A funding solution for developing nations’ climate challenge

Source- The post is based on the article “A funding solution for developing nations’ climate challenge” published in “The Indian Express” on 26th May 2023.

Syllabus: GS2- International relations. GS3- Environment

Relevance– Global cooperation for climate change

News– The G20 has set up a high-level committee to suggest reform of multilateral development banks (MDBs) so that they are fit for purpose in the contemporary global scenario

What are challenges associated with climate financing for developing countries?

Money estimates annually for greening in developing countries are in the range of $2-3 trillion. These are relatively manageable figures. Annual global savings, coming mostly in the developed world, is around $20 trillion. But, they are beyond the domestic capacities of developing countries.

For example, in India, solar and wind energy attracted investments worth $66 billion in the last eight years. But, this requirement will increase manifold.

India will require around $1.15 trillion in the next eight years to install 450 GW of renewables by 2030, for infrastructure of transmission and storage, Green Hydrogen push and increase the share of electric vehicles.

A total investment of $1.15 trillion is the estimated requirement, with the debt requirement being around $850 billion and equity roughly $300 billion.

The $850 billion debt requirement alone is more than a quarter of the total loans of all commercial banks in India. Moreover, these requirements will have to compete with other developmental and individual priorities.

Other domestic financing routes such as bonds, pension funds and insurance funds have limited prospects for clean-tech segments. They are concentrated in high-quality assets, that is, AA+ rated assets.

The gap of around 40-60% of the total debt requirement, can only be filled by foreign sources. But developed countries are reluctant to provide funding.

What are solutions for climate financing for the developing world?

Global MDBs can be particularly instrumental. They can provide interrupted flow of private capital in the developed world for green projects in developing countries.

This can be done by the creation of an International Foreign Exchange Agency linked to the WB. It will provide hedging support for foreign exchange borrowings by green projects in developing countries.

Large-scale pooling of projects and currencies coupled with reinsurance is an alternative to insurance. It can considerably lower the costs of foreign borrowed capital for green projects in the private sector in developing countries.

Residual risks could be covered by sovereign support from developed countries.

The idea of a foreign exchange agency is operational in a small manner between Europe and West Africa. But the requirement is for something on a truly large scale covering several currencies and reaching the largest populations in developing countries.

How will the G20 be helpful in climate financing?

The G20 committee should accord a high priority to climate financing. Unlike many other areas of divergence in the present geopolitics, climate change has multi-partisan consensus.

This must be leveraged at the MDBs with an agency or any other appropriate mechanism taking care of the currency risk. This is a relatively low-cost option for global well-being. It could be piloted during India’s G20 presidency.