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Money to fight climate change: Are taxes the answer?

COP27: The Sharm el-Sheikh agreement includes an estimate of the money required to fight climate change. To meet the demand, corporates will have to step in. New taxes may have to be imposed, and more innovative solutions sought.

A man rides a boat past a toll plaza amid flood water on main Indus highway, following rains and floods during the monsoon season in Sehwan, Pakistan, September 15, 2022. (Reuters Photo: Akhtar Soomro, File)

As the world struggles to check rising global temperatures, it is getting increasingly clear that the single-biggest challenge in putting up an effective response to climate change is the failure to mobilise adequate financial resources. The money currently being channelised for climate action is barely one to 10per cent of the estimated requirements.

At the recently concluded climate change meeting in Sharm el-Sheikh, Egypt, countries agreed that a complete transformation of the international financial system was needed to significantly scale up resources for climate action. Accordingly, the meeting called upon the multilateral development banks, lending agencies and other financial institutions to align their priorities with the global climate goals, and redesign their structures and processes.

Enormity of the problem

The final Sharm el-Sheikh agreement includes an estimate of the scale of money required. It says that the global transition to a low-carbon economy would likely require about US$ 4-6 trillion every year till 2050. About US$ 4 trillion would need to be invested annually in the renewable energy sector till 2030 if the net-zero emissions targets were to be achieved. The cumulative requirement of the developing countries, just for implementing their climate action plans, was about US$ 6 trillion between now and 2030.

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Of course, these are not mutually exclusive requirements. There would be considerable overlap. But even US$ 5-7 trillion every year is a huge ask. It means that at least five per cent of the global GDP would need to be directed into climate action every year. It also shows how quickly the cost of inaction has been rising. Just a few years ago, the estimated requirements ranged between 1 and 1.5 per cent of global GDP.

The current requirements are, therefore, about two orders of magnitude higher than the money being made available. The US$ 100 billion amount that the developed countries have promised to mobilise every year represents practically the entire money in play right now. And even this US$ 100 billion has not yet been fully realised. Developed countries say they would reach this target by 2023. As of now, all that is flowing in is about US$ 50-80 billion every year.

Overhaul of financial system


There are two main dimensions to the problem of climate finance — availability and access. The transformation of the financial sector needs to address both of these.

One straightforward way of ensuring funds is for the developed countries to increase their contributions. But even if this happens, it will likely result in only a marginal increase in the overall pie. The more significant jump would come from businesses and corporations investing money into green projects.

In social or health sector projects, every dollar of public money invested is expected to mobilise about four dollars in private money. In climate finance thus far, private investments have lagged behind public money. Barely 30 per cent of current financial flows are coming from private sources. There is a clear opportunity here.


But businesses and corporations do not invest unless they are reasonably sure of healthy returns. It is here that the international financial institutions can engage with governments, central banks, commercial banks and other financial players operating at national or regional levels to create the right environment for investments in green projects. Incentivising climate-friendly investments and discouraging, or even penalising, dirty investments would be at the heart of this approach.

The current rules and regulations of the global financial system make it extremely difficult for large number of countries to access international finance, particularly those with political instabilities, or weaker institutional and governance structures. The transformation would, therefore, also involve simplification of practices, changes in the way risks to investments are assessed, and an overhaul of the credit rating systems.

Besides availability and access, there is a third element as well — transparency. Climate finance flows through a maze of channels — bilateral, regional, multilateral. It is in the form of grants, concessionary loans, debt, equity, carbon credits, and more. There are differences of opinion over whether a particular sum of money is actually climate-related. As a result, there are widely differing assessments of the quantum of climate finance currently being mobilised. This needs to be addressed.

Where will the new money come from?

Whether we like it or not, bulk of the additional financial resources to fight climate change would come from the pockets of the common citizen. There already are growing number of voices calling for an early fixing of carbon price, so that the carbon markets can start functioning quickly.


Invariably, this would, sooner or later, also result in different types of carbon taxes, even at the consumer level. The use of petrol and diesel, and other fossil fuels is almost surely going to be taxed. The production of coal is already being taxed for several years in India, and it has been generating valuable resources for the government, which has utilised it mainly for investing in clean technologies. These funds have also been utilised for works in the Clean Ganga Mission and during the Covid-19 pandemic.

Newer forms of carbon tax are likely to be imposed on businesses as well. In many cases, these would filter down to the common person.


Many more innovative sources of money would have to be explored. For example, the efforts to prevent urban flooding in a city like Mumbai or Bengaluru can seek financial participation of the corporate houses who suffer losses because of damage to their assets or disruptions in activities. As of now, it is the job of the government to build resilient infrastructure or early warning systems. But very soon, it would make sense for the corporates to join hands and facilitate these processes. Bankers who have lent money to build up corporate assets, or the insurers of those assets, would have an interest in pushing businesses into doing so. It is likely that more climate money would be raised locally, rather than sourced from outside.

More money is flowing into the green economy than a few years ago, but the pace of increase is nowhere adequate. Unfortunately, when it comes to climate action, the other thing in short supply, besides money, is time.

First published on: 30-11-2022 at 07:13 IST
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