The United Nations Framework Convention on Climate Change Conference (UNFCCC) of Parties 27 held in Sharm el-Sheikh, Egypt, recently spawned a significant consensus among countries: a complete evolution of the international financial system is necessary to raise resources substantially for Climate Action. As it stands now, the money directed towards climate action only covers a meager 1-10% of the estimated requirements.
The Concept of Climate Finance
Climate Finance refers to financing on local, national, or transnational levels — sourced from public, private and alternative media — intended to support mitigation and adaptation actions that address climate change. The UNFCCC, Kyoto Protocol, and Paris Agreement call for financial assistance from wealthier countries (Developed Countries), to those that are less resourced and more vulnerable (Developing Countries). This follows the principle of “Common but Differentiated Responsibility and Respective Capabilities” (CBDR), acknowledging different capacities and differing responsibilities of individual countries in addressing climate change, enshrined in the 1992 Earth Summit held in Rio de Janeiro, Brazil.
The Funding Gap in Climate Action
Estimations indicate that the global move to a low-carbon economy would necessitate about USD 4-6 trillion every year until 2050. About USD 4 trillion would need yearly investment in renewable energy until 2030 to achieve net-zero emissions targets. Developing countries alone require around USD 6 trillion between 2022-2030 for their climate action plans, translating to a necessity of directing at least 5% of global Gross Domestic Product (GDP) into climate action annually. The USD 100 billion that developed countries promised to mobilize yearly practically represents the whole current monetary circulation for climate action.
Challenges in Mobilization of Climate Fund
The current rules and regulations of the global financial system make it challenging for many countries to access international finance, particularly those with political instabilities or weaker institutional and governance structures. Climate finance flows through a complex maze of channels — bilateral, regional, multilateral — in the form of grants, loans, debt, equity, carbon credits, amongst others. Discrepancies exist over whether specific amounts of money are genuinely climate-related, and assessments of the quantity of climate finance currently being mobilized differ widely.
Taxes as a Potential Source for Climate Fund
A large portion of additional financial resources for battling climate change could derive from taxes on citizens. Levies on the use of petrol, diesel, and other fossil fuels can serve as valuable resources for the government already seen in India where coal production has been taxed for several years. The resulting funds have been primarily used for investing in clean technologies, the Clean Ganga Mission, and during the Covid-19 pandemic. Businesses can also anticipate receiving potential forms of Carbon Tax.
India’s Initiatives for Climate Finance
In 2015, India established the National Adaptation Fund for Climate Change (NAFCC) to support State and Union Territories particularly vulnerable to climate change. The National Clean Energy Fund, funded through a carbon tax on industrial coal use, was created to promote clean energy. The National Adaptation Fund, established in 2014, aims to bridge the gap between need and available funds, operated under the Ministry of Environment, Forests, and Climate Change (MoEF&CC).
The Way Forward
Sustaining a political commitment to raising new finance is one of the primary needs moving forward. This alongside ensuring that finance is better targeted at reducing emissions and vulnerability, learning and improving from recent experiences such as the Green Climate Fund. International Financial Institutions can liaise with governments, central banks, commercial banks, and other financial players at national or regional levels to create a conducive environment for investments in green projects. Incentives for climate-friendly investments and discouraging or penalizing harmful investments should also be practiced. The funding transformation should also involve simplifying practices, reassessing investment risks, and overhauling credit rating systems.