly $4trn. The mismatch is particularly acute for developing economies, even as international public finance remains limited and the global financial architecture continues to structurally favour developed nations.

One approach adopted in several countries to deal with budget constraints is the use of certification schemes. “Under such systems, companies that produce cleaner fuels or lower-carbon products receive tradable certificates, creating an additional revenue stream,” says Ghosh of S&P Global Energy.

Such incentives give companies confidence that investments in greener fuels will not only reduce emissions but also improve commercial viability.

The absence of a strong carbon-pricing signal is another major hurdle. In regions such as the European Union, an established carbon price directly influences capital-allocation decisions—companies assess whether decarbonisation investments make sense relative to the cost of carbon.

In India, while some companies use internal or shadow carbon prices, these are generally too low to materially influence investment decisions.

As a result, capital continues to flow toward core business expansion rather than large-scale decarbonisation projects.

Green Premium

Green industrial products are often associated with high initial costs due to the use of expensive low-carbon technologies for production and for price-sensitive sectors such as construction and manufacturing. As a result, demand lags behind supply, discouraging large-scale production.

“In the absence of a meaningful carbon price, there is no additional revenue stream to justify investment like CCUS. Even if funding is available, someone still has to pay for the technology, and currently, there is no willingness in the market to absorb that cost,” says Acharya of JSW group

A critical gap is the absence of universal standards and a legally binding national Green Public Procurement (GPP) framework to measure the effectiveness of green materials, says Acharya. This has led to manufacturers using their own benchmarks leading to inconsistencies.

A robust regulatory framework is essential. The government must set universal standards and introduce GPP mandates, leveraging its purchasing power to prioritise low-carbon materials in infrastructure projects. Large corporations can also commit to green procurement, signalling demand and credibility, say analysts.

Industrial decarbonisation in India is no longer a question of ambition but of execution. While technologies such as green hydrogen and carbon capture hold promise, their commercial viability remains constrained by weak policy signals, high capital costs and the absence of strong market incentives.

Bridging these gaps will determine whether India’s industries can transition in time to remain competitive in a low-carbon global economy as achieving net-zero targets is impossible without industrial decarbonisation. Industry accounts for roughly 25–30% of global emissions, and this share is expected to rise. If this sector is not addressed, global temperature targets of limiting warming to 1.5°C or even 2°C will almost certainly be breached.

At the ground level, the economic consequences are equally significant. India’s industrial sectors—such as iron and steel, aluminium and automobiles—are deeply export-oriented. As global markets decarbonise, trade barriers linked to emissions are becoming unavoidable.

All eyes are on how India Inc paces itself for the decarbonisation marathon.