India has taken over the presidency of the G20 at a time when consensus-building is difficult. One area where there is complete polarisation is the subject of climate change. When it comes to climate finance specifically, the present commitments made by the developed world are absolutely insufficient. The figure of $100 billion for projects in developing nations, which was arrived at about 13-14 years ago had no basis and is devoid of any logic. In fact, when it was estimated, at that time too, it was too small vis-à-vis the need. For the past 10 years or so, there has been too much debate on this figure and the developing world has been lamenting that this meagre amount of $100 billion per year is not forthcoming from the developed world.
In contrast, it has been estimated that between 2011 and 20, fossil-fuel subsidies in 51 countries were 40 per cent higher than the total money spent on climate finance (Climate Policy Initiative). The developed world (OECD) has been juggling statistics to prove that actually close to $80 billion was provided to the developing world for climate finance in 2020.
On the other hand, sceptics say that the actual transfer of resources would be in the range of $19-22 billion only. While stating that they are providing close to $80 billion per year, the developed world is including the normal commercial debt for climate-related activities in its calculations. One is being clever by half since $100 billion is supposed to be in the form of concessional finance only, or better still, grants.
The need for climate finance today is estimated to be around $4.35 trillion in order to meet the Paris Agreement targets. What is being actually spent is about one-seventh of this amount. There are two main components of climate finance — mitigation and adaptation. While mitigation would include projects where we set up renewable generation projects, an example of an adaptation project would be the building of sea walls to prevent flooding. Most of the money that is flowing into climate finance is actually for mitigation (93 per cent) and it is not difficult to see why. Mitigation projects usually have a revenue stream and are thus considered to be bankable. So financial institutions have no problem in extending loans on pure market terms and conditions. On the other hand, adaptation projects have high upfront costs, have a long gestation period and no defined income stream. Therefore, they are considered risky by banks and other financial institutions. Having said that, there is no denying that it is difficult to assess how much has been invested towards adaptation since it is difficult to define as to what constitutes adaptation.
The incessant debate on $100 billion has made one thing very clear — this money is probably not coming. Though the resolve to provide $100 billion per year is repeated in every meeting of the Conference of Parties (CoP), there is little movement on the ground. In the last meeting of the CoP (CoP27 at Sharm El-Sheikh, Egypt) it was agreed that a loss and damage fund would be set up. But, the quantum of this fund and other details would be finalised subsequently. This fund is expected to look into what must be done immediately to take care of rising sea levels, desertification etc. If the past experience of concessional finance is any indication, nothing is likely to come from this proposed fund soon. Moreover, for countries like India, one is not sure whether we would be in the category of receiving assistance or offering
assistance.
It is now time for countries, especially those like India, to look within and mobilise resources for climate finance. It would require different institutions to come together and complement each other. The financial institutions will have to fund technologies that are commercially mature, like wind and solar. They will also have to finance electric mobility. The government will have to step in for technologies that are not yet ripe for commercial ventures like green hydrogen where direct financial support needs to be given for the installation of electrolysers. The cost of electrolysers today is prohibitive and only large-scale orders can bring down costs through economies of scale.
As far as adaptation measures are concerned, the private sector has to be roped in. But this will require government intervention. Worldwide, the major chunk of adaptation finance comes from multilateral development banks in the form of loans. Private sector participation in adaptation projects is less than 2 per cent. The reason is that the private sector views investments in adaptation projects as risky for the reasons already mentioned. In addition, there are also concerns about information asymmetry when it comes to climate issues. Further, there aren’t enough incentives available for the private sector to get involved with adaptation projects. In case the government co-funds adaptation projects with the private sector, it will help in risk mitigation of such projects. But, no doubt, the government will need additional resources. These can possibly be raised through the imposition of carbon taxes, issue of green bonds and catastrophe (CAT) bonds etc.
Thus, as far as climate finance is concerned, countries will have to mostly look within. In any case, $100 billion a year is just a drop in the ocean. For countries like India, it is all the more pertinent since it is doubtful that we would be eligible for receiving concessional finance.
The writer is Senior Visiting Fellow, ICRIER, and former Member (Economic and Commercial), Central Electricity Authority. Views are personal
