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Climate Finance

2023 NOV 26

Mains   > Environment & Ecology   >   Global warming   >   Climate treaties and protocols

REFERENCE NEWS:

  • As per the report recently published by the Organisation for Economic Cooperation and Development (OECD), economically developed countries fell short of their promise to jointly mobilise USD 100 billion a year towards the climate mitigation and adaptation needs of developing countries in 2021, one year past the 2020 deadline. The report said developed countries mobilised $89.6 billion in 2021 and that finance for adaptation fell by 14% in 2021 compared to 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 CLIMATE FINANCING:

  • To adapt to the adverse effects of climate change:
    • Significant financial resources are needed to help communities, especially in vulnerable regions, adapt to the adverse effects of climate change, such as rising sea levels, extreme weather events, and disrupted food and water supplies.
    • For instance, 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.
  • 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.
  • For investment in green technology and infrastructure:
    • The target of limiting global warming below 1.5 degree C is possible only with fast-paced mitigation activities. It needs heavy investments in green technology.
    • For instance, as per the International Renewable Energy Agency (IRENA), global investment in energy transition technologies reached a record high of USD 1.3 trillion in 2022, yet this amount is less than one-third of the average annual investment needed to meet the 1.5°C scenario.
  • Address the historical injustice:
    • While a handful of high-income countries are responsible for causing climate change, its impact is disproportionately large in lower-income countries. Many of these are former colonies of these developed world. Financing from developed world to the developing world is vital to resolve this historical injustice.  

EXISTING MECHANISMS OF CLIMATE FINANCE:

  • 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.
  • 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.
  • Global Environment Facility (GEF): 
    • It is a multilateral financial mechanism established during the Rio Earth Summit of 1992 that provides grants to developing countries for projects that benefit the global environment and promote sustainable livelihoods in local communities.
  • Green Climate Fund (GCF): 
    • GCF 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.
  • Special Climate Change Fund (SCCF): 
    • 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). It is operated by the Global Environment Facility (GEF).
  • Adaptation Fund:Established under the Kyoto Protocol of the UNFCCC. 
  • Long-term climate finance.
  • Climate finance data portal by UNFCCC.
  • The Climate Investment Funds (CIFs): It is established in 2008 and is administered by the World Bank
  • 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)
  • 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).
  • Kunming Climate Fund by China:China announced establishment of USD 230 million Kunming Biodiversity Fund to support biodiversity protection in developing countries

CLIMATE FINANCING IN INDIA:

  • Climate Change Finance Unit:
    • 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
  • 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.
  • 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.
    • The absence of a universally accepted definition of 'climate finance' benefits developed nations as they can classify various types of funding, including overseas development assistance (ODA) and costly loans, under this term. For instance, this ambiguity has led to instances where projects unrelated to climate action, like chocolate shops in Asia and hotel expansions in Haiti, have been labelled as climate finance.
  • Lack of standard accounting framework
    • It leads to double-counting, inflated numbers, repackaging the existing aid to look like new aids etc.
  • Inflated figures:
    • 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.
    • Oxfam estimates that in 2017-18, out of an average of USD59.5 billion of public climate finance reported by developed countries, the climate-specific net assistance ranged only between USD19 and USD22.5 billion per year.
  • Skewed focus on mitigation:
    • Climate finance has remained skewed towards mitigation, despite the repeated calls for maintaining a balance between adaptation and mitigation.
    • 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.
  • Climate finance through loans exacerbates the debt crisis of low-income countries:
    • A report released by Oxfam in 2020 warned that the recent increase in funding came in the form of loans, not grants, with climate-related loans increasing from USD 13.5 billion in 2015 to USD 24 billion in 2018.
    • The overwhelming provisioning of climate finance through loans risks exacerbates the debt crisis of many low-income countries.
    • For example, an assessment by the American non-profit research group Climate Policy Initiative of global climate finance flows between 2011 and 2020 found that 61% of climate finance was provided as loans, of which only 12% were at concessional interest rates.
  • 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.
    • However, climate funds coming through private sector will be directed to those projects judged “bankable” and not selected based on developing countries’ priorities and needs.
  • Viability of climate funding:
    • Projects in climate change has longer gestation period which deter financial institutions from investing in them.

WAY FORWARD:

  • Ensuring accountability:
    • Climate finance must fall under some kind of regulatory/auditing institutions to ensure its efficiency. The UN should take proactive measures in this regard.
  • 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. (15 marks, 250 words)