India’s pledge to achieve net zero by 2070 underscores the urgent need for economic transformation. Scaling up next-generation net-zero solutions is essential to attaining this goal. But often, such technology can run into an early-stage funding wall. To help promising new climate technologies overcome business and policy hurdles, a paradigm shift in the government’s role is crucial. By going beyond policymaking and providing subsidies to act as a strategic, entrepreneurial investor, the government can serve as an enabler.

History is rife with cases where proactive state support catalysed path-breaking innovations/discoveries — be it pioneering sea voyages in the 1600s or the moonshot mission, marking the arrival of the space age. Recent examples include state-funded research and early-stage financial support for information and communication technology, and renewable energy. Although state support for these sectors was limited, the high impact it had in pushing the frontiers of human achievements cannot be overstated. Such policies, often a characteristic of an “entrepreneurial state”, entail proactive identification and investments in relatively high-risk, high-reward technological areas, usually before the private sector is willing or able to.

A significant challenge lies in advancing nascent climate technologies from laboratory-proven potential to commercial viability at scale. Private finance typically chases low-risk business opportunities with clearer pathways to profitability in the short- to medium-term. They are discouraged by the inherent technological and business uncertainties of yet-to-be-proven innovations.

This void can be filled through strategic public capital. Beyond traditional instruments like grants for basic research, public investments can be structured to exhibit patient, risk-tolerant capital. By cushioning initial high risks, such investments not only provide a lifeline but also represent confidence, thereby catalysing or ‘crowding in’ private sector finance as technologies mature.

Strategic risk allocation

Concerns over taxpayer money being channelled into risky ventures often dominate the discussion on state investment. In the US, Solyndra, a solar company that went bankrupt despite state-backed guarantees, remains a case in point. However, such examples ignore the characteristics of innovation finance. In such ventures, failures are a feature, not an anomaly. They are an outcome of the larger diversification strategy. The same US Department of Energy programme provided a $465 million loan to Tesla at a critical juncture. This eventually led to the electric vehicle revolution.

Thus, prudent risk management through diversification, instead of zero exposure to risk, is the way to go. A portfolio-based strategy accommodates investments across the spectrum of promising climate technologies and start-ups. This approach opens doors to potentially high returns while cushioning the impact of any single failure. Such returns can be further ploughed back to future-proofing our planet, creating a virtuous innovation cycle.

Such a model is relevant for countries like India, as current venture capital flows into Indian climate technology while growing, which remains insufficient compared to the scale of the transition challenge.

To invest in climate technology, one needs to effectively combine public resources with private capital. Diverse models are suited to different growth stages and risk profiles:

Strategic grants and subsidies can be key in driving innovation, especially in early-stage research, feasibility studies and prototyping.

Public equity capital provides direct investments as patient, risk-tolerant capital, creating breathing space for companies to achieve development milestones.

It signals large-scale value-creation potential for public and private interests.

Targeted risk mitigation entails providing state-backed insurance or guarantees designed to mitigate specific risks, such as technological failure in novel systems.

Creating a state-supported or co-managed venture fund focusing exclusively on climate technologies has shown promising outcomes in Finland, Estonia and New Zealand. It amalgamates expert portfolio management with tailored financing solutions for start-ups and scale-ups. Initiatives like “Make in India” can also benefit from such funding avenues.

Jena is a Sustainable Finance Specialist at Institute for Energy Economics and Financial Analysis (IEEFA), and Thakur is an alumnus of IIT Bombay and IIM Ahmedabad

Published on May 8, 2025