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The 15th Finance Commission incorporated climate change considerations into fiscal transfers by:
- Reducing grants to States with high carbon emissions
- Including forest cover as a criterion for horizontal devolution to reward environmental conservation
- Mandating all States to adopt renewable energy targets
- Creating a separate climate fund outside the FC framework
Answer: Including forest cover as a criterion for horizontal devolution to reward environmental conservation
Climate change and fiscal transfers: (a) 15th Finance Commission: Included forest cover (10% weight) as criterion for horizontal devolution to reward States for environmental conservation, (b) Rationale: (i) Environmental public good: Forests provide carbon sequestration, biodiversity, water regulation benefits that extend beyond State boundaries, (ii) Opportunity cost: States with high forest cover forego development opportunities (mining, industry) to conserve environment; forest cover criterion compensates for this opportunity cost, (iii) Incentive alignment: Rewarding forest conservation encourages States to maintain, expand forest cover, contributing to national climate goals, (c) Applications: (i) Forest-rich States: States like Chhattisgarh, Odisha, Northeastern States benefit from forest cover criterion, receiving higher devolution for conservation efforts, (ii) Conservation incentives: Criterion encourages States to invest in forest protection, afforestation, sustainable forest management, (iii) Climate co-benefits: Forest conservation contributes to climate mitigation (carbon sinks), adaptation (water security, disaster resilience), (d) Challenges: (i) Measurement: Ensuring accurate, updated forest cover data for criterion application, (ii) Equity: Balancing forest conservation rewards with development needs of forest-dependent communities, (iii) Coordination: Ensuring FC grants complement other climate finance mechanisms (National Adaptation Fund, Green Climate Fund), (e) Illustrates adaptive fiscal federalism: FC incorporates environmental externalities into fiscal transfers; forest cover criterion aligns fiscal incentives with climate goals, rewarding States for providing environmental public goods.