Finance is the binding constraint in efforts to fight climate change

Source: The post is based on the article “Finance is the binding constraint in efforts to fight climate change” published in Live Mint on 28^th April 2023.

Syllabus: GS 3 – Environment – Climate Change

Relevance: concerns associated with climate finance

News: Countries around the world are adopting climate mitigation technologies to tackle climate change. However, climate finance still remains a hindrance towards adopting such technologies.

What are different climate mitigation technologies being adopted and what are the concerns associated with them?

Renewable Power: The most mitigation technologies being adopted are solar, wind, hydropower, etc. The cost of solar panels, wind turbines, storage batteries and other components have declined dramatically such that the cost of renewable power is now comparable to fossil-fuel based power.

However, despite the low cost of renewable power, renewable energy still accounts for only around 15% of global power generation. 

Green Hydrogen: The cost of green hydrogen has been dependent on the cost of electrolyzers, which has come down, making green hydrogen commercially viable and attracting large-scale corporate investment, including in India.

However, despite this, the rollout of green hydrogen on a scale is just starting.

Carbon Capture and Sequestration (CSS): CCS technologies are needed to capture carbon and store it till it can be broken down for commercial use.

However, existing CSS technologies are very expensive. Much investment is required in R&D to reduce costs before CSS technologies become commercially viable.

Carbon Sink: Terrestrial and underwater forests are the natural carbon sinks that contain the carbon load in the atmosphere. But the level of emissions has gone far beyond the capacity of natural ‘carbon sinks’ to absorb the additional carbon load.

Hence, to lower the ambient carbon load and eventually reverse global warming, it is necessary to invest heavily in R&D to create technologies that synthetically imitate and improve the capacity of natural carbon sinks.

These all imply that vast amounts of capital are required to successfully address the climate crisis.

As per the Emission Gap Report 2022, the current annual investment in climate finance of about $571 billion needs to rise to at least $1.7-2 trillion.

What measures can be taken for climate finance?

First, Global public sector finance can be considered to finance global public goods.

However, the report of the G20-appointed Committee to Review the Multilateral Development Banks’ (MDBs) Capital Adequacy Framework indicates that MDBs may at best generate additional assistance of $1 trillion for all purposes. There is doubt even over this amount.

Second, Private capital may be relied upon and may act as an alternative to public capital. However, most of this capital originates in advanced countries and would not easily flow to tropical developing countries.

Third, along with private capital flows, developing countries must focus on creating a suitable ecosystem including universally accepted concepts, definitions and standards for climate finance, appropriate rating systems and technical assessment methodologies.

Fourth, developing countries will also require de-risking of such private capital flows, along with its attendant moral hazard. MDBs can play a crucial role by providing credit guarantees.