Climate Finance 1

Climate Finance

• 07 Dec 2018
• 16 min read

Last Updated: August 2022

Why in News?

• Recently, the UNFCCC COP26 President, Alok Sharma, visited India to discuss India’s implementation of its COP 26 commitments.

  • He also stated that a mechanism is being put in place to achieve the target of climate financing USD 100 billion by 2023.

What is Climate Finance?

• It refers to local, national, or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.
  • It seeks to support mitigation and adaptation actions that will address climate change.
• The UNFCCC, Kyoto Protocol, and the Paris Agreement call for financial assistance from Parties with more financial resources (Developed Countries) to those that are less endowed and more vulnerable (Developing Countries).
  • This is in accordance with the principle of “Common but Differentiated Responsibility and Respective Capabilities” (CBDR).
• In COP26, new financial pledges to support developing countries in achieving the global goal for adapting to the effects of climate change were made.
  • New rules for the international carbon trading mechanisms agreed at COP26 will support adaptation funding.

What is the USD 100 Billion Target and why does it matter?

• In 2009, at the UNFCCC COP15 (held in Copenhagen),
  • The developed country parties, to achieve meaningful mitigation actions and transparency on implementation, jointly set a target of USD 100 billion a year by 2020 to address the needs of developing countries.
• The climate finance goal was then formally recognized by the UNFCCC Conference of the Parties at COP16 in Cancun.
  • At COP21 in Paris, Parties extended the $100 billion goals through 2025.
• After COP26 there was a consensus that developed nations will double their collective provision of adaptation finance from 2019 levels by 2025, in order to achieve this balance between adaptation and mitigation.

What is the Need for Climate Finance?

• The Scale of Needed Investment Globally:

  • According to the World Economic Forum 2022, to avoid the worst fallout from the climate crisis, more funding must be dedicated to helping people adapt to climate change.

    • The world needs to invest an estimated $5.7 trillion annually in green infrastructure and other adaptation and mitigation efforts. This will require a generation-defining level of creativity and commitment, not just from governments, but also from the private sector.

  • Mitigation – Large-scale investments are required to significantly reduce emissions.
  • Adaptation – Significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.
  • It is also critical to support developing countries to build resilience to worsening climate impacts and to catalyzing private sector climate investment.
  • Climate Finance is needed to transition the world’s economy to a low-carbon path, as direct government funding is scarce in these countries.

  
  

• The scale of needed investment in India:
  • Under Paris Accord, India has planned to reduce its carbon emission intensity – emission per unit of GDP – by 33-35%. To achieve these targets and build its renewable capacity India needs climate finance.
  • India’s Green Bond market is in growth stage, first green bonds were issued in 2015 – indicating the need to explore more options for climate financing.
  • In India, banks and non-banking financial companies have a limited appetite for long-term debt due to asset-liability mismatch.
  • Along with problems arising out of climate change, India also face traditional problems like poverty, pollution, education and skill gaps etc.Hence there is a greater need for climate finance.

Global Climate Financing: What is the Scenario?

• Green Climate Fund (GCF): It was established to limit or reduce greenhouse gas (GHG) emissions in developing countries and to help vulnerable societies adapt to the unavoidable impacts of climate change.
• Adaptation Fund (AF): It was established under the Kyoto Protocol in 2001 and has committed US$ 532 million to climate adaptation and resilience activities.
• Global Environment Fund (GEF): It has served as an operating entity of the financial mechanism since the Convention came into force in 1994.
  • It is a private equity fund focused on seeking long term financial returns by investments in clean energy under climate change.
• Other Funds: In addition to providing guidance to the GEF and the GCF, parties have established two special funds:
  • The Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF).
    • Both funds are managed by the GEF.
  • At the Paris Climate Change Conference in 2015, the Parties agreed that the operating entities of the financial mechanisms – GCD, GEF, SCCF and the LDCF, shall serve the Paris Agreement.

Climate Financing and India: What is the Scenario?

• Intended Nationally Determined Contributions (INDCs) are nationally binding targets adopted under UNFCCC. India has to reduce GHG emissions under this, which requires climate financing.
• National Clean Energy Fund:
  • The Fund was created to promote clean energy, funded through an initial carbon tax on use of coal by industries.
  • Governed by an Inter-Ministerial Group with the Finance Secretary as the Chairman.
  • Its mandate is to fund research and development of innovative clean energy technology in the fossil and non fossil fuel based sectors.

• National Adaptation Fund for Climate Change (NAFCC):

  • It was established in 2015 to meet the cost of adaptation to climate change for the State and Union Territories of India that are particularly vulnerable to the adverse effects of climate change

• Clean Development Mechanism (CDM):
  • It allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2.
  • The CDM is the main source of income for the UNFCCC Adaptation Fund.
  • The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
• Internal Programmes:
  • Compensatory Afforestation Fund Management and Planning Authority (CAMPA), Disaster Management Fund etc.
  • A Climate Change Finance Unit was set up by Department of Economics in the Ministry of Finance to advise and guide the MoEF&CC as well as to lead on global climate finance issues.

What are the Principles of Climate Finance?

• Polluter Pays:
  • The ‘polluters pays’ principle is the commonly accepted practice according to which those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment.
  • This principle underpins most of the regulation of pollution affecting land, water and air formally known as the 1992 Rio Declaration.
  • It has also been applied more specifically to emissions of greenhouse gases which cause climate change.
• Common but Differentiated Responsibility and Respective Capability (CBDR–RC):
  • CBDR–RC is a principle within the United Nations Framework Convention on Climate Change (UNFCCC).
  • It acknowledges the different capabilities and differing responsibilities of individual countries in addressing climate change.
• Additionality:
  • Climate finance should be additional to existing commitments to avoid the diversion of funding for development needs to climate change actions.
  • This includes use of public climate finance and investments by the private sector.
• Adequacy & Precaution:
  • In order to take precautionary measures to prevent or minimise the causes of climate change as a stated goal under UNFCCC, the level of funding needs to be sufficient to keep a global temperature with in limits as much as possible.
  • A better level of adequacy might be increased in the national estimates of the needed climate funds, this will help build planned investments with respect to INDC.
• Predictability:
  • Climate finance must be predictable to ensure sustained flow of climate finance.
  • It can be done through multi-year, medium-term funding cycles (3 – 5 years).
  • This allows for adequate investment programs to scale up a country’s national adaptation and mitigation priorities.

What is the Significance of Climate Financing?

• 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.
• Climate Financing recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.
  • Hence, developed countries should also continue to take the lead in mobilizing climate finance through a variety of actions, including supporting country-driven strategies and taking into account the needs and priorities of developing country Parties.
• Climate finance is critical to tackle the issues posed by climate change and achieve the goal of limiting the rise in the earth’s average temperature to below 2 degrees Celsius over pre-industrial levels, something the 2018 IPCC report has predicted.

What are the Challenges Regarding Climate Finance?

• At global levels:
  • There is a gap between national needs and climate finance under Nationally Determined Contribution there is need for additional international financial support.
  • Least developed countries receive much less approved funding in per-capita terms from the multilateral climate funds.
  • The rate of approvals is time taking, due to which the drawee nation has insufficient funds to complete its target and leads to stalling of projects.
  • The uncertainties such as, the recent refusal of US to pay $2 billion of its pledge this has created shortage of funds at available GCF.
• At National levels:
  • In India the local market for climate finance are insufficiently involved in financial products that support climate change adaptation.
  • There is imminent failure in securing viability-gap funding either from governments, or multilateral development banks.
  • Projects in climate change have longer gestation periods which deter financial institutions from investing in them.
  • Shortage of funds due to insufficient budget allocation are often interfered due to any excess or additional grants which leads to stalling of green projects.

What can be the Way Forward?

• An analytical framework is necessary to combine potential climate risks with a systematic cost-benefit analysis.
• Favourable policy and institutional actions are important for successful introduction or scaling up of financial instruments.
• Such actions, through public-private partnership (PPP) and People-first PPPs can help improve climate finance.
  • People-first Public-Private Partnerships (PPPs) ensure that out of all stakeholders, ‘people’ are on the top. Its focus is on improving the quality of life of the communities, particularly those that are fighting poverty, by creating local and sustainable jobs.
• Climate finance should be equipped with non institutional financial services such as market funds, private etc.
• Developed countries must assist and work with developing nations to help them make clean energy transitions and get financing for climate resilient infrastructure, thus, ensuring that the former is delivered on the $100-billion goal.
• Further, there is a need to sustain a political commitment to raising new finance, besides,
  • Ensuring that finance is better targeted at reducing emissions and vulnerability.
  • Learning and improving from recent experiences, particularly as the Green Climate Fund gets to work.