Why in the News?

With India gearing up to host the G20 summit on September 9 and 10, the focal points of extensive discussions are expected to revolve around climate change and its financial aspects. The current pledges from developed nations, particularly concerning climate financing mechanisms, fall short in effectively addressing the challenges posed by climate change.

What is Climate Finance?

• Climate finance encompasses funding at the local, national, or transnational levels.
• The UNFCCC, the Kyoto Protocol, and the Paris Agreement emphasize the need for financial support from wealthier Parties to aid those with fewer resources and greater vulnerability.
• This acknowledgment is rooted in the understanding that countries' contributions to and capabilities for addressing climate change differ widely.
• Mitigation efforts demand substantial investments for significant emission reductions.
• Equally, adaptation efforts rely on substantial financial resources to counter the adverse effects and mitigate the impacts of a shifting climate.

Challenges with the Current Framework of Climate Financing:

Inadequacy of the $100 Billion Target

• During COP15 in 2009 (Copenhagen, Denmark), developed nations collectively committed to mobilize $100 billion annually by 2020 to support climate initiatives in developing countries.
• However, the basis for this figure, established over a decade ago, lacks rationale and logic.
• Even at its inception, the estimated amount was insufficient to meet the actual requirements, leading to ongoing debates about its adequacy.
• Moreover, the developing world has consistently raised concerns that the promised $100 billion annually is not being delivered by developed nations.
• Today, to meet the objectives of the Paris Agreement, the demand for climate finance stands at approximately $4.35 trillion.
• Actual expenditure remains just a fraction of this, around one-seventh of the needed sum.

Inclusion of Commercial Loans as Grants

• Developed nations (OECD) claim to have provided nearly $80 billion to developing nations as climate finance in 2020.
• However, the actual financial transfers amount to only $19-22 billion.
• This discrepancy arises from the developed world including regular commercial debt related to climate activities in their calculations.
• This approach reveals an evasion of responsibility, as the committed $100 billion is intended to be in the form of concessional finance or grants, not loans.

Challenges in Financing Adaptation vs. Mitigation

• Climate finance is comprised of two main categories: mitigation and adaptation.
• A significant majority (93 percent) of funds directed toward climate finance are channeled into mitigation projects, with an understandable rationale.
• Mitigation initiatives often generate revenue streams and are perceived as financially viable, making them conducive to loans under standard market conditions.
• In contrast, adaptation projects entail substantial initial expenses, prolonged timeframes, and a lack of predictable income sources.
• This makes them appear risky to financial institutions, resulting in limited funding availability.

Limited Progress in Grant Provision

• Despite the recurrent commitment to deliver $100 billion annually, little tangible progress has been achieved.
• Even during recent Conferences of Parties (CoP), this promise is reiterated, yet real-world advancements remain limited.
• In the most recent CoP (CoP27 in Sharm El-Sheikh, Egypt), an agreement was reached to establish a loss and damage fund.
• However, the fund's specifics and quantum will be finalized later.
• This fund is intended to address immediate challenges like rising sea levels and desertification.
• Considering historical trends in concessional finance, substantial outcomes from this proposed fund are unlikely in the near future.
• Furthermore, there is ambiguity regarding whether countries like India will be eligible to receive assistance or provide it.

Strides Toward Fulfilling Climate Finance Objectives:

• Global Financing Pact 2023
• In June 2023, the French President orchestrated a summit aimed at funding climate change mitigation (as well as poverty reduction) in the Global South.
• During this Summit, it was declared that an additional lending capacity of USD 200 billion would be made accessible to emerging economies.
• Moreover, the Summit signaled the imminent achievement of the long-anticipated USD 100 billion climate finance target within the current year.
• Integration of Disaster Clauses:
• To address the impacts of extreme weather occurrences, the World Bank introduced disaster clauses.
• These clauses allow for the suspension of debt payments during such events, providing relief to affected nations.
• Investment in Special Drawing Rights (SDRs):
• The IMF unveiled a commitment to allocate USD 100 billion in Special Drawing Rights (SDRs) to support vulnerable nations.
• However, certain SDR allocations are pending approval from the US Congress.

Way Forward for India and Other Developing Nations Amidst Limited Support from Developed Countries:

• Resource Mobilization for Climate Finance:
• In the face of the inadequacies in support from developed nations, countries like India must now turn inwards and strategically mobilize resources for climate finance.
• This endeavor calls for collaborative efforts among various institutions that can complement each other's strengths.
• Financial organizations will need to invest in mature technologies, such as wind and solar, which are commercially viable.
• Investing in Advanced Technologies:
• For technologies not yet ready for widespread commercial viability, governments must play a pivotal role.
• For instance, direct financial backing is essential for the adoption of electrolysers in nascent areas like green hydrogen.
• Currently, the cost of electrolysers poses a barrier, and scaling up through substantial orders can trigger cost reductions through economies of scale.
• Private Sector Engagement in Adaptation Projects:
• Regarding adaptation initiatives, involving the private sector is crucial, necessitating government intervention to facilitate collaboration.
• Globally, most adaptation funding originates from multilateral development banks in the form of loans.
• However, private sector participation in adaptation projects remains below 2 percent.
• This imbalance arises from the private sector's perception of adaptation projects as high-risk ventures, given the limited incentives available for such engagements.
• If governments co-finance adaptation projects with the private sector, it could mitigate risks and attract private sector participation.

Securing Additional Resources

• To enable government involvement in these endeavors, additional resources will be indispensable. Possible avenues include imposing carbon taxes, issuing green bonds, and exploring catastrophe (CAT) bonds, among other innovative mechanisms.

When it comes to climate finance, countries must primarily look within, given the apparent lack of full commitment from the developed world to provide necessary assistance.

This holds special importance for nations like India, particularly as they might not qualify for concessional financing. As a result, these countries need to prioritize self-reliance and innovative strategies to address the challenges of climate change.

Mains Question:

• How can developing countries like India address climate finance challenges in the face of limited commitment from developed nations? Discuss strategies for effective funding and the role of self-reliance. (15M)