Context

• As India is set to host G20 summit on September 9 and 10, the subject of climate change and its finance is going to be areas of major discussion.
• The present commitments made by the developed world, climate financing mechanism in particular, are insufficient to counter climate change.

Climate Finance

• Climate finance refers to local, national, or transnational financing.
• The UNFCCC, the Kyoto Protocol and the Paris Agreement call for financial assistance from Parties with more financial resources to those that are less endowed and more vulnerable.
• This recognises that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.
• Climate finance is needed for mitigation, because large-scale investments are required to significantly reduce emissions.
• Climate finance is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.

Issues with the Current Mechanism of Climate Financing

• The Figure of $100 Billion is Insufficient Amount
  • At COP15 in 2009 (Copenhagen, Denmark), developed countries committed to a collective goal of mobilising USD 100 billion per year by 2020 to support climate action in developing countries.
  • The figure of $100 billion for projects in developing nations, which was arrived at about 13-14 years ago had no basis and is devoid of any logic.
  • When it was estimated, at that time too, it was too small as compared to the need. For the past 10 years, there has been too much debate on this figure.
  • Moreover, the developing world has been complaining that this meagre amount of $100 billion per year is not forthcoming from the developed world.
  • The need for climate finance today is estimated to be around $4.35 trillion in order to meet the Paris Agreement targets.
  • What is being actually spent is about one-seventh of this amount. 
• Inclusion of Commercial Loans as Grants by the Developed World
  • The developed world (OECD) has been trying to prove that close to $80 billion was provided to the developing world for climate finance in 2020.
  • On the other hand, the actual transfer of resources would be in the range of $19-22 billion only.
  • While stating that they are providing close to $80 billion per year, the developed world is including the normal commercial debt for climate-related activities in its calculations.
  • It shows that the developed world is evading its responsibility because $100 billion is supposed to be in the form of concessional finance or grants only.
• Difficulty in Financing Adaptation Projects as Compared to Mitigation Projects
  • There are two main components of climate finance — mitigation and adaptation.
  • Most of the money that is flowing into climate finance is actually for mitigation (93 per cent) and it is not difficult to see why.
  • Mitigation projects usually have a revenue stream and are thus considered to be bankable.
  • So financial institutions have no problem in extending loans on pure market terms and conditions.
  • On the other hand, adaptation projects have high upfront costs, have a long gestation period and no defined income stream.
  • Therefore, they are considered risky by banks and other financial institutions.
• Very Little Progress on Delivery Towards Providing Grants
  • The resolve to provide $100 billion per year is repeated in every meeting of the Conference of Parties (CoP), has seen little movement on the ground.
  • In the last meeting of the CoP (CoP27 at Sharm El-Sheikh, Egypt) it was agreed that a loss and damage fund would be set up. But, the quantum of this fund and other details would be finalised subsequently.
  • This fund is expected to investigate what must be done immediately to take care of rising sea levels, desertification, etc.
  • If the past experience of concessional finance is any indication, nothing is likely to come from this proposed fund soon.
  • Moreover, for countries like India, it is unclear whether they would be in the category of receiving assistance or offering assistance.

Steps Taken Towards Meeting the Climate Finance Goals

• New Global Financing Pact 2023
  • The French President convened a summit in June 2023 to provide finance for tackling climate change (and poverty alleviation) in the Global South.
  • The Summit announced the unlocking of an additional USD 200 billion lending capacity for emerging economies.
  • The Summit indicated that the long-awaited USD 100 billion climate finance goal would be achieved this year.
• Introduction of Disaster Clauses: The World Bank introduced disaster clauses to suspend debt payments during extreme weather events.
• Investment in Special Drawing Rights (SDRs): The IMF announced the allocation of USD 100 billion in SDRs for vulnerable countries, although some SDRs still require approval from the US Congress. 

Way Forward for India and Other Developing Countries Amidst Lack of Commitment from Developed Nations

• Mobilisation of Resources for Climate Finance
  • It is now time for countries, especially those like India, to look within and mobilise resources for climate finance.
  • It would require different institutions to come together and complement each other.
  • The financial institutions will have to fund technologies that are commercially mature, like wind and solar.
• Invest in Futuristic Technology
  • The governments will have to step in for technologies that are not yet ripe for commercial ventures like green hydrogen where direct financial support needs to be given for the installation of electrolysers.
  • The cost of electrolysers today is prohibitive and only large-scale orders can bring down costs through economies of scale.
• Engage Private Sector for Adaptation Projects
  • As far as adaptation measures are concerned, the private sector has to be roped in. But this will require government intervention.
  • Worldwide, the major chunk of adaptation finance comes from multilateral development banks in the form of loans. Private sector participation in adaptation projects is less than 2 per cent.
  • The reason is that the private sector views investments in adaptation projects as risky because there are not enough incentives available for the private sector to get involved with adaptation projects.
  • In case the government co-funds adaptation projects with the private sector, it will help in risk mitigation of such projects.
  • But the government will need additional resources. These can possibly be raised through the imposition of carbon taxes, issue of green bonds and catastrophe (CAT) bonds etc.

Conclusion

• For climate finance, countries will have to mostly look within, since the developed world does not seem to be fully committed in providing the needed assistance.
• For countries like India, this is especially important because they are unlikely to be eligible for concessional financing.