Climate Finance

WHY IN NEWS?

• In the run-up to the 26th Conference of the Parties of the UN Framework Convention on Climate Change (UNFCCC), media reports have claimed that developed countries are inching closer to the target of providing $100 billion annually in climate finance to developing countries by 2025 (the original target was 2020)

WHAT IS CLIMATE FINANCE?

• Climate finance 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.
• 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.

NEED FOR A ROBUST CLIMATE FINANCE MECHANISM:

• Resources are needed to adapt to the adverse effects of climate change:
  • The ill-effects of climate change are already visible in erratic rainfall, rising number of cyclones and their destructive capabilities, increase in extreme weather events, glacier melting events.
  • Therefore significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.
• To support vulnerable countries:
  • Contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously
  • The global south is the main sufferer of the climate change ill effects, even though they are not the main contributor. But their mitigation and adaptation capabilities are very meagre. They depend heavily on climate finance flow from developed world.
• Need for huge investment in green technology and infrastructure:
  • The target of limiting global warming below 1.5 ?C is possible only with fast-paced mitigation activities. It needs heavy investments in green technology.
  • The World Economic Forum projects that by 2020, about $5.7 trillion will need to be invested annually in green infrastructure.
• Climate finance is needed for mitigation:
  • Keeping warming below the target level necessitates rapid, large-scale emissions reductions, and a corresponding transition away from high-carbon production and consumption, across all sectors >> this requires huge upfront cost.

PRINCIPLES GUIDING CLIMATE FINANCE:

• Transparency and enhanced predictability:
  • The Paris Agreement places emphasis on the transparency and enhanced predictability of financial support.

• Making climate finance flow consistent with emission reduction and climate-resilient development:
  • Efforts under the Paris Agreement are guided by its aim of making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
  • Assessing progress in provision and mobilization of support is also part of the global stocktake under the Agreement
• Assessing the climate financial needs
  • It is important for all governments and stakeholders to understand and assess the financial needs of developing countries, as well as to understand how these financial resources can be mobilized.
• Equitable focus to adaptation and mitigation:
  • Provision of resources should also aim to achieve a balance between adaptation and mitigation.
• Common but differentiated responsibility and respective capabilities:
  • In accordance with the principle of “common but differentiated responsibility and respective capabilities” set out in the UNFCCC, developed country Parties are to provide financial resources to assist developing country Parties in implementing the objectives of the UNFCCC.
  • The Paris Agreement reaffirms the obligations of developed countries, while for the first time also encouraging voluntary contributions by other Parties.
• Additionality
  • Climate finance should be additional to existing commitments to avoid the diversion of funding for development needs to climate change actions.

EXISTING MECHANISMS OF CLIMATE FINANCE

• Global Environment Facility (GEF)
  • It was established during the Rio Earth Summit of 1992.
  • It is a multilateral financial mechanism that provides grants to developing countries for projects that benefit the global environment and promote sustainable livelihoods in local communities
  • GEF also serves as a financial mechanism for UNFCCC since 1994.
• Green Climate Fund (GCF)
  • At COP 16, in 2010, Parties to UNFCCC established the Green Climate Fund (GCF) and in 2011 also designated it as an operating entity of the financial mechanism.
  • GSF is the world’s largest environmental fund that seeks to help developing nations in cutting down their greenhouse gas emissions, while at the same time making them adapt suitably to climate change.
  • The financial mechanism of the GCF helps in coursing funds from developed to developing countries.
• Special Climate Change Fund (SCCF)
  • It was created in 2001 to address the specific needs of developing countries under the UNFCCC to adapt to the impact of climate change and increase resilience.
  • It covers the incremental costs of interventions to address climate change adaptation relative to a development baseline.
  • Adaptation to climate change is the top priority of the SCCF, although it can also support technology transfer and its associated capacity building activities.
  • The SCCF is intended to catalyse and leverage additional finance from bilateral and multilateral sources, and is administered as a specialised trust fund by the Global Environment Facility (GEF).
• Least Developed Countries Fund (LDCF)
  • It was established in 2001 to support the LDC work programme under the UN Framework Convention on Climate Change (UNFCCC), including the preparation and implementation of national adaptation programmes of action (NAPAs).
  • It is operated by the Global Environment Facility (GEF).
• Adaptation Fund
  • The Adaptation Fund was established under the Kyoto Protocol of the UNFCCC
  • It finances projects and programmes that help vulnerable communities in developing countries adapt to climate change. Initiatives are based on country needs, views and priorities.
  • The Fund is financed largely by government and private donors, and also from a two percent share of proceeds of Certified Emission Reductions (CERs) issued under the Kyoto Protocol’s Clean Development Mechanism projects.
• Standing Committee on Finance
  • At COP 16 in 2010, Parties to UNFCCC decided to establish the Standing Committee on Finance (SCF) to assist the COP in exercising its functions in relation to the financial mechanism of the Convention.
  • Currently, the SCF has four specific functions:
    • Assisting the COP in improving coherence and coordination in the delivery of climate change financing
    • Assisting the COP in rationalization of the financial mechanism of the UNFCCC
    • Supporting the COP in the mobilization of financial resources for climate financing
    • Supporting the COP in the measurement, reporting and verification of support provided to developing country Parties.
  • The Committee is also tasked to organize an annual forum on climate finance, prepare a biennial assessment and overview of climate finance flows etc.
  • Furthermore, the SCF is designed to improve the linkages and to promote the coordination with climate finance related actors and initiatives
  • At the Paris Conference in 2015, Parties decided that the SCF shall also serve the Paris Agreement.
• Long-term climate finance:
  • The long-term finance process is aimed at progressing on the mobilization and scaling up of climate finance of resources originating from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources.
  • Through the Cancun Agreements in 2010 developed country Parties committed, in the context of meaningful mitigation actions and transparency on implementation, to a goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries.
  • When adopting the Paris Agreement Parties confirmed this goal, called for a concrete road map to achieve the goal by 2020, and agreed that prior to 2025 the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA) shall set a new collective quantified goal from a floor of USD 100 billion per year.
• Climate finance data portal:
  • The UNFCCC website includes a climate finance data portal with helpful explanations, graphics and figures for better understanding the climate finance process and as a gateway to information on activities funded in developing countries to implement climate action.
• The Climate Investment Funds (CIFs)
  • It is established in 2008 and is administered by the World Bank.
  • The CIFs have a total pledge of USD 8.08 billion. They include:
    • Clean Technology Fund (CTF)
    • Strategic Climate Fund (SCF)
    • Pilot Program for Climate Resilience (PPCR)
    • Forest Investment Program (FIP)
    • Scaling-Up Renewable Energy Program for Low-Income Countries (SREP)
• Other Multilateral climate finance mechanisms:
  • Forest Carbon Partnership Facility (World Bank)
  • The EU Global Energy Efficiency and Renewable Energy Fund (European Investment Bank).
  • Africa Climate Change Fund (ACCF)
• Flexible mechanisms under Kyoto Protocol:
  • These mechanisms enable Parties to achieve emission reductions or to remove carbon from the atmosphere cost-effectively in other countries
  • Clean Development Mechanism (CDM):
    • It is a United Nations-run carbon offset scheme allowing countries to fund greenhouse gas emissions-reducing projects in other countries and claim the saved emissions as part of their own efforts to meet international emissions targets.
    • The CDM was intended to meet two objectives:
      • To assist non-Annex I countries (predominantly developing nations) achieve sustainable development and reduce their carbon footprints
      • To assist Annex I countries (predominantly industrialized nations) in achieving compliance with their emissions reduction commitments (greenhouse gas emission caps)
    • The CDM addressed the second objective by allowing the Annex I countries to meet part of their emission reduction commitments under the Kyoto Protocol by buying Certified Emission Reduction (CER) units from CDM emission reduction projects in developing countries
  • Joint Implementation
    • Through the Joint Implementation, any Annex I country can invest in emission reduction projects in any other Annex I country as an alternative to reducing emissions domestically.
• Bilateral Channels:
  • Germany’s International Climate Initiative (IKI)
  • The UK government’s International Climate Fund (ICF)
  • Brazil’s Amazon Fund, administered by the Brazilian National Development Bank (BNDES), is the largest national climate fund.
  • The Caribbean Catastrophic Risk Insurance Facility (CCRIF)

CLIMATE FINANCING IN INDIA

• India’s Intended Nationally Determined Contributions (INDCs) under UNFCCC are:
  • To reduce the emissions intensity of its GDP by 33 to 35 percent by 2030 from 2005 level
  • To achieve about 40 percent electric power installed capacity coming from non-fossil fuel-based energy resources by 2030.
• To achieve this, India has been continuously building on to its climate finance mechanisms
• The establishment of the climate change finance unit in 2011 in the Finance Ministry gave shape to the climate finance mechanism. It is the nodal agency that represents MoF in all climate finance platforms - national and international
• The NITI Aayog is primarily responsible for the estimation of finance requirements in the country.
• Climate finance in India comes through the following agencies:
  • Union Budgetary support
  • State Budgetary support
  • External Support
    • From multi-lateral agencies:
      • International climate finance flows to India through a number of channels. The primary route is the multilateral climate funds established by the UNFCCC such as Global Environment Facility, Adaptation Fund, Global Climate Fund etc.
    • From bilateral agencies:
      • The key sources of bilateral assistance in form of grants are United States Agency for International Development (USAID), Canadian International Development Agency (CIDA) etc.
      • These are largely in form of grants.
  • The National Adaptation Fund:
    • The fund was established in 2014 with a corpus of Rs. 100 crore with the aim of bridging the gap between the need and the available funds.
    • The fund is operated under Ministry of Environment, Forests and Climate Change.
  • The National Clean Energy Fund:
    • The Fund was created to promote clean energy, funded through an initial carbon tax on use of coal by industries.
    • Its mandate is to fund research and development of innovative clean energy technology in the fossil and non-fossil fuel based sectors.
  • Compensatory Afforestation Fund
    • The Compensatory Afforestation Fund Act establishes National Compensatory Afforestation Fund under the Public Account of India, and a State Compensatory Afforestation Fund under the Public Account of each state.
    • Compensatory afforestation means that every time forest land is diverted for non-forest purposes such as mining or industry, the user agency pays for planting forests over an equal area of non-forest land, or when such land is not available, twice the area of degraded forest land.
  • National Disaster Response Fund and State Disaster Response Fund (SDRF):
    • It aims for meeting the expenses for emergency response, relief and rehabilitation due to any threatening disaster situation or disaster.
  • National Mission for Enhanced Energy Efficiency:
    • The National Mission for Enhanced Energy Efficiency under the National Action Plan on Climate Change (NAPCC) gives practical financial mechanisms through its programmes like:
      • PAT- Perform, Achieve and Trade.
      • MTEE- Market Transformation for Energy Efficiency.
      • EEFP- Energy Efficiency Financing Platform.
      • FEEED- Framework for Energy Efficient Economic Development.
  • Private Climate Finance:
    • Private parties participate in climate finance through green bonds, concessional and non-concessional Loans, national carbon markets etc.

CHALLENGES:

• Definition of Climate Finance:
  • Various organisations define climate finance in different ways making it difficult to synergise the operations
• Lack of standard accounting framework
  • It leads to double-counting, inflated numbers, repackaging the existing aid to look like new aids etc.
• Inflated figures:
  • The OECD reports on climate finance have long been criticised for inflating climate finance figures by including funds for development projects such as health and education that only notionally target climate action.
  • The Oxfam report on climate finance discounts for the climate relevance of reported funds to estimate how much climate finance is actually targeting climate action and also discounts for grant equivalence.
  • In contrast to the OECD report, Oxfam estimates that in 2017-18, out of an average of $59.5 billion of public climate finance reported by developed countries, the climate-specific net assistance ranged only between $19 and $22.5 billion per year.
• Skewed focus on mitigation:
  • Climate finance has also remained skewed towards mitigation, despite the repeated calls for maintaining a balance between adaptation and mitigation.
  • The 2016 Adaptation Gap Report of the UN Environment Programme had noted that the annual costs of adaptation in developing countries could range from $140 to $300 billion annually by 2030 and rise to $500 billion by 2050.
  • Currently available adaptation finance is significantly lower than the needs expressed in the Nationally Determined Contributions submitted by developing countries.
• Unrecognised climate funding:
  • Many actions to improve climate resilience take place within local markets where there is a supply and demand for products and solutions that protect assets from climate risks — such as water-efficient irrigation technologies, storm resilient building materials, water harvesting services, flood control, climate resilient crops and seeds.
  • Nor are the local financial markets, in developing countries, deep and robust enough to offer a broad range of financial instruments and products to support these transactions, leading to their imminent failure in securing viability-gap funding either from governments, or multilateral development banks.
  • As much of these market activities related to climate resilience remains “hidden in plain sight”, products and solutions that help assets to adapt to climate risks, remain largely unrecognised.
• Climate finance through loans exacerbates the debt crisis of low-income countries:
  • OECD recently claimed that climate finance provided by developed countries had reached $78.9 billion in 2018.
  • However, of the total public climate finance given, loans comprise 74%, while grants make up only 20%.
  • Between 2013 and 2018, the share of loans has continued to rise, while the share of grants decreased.
  • The overwhelming provisioning of climate finance through loans risks exacerbates the debt crisis of many low-income countries.
• Huge reliance on private sector investment
  • Climate finance from developed countries focus on mobilisation of private sector investment. Public finance is contributing only for “de-risking” of investment.
  • At the end of the day, climate funds coming through private sector, will be directed to those projects judged “bankable” and not selected based on developing countries’ priorities and needs.
• Broken commitments from major players:
  • U.S promised $3 billion to the Green Climate Fund (GCF) under President Barack Obama, but delivering only $1 billion before President Donald Trump withdrew U.S. support from the GCF.
• Viability of climate funding:
  • Projects in climate change has longer gestation period which deter financial institutions from investing in them.

WAY FORWARD:

• Understanding the benefits of climate financing:
  • There need a deeper understanding of the benefits offered by climate resilience to better inform business decisions regarding climate risk transfer schemes such as insurance
• Ensuring accountability:
  • Climate finance must fall under some kind of regulatory/auditing institutions to ensure its efficiency.
• Principles that need to be followed in climate financing:
  • Climate financing must be guided by equity considerations in line with climate justice so that climate finance is needs-based rather than results-based.
  • Gender-budgeting of climate finance is non-negotiable
  • Climate finance must be part of all decentralized plans made by village panchayats, urban local bodies and district planning authorities.
• Institution building:
  • Given the level of specificity and technical expertise required, creating a national level climate finance regulatory authority will better equip us to understand, manage, and finance climate change priorities.
  • It can oversee all of the climate change mechanisms supported by the government.
• Improving private climate finance:
  • The key requirement for raising private climate finance is risk reduction for investors
  • Viability gap funding by government could help in risk reduction.
• Strengthening financial market:
  • The financial sector globally needs to develop markets for instruments to invest in climate resilience main streamed projects.
  • Instruments such as catastrophe risk insurance, disaster-relief fund, restoration fund, contingent credit at preferential rate, climate bond, social protection-bond etc. need to be soundly designed and rightly targeted to beneficiaries’ needs.

PRACTICE QUESTION:

Q. “Climate finance is both a key to global climate change cooperation and one of the thorniest issues climate negotiators face”. Discuss.