India’s G20 presidency: Financing the green transition

Source– The post is based on the article “India’s G20 presidency: Financing the green transition” published in “The Indian Express” on 30th August 2023.

Syllabus: GS3- Environment

News– The article deals with the issue of climate finance.

What are challenges in regard to climate finance at global level?

The current commitments made by developed nations are significantly inadequate.

The initial allocation of $100 billion for projects in developing countries, determined about 13-14 years ago, lacked a solid foundation and logical reasoning. Even during its original estimation, it was insufficient given the actual requirements.

Developing nations have been expressing dissatisfaction that the sum of $100 billion annually has not been provided by the developed countries.

The developed nations have been manipulating data to argue that nearly $80 billion was delivered to the developing world for climate finance in 2020.

However, critics contend that the true resource transfer likely falls within the range of $19-22 billion only.

The developed world is factoring in regular commercial debt for climate-related initiatives in their calculations. This approach is misleading. The intended $100 billion is supposed to be in the form of concessional finance or grants.

The current requirement for climate finance is estimated at $4.35 trillion to meet the objectives of the Paris Agreement. However, the actual expenditure in this area is only about one-seventh of this total.

Climate finance comprises two primary components: mitigation and adaptation.

The majority of funds allocated to climate finance are directed towards mitigation projects. It is approximately 93%. Mitigation initiatives often generate a revenue stream. It makes them viable for financial institutions to offer loans based on market terms.

On the contrary, adaptation projects come with substantial upfront costs, extended gestation periods, and no clear income source. They are viewed as risky ventures by banks and financial organisations.

What is the way forward for climate finance?

It is now an opportune moment for nations to introspect and arrange funds for climate finance. This would necessitate collaboration among various institutions that can complement each other.

Financial establishments must support commercially established technologies, such as wind and solar, as well as invest in electric mobility.

The government should take the lead in backing technologies that are not yet commercially viable, such as green hydrogen.

For adaptation strategies, involving the private sector is crucial. But, government intervention is required to facilitate this.

Worldwide, the primary portion of adaptation funding is sourced from multilateral development banks through loans. Less than 2% coming from private sector engagement.

The private sector hesitates due to the perceived risks, along with concerns about information disparities concerning climate matters. There is a lack of incentives for the private sector to participate in adaptation initiatives.

Co-financing adaptation projects with the government can mitigate risks. But, this will require additional resources. Possible means of generating these resources include implementing carbon taxes, issuing green bonds, and utilising catastrophe (CAT) bonds.

Hence, for climate finance, nations must predominantly rely on their own resources.