The Reserve Bank of India (RBI)’s annual report every year draws considerable attention. The annual transfer of surplus to the Union of India is a much-awaited figure. The curiosity, however, is much wider as the annual report also gives a glimpse into RBI’s thinking on the economy, its currency operations, banking frauds and other issues of interest for banking and finance. 

However, rarely has the public interest gravitated towards the carbon footprint or the environmental impact of RBI’s monetary policy and currency operations. Rarely has it been noticed that RBI has one of the largest physical currency operations in the world which has environmental impact. Its large foreign exchange reserves, invested in government security of major currencies, results in substantial financed emissions. 

Climate-related disclosures for central banks have not become widespread and only a few central banks such as the Bank of England, the Dutch Central Bank and Banque de France have taken the initiative to report the climate burden/ risk inherent in their operations. However, since the establishment of the network for greening the financial system (NGFS) in 2017 and RBI joining NGFS in 2021, disclosures in this direction are expected to increase in a more systematic fashion.

How do we gauge the environmental burden of RBI? This is not an easy question to answer. A part of the challenge is that RBI’s annual report is not geared to answer such questions. Secondly, some of the data required to arrive at an answer is classified. For instance, the currency composition of RBI’s foreign exchange reserves is not available. The chemical composition of banknotes is also a secret to prevent counterfeiting.

The generally accepted framework such the greenhouse gas protocol (GHGP) is applicable to corporates. However, RBI as a central bank, has a nuanced position. The owner of the bank, the Union of India, becomes the principal debtor which makes RBI different from an ordinary company. Then, if we take the proposition of ‘independence of the central bank’ in the realm of environmental economics, there is a case for the separation of the RBI from its owner. 

If we adopt the GHGP lens for RBI, then its emission can be viewed in three ways, namely: Scope-1 emissions which are direct emissions at the production facility, Scope-2 emissions which are indirect emissions on account of the purchase of electricity and Scope 3 emissions which are indirect emissions on account of other purchases.

RBI annual reports since 2018 have been making a fair amount of disclosures on efforts to contain Scope-1 and Scope-2 emissions. A total of 11 office buildings and 24 residential buildings till December 2022 have been awarded a green rating from IGBC, thereby reducing its Scope-1 emission. Keeping June 2018 as the base, the RBI annual report discloses that the aggregate energy sourced from renewables was at 6.6% on December 2022, increasing from 3.34% in 2020.  

Although it is difficult to calculate the exact CO2 emissions of RBI under Scope-1 and Scope-2 heads, the disclosures do indicate consistent reduction over the years.

Now coming to the Scope-3 emissions which include the financed emissions on account of the RBI investing foreign exchange (FX) reserves in sovereign securities overseas. Not much is known about the strategic asset allocation of FX reserves, but RBI discloses in the report on the management of foreign exchange reserves that “[FX] assets are maintained as a multi-currency portfolio comprising major currencies, such as US dollar, Euro, Pound sterling, Japanese yen, etc. and are valued in terms of US dollars.”

To work around this, India’s external debt report mentions that around 50%-55% of the external debt is denominated in US dollars, 5% in yen and 2.8% in euro. Further, from 2014 data on trade invoicing, we know that 80% of imports were invoiced in dollars. Assuming RBI will minimise ALM (asset liability mismatch) and basis risk in its operation, for 2018, the composition of FX reserves works out as: 62% in US dollar, 5% in yen and 3.5% in euro. The balance 30% is equally divided between British pound, Australian dollar (AUD) and Canadian dollar (CAD) given that FCNR (foreign currency non-resident) deposits receive funds in these currencies as well. 

Using these ratios, the financed emissions of RBI as on June 2018 work out at 334.5 Mt CO2e per one-million-dollar output measured at constant 2017 PPP prices on account of its exposure to respective economies. 

Lastly, coming to the liability side, ‘notes issued’ constitutes the largest share. Estimating the environmental burden of this head is the most difficult as the production aspect of RBI’s currency operation is classified. Accounting for emissions from the minting of coins is even more challenging. 

However, there is one interesting point of this enquiry. After demonetisation, RBI changed the property of its notes substantially because national security was one of the grounds justifying demonetisation. Literature on the subject indicates that the manufacture of the notes accounts for 82% of total greenhouse gas emissions which implies there was a bulge in emissions on account of printing notes around 2016.  

As of June 2018, there were 102,395mn (million) post-demonetisation currency pieces in circulation. Following the work of Pagone, Hart and Salonitis (Carbon Footprint Comparison of Bitcoin and Conventional Currencies in a Life Cycle Analysis Perspective), an average banknote is 0.956gm in weight and consists of 0.815gm of cotton, 0.082gm of ink, 0.010gm of thread and 0.049gm of foil. Taking this as a working base for Indian currency, this translates into 97,886 tonnes of physical currency printed. 

Of the four constituents, we are sure of cotton which constitutes 85% of raw material. From web we know 1Mt cotton emits 4.2kg CO2e emissions. Thus, the cumulative emissions on account of printing of new currency post demonetisation is roughly 3.5 lakh kg of CO2, with 88% occurring in 2016, 10% in 2017 and the remainder in 2018. 

In conclusion, what we have traced here is the environmental burden of RBI by taking June 2018 as the base. The RBI has taken considerable efforts in reducing its Scope-1 and Scope-2 emissions. However, not much is known about its Scope-3 emissions and emissions on account of its currency operations, which is what this work explores using NGFS backward-looking methodology. 

If it does not require amendments in the RBI Act, the bank may start reporting its green initiatives using the more acceptable language of GHGP in the future. In any case, it looks like that is the future, going forward.