As India gears up to host the upcoming G20 summit on September 9 and 10, one of the pivotal themes of discussion revolves around climate change and its financial implications. The urgency to address climate change has put the spotlight on climate finance, yet the present commitments by developed nations are falling short.
About Climate Finance: Addressing Global Disparities
The notion of climate finance encompasses financial support at local, national, and transnational levels. The UNFCCC, Kyoto Protocol, and Paris Agreement emphasize the necessity of financial assistance from economically stronger nations to those more vulnerable. Recognizing varying contributions to and capacities for combating climate change, this approach underscores both mitigation and adaptation efforts.
Inadequacies in Current Climate Financing Mechanisms
- Insufficient $100 Billion Commitment: A commitment was made by developed nations during COP15 in Copenhagen (2009) to mobilize $100 billion annually by 2020 to aid climate action in developing countries. However, this figure lacked a logical basis and has been a topic of extensive debate. Regrettably, this meager amount has not materialized, triggering dissatisfaction from the developing world. Current estimations assert the need for $4.35 trillion to fulfill the Paris Agreement targets, with actual disbursements constituting a mere fraction of this.
- Commercial Loans Masked as Grants: The developed world, particularly OECD nations, claims to have provided nearly $80 billion for climate finance in 2020. However, the actual disbursement lies closer to $19-22 billion. This discrepancy stems from including regular commercial debts in climate-related calculations, evading the intent of providing $100 billion solely as concessional finance or grants.
- Disparity between Adaptation and Mitigation Funding: While 93% of funds are directed toward mitigation projects, adaptation projects face greater challenges. Mitigation projects often generate revenue streams, making them attractive for loans, whereas adaptation projects demand significant upfront costs, possess longer gestation periods, and lack defined income sources, rendering them less favorable for financial institutions.
- Lack of Progress on Grants Delivery: The commitment to provide $100 billion annually is recurrent in CoP meetings, yet tangible progress remains elusive. The recent CoP27 meeting led to the proposal of a loss and damage fund, but specifics are pending. This fund seeks to address immediate concerns like rising sea levels and desertification, yet historical trends suggest slow implementation. Ambiguity prevails for countries like India, as it remains uncertain whether they will receive or offer assistance.
Global Financing Pact 2023
In 2023, a summit convened by the French President unlocked $200 billion lending capacity for emerging economies, signaling a positive stride toward the elusive $100 billion climate finance goal. Moreover, the introduction of disaster clauses by the World Bank suspends debt payments during extreme weather events, adding resilience to vulnerable economies. The IMF’s allocation of $100 billion in Special Drawing Rights (SDRs) to vulnerable nations showcases an intention to assist, although final approval is pending.
Way forward
- Mobilizing Climate Finance: For countries like India, the time has come to explore internal resource mobilization for climate finance. Collaboration among diverse institutions will prove crucial. Financial bodies must support mature technologies like wind and solar, while governments can provide direct financial backing for nascent technologies such as green hydrogen.
- Private Sector Engagement in Adaptation: Addressing adaptation requires active participation from the private sector, necessitating government intervention. With the bulk of adaptation funding originating from multilateral development banks, private sector contribution remains under 2%. Collaborative funding between governments and the private sector could mitigate risks. Potential resources for governments include carbon taxes, green bonds, and catastrophe (CAT) bonds.
UPSC Mains Questions
- How has the $100 billion commitment for climate finance evolved since its inception, and what factors have contributed to its inadequacy?
- Explain the disparity between funds allocated for mitigation and adaptation projects in climate finance, highlighting the underlying challenges.
- What innovative approaches, introduced in 2023, signal progress toward achieving climate finance goals, and how might they bridge the funding gap?
- Discuss the significance of engaging the private sector in adaptation projects and propose potential strategies for governments to incentivize private sector participation.