Green bonds and guarantees: Key tools to contain global warming

Source: This post is based on the article “Green bonds and guarantees: Key tools to contain global warming”, published in Live Mint on 25^th May 2022.

Syllabus Topic: GS Paper 3, Environment and Climate Change

Context: The article discusses the need for adequate financing to facilitate a fundamental transition from fossil fuel-based to non-fossil fuel-based production in order to mitigate global warming.

The transition from fossil fuel-based to non-fossil fuel-based production requires scientific knowledge and technologies like green hydrogen and renewable energy.

Technologies such as green hydrogen, are commercially viable, as of now, but not implemented at the required scale to prevent catastrophic global warming.

The main hurdle in their adoption is Finance, not technology.

What are the challenges to financing of green technologies?

The issue of legacy and responsibility: For more than 30 years since the Rio de Janeiro Earth Summit of 1992, emerging market and developing economies (EMDEs) have been demanding that the ‘polluter pays’ principle should apply globally. It is because developed countries have played a major role in the present pollution, so they must pay the fine for that now. However, this demand has not received any attention yet.

Huge deficit: The required investment in clean energy projects for effective mitigation is estimated at $5 trillion per year, against the available $ 1.4 trillion. Multilateral development banks (MDBs) alone cannot fill the massive financing gap, as their collective mobilization capacity is limited.

Financing through bonds: Thematic bonds, including green bonds, have grown annually at a phenomenal rate, and the volume could reach $5 trillion by 2025. However, only a small percentage of thematic bonds have flowed to EMDEs.

What can be the course of action?

1. MDBs can provide insurance and risk guarantees to attract foreign investors and mitigate perceived risks.
2. EMDE governments should develop green bond frameworks, strengthen ESG mandates, and create demand for thematic bonds.
3. India has taken positive steps in issuing a green bond framework and successfully issuing local currency bonds.