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July 18, 2023

International Relations|Climate Change

Reimagining Climate Finance

By Nitin Desai







Climate change is once again emerging as the most critical challenge for global cooperation because of the widespread experience of adverse climate events. and the growing evidence of the inadequacy of current efforts for mitigation.  Of the many negotiation issues, climate finance will probably play an important role in the forthcoming meeting of the UNFCCC in Dubai this December. The main challenge is to work out the quantum and the funding responsibilities about the required transfer of funds from developed to emerging market and developing countries (EMDCs) for climate related actions.

A recent report digs a little deeper than earlier estimates and projects $2-2.8 trillion per year by 2030, (6-8.5 percent of GDP) as the climate related investment requirement for EMDCs other than China.[1] The investment in development activities that will contribute significantly to climate mitigation account for around 75 percent of the estimate and the balance is for loss and damage and adaptation and resilience. It estimates that about $ 1 trillion would have to come from international transfers of funds.

Another more granular estimate has come from the World Bank’s Country Climate and Development Reports (CCDRs)[2], to analyse how each country’s development goals can be achieved in the context of mitigating and adapting to climate change. In the first round, these estimates have been prepared for 24 countries and show a wide range of variation for the investment between 2022 and 2030 as a percentage of GDP required for a resilient and low carbon pathway—1.1 percent for Upper Middle Income countries (UMI), 5.1 percent for lower middle income countries (LMI) and 8 percent for low-income countries (LMI). One reason for the large difference is the inclusion of requirements to close existing development and infrastructure gaps in most LIs and LMIs, which explains the difference of estimates, for instance of 1 percent for China and 10 percent for Pakistan.

Yet another granular estimate can be found in the presentations of Nationally Determined Contributions (NDC) submitted to the UNFCCC. India’s NDC submitted in 2015 indicates preliminary estimates of $206 billion (at 2014-15 prices) between 2015 and 2030 for implementing adaptation actions in agriculture, forestry, fisheries infrastructure, water resources and ecosystems and $834 billion till 2030 (at 2011 prices) for mitigation activities for moderate low carbon development.

These estimates are helpful. But for negotiations on official global transfers the estimate should be the requirement of concessional finance at the country level to shift to a climate friendly development path. This should take into account not just the net additional investment costs to the economy but also the impact on the cost of the end product.

Take the example of investment in renewable energy that will replace carbon emitting fossil fuel use for electricity generation. The net investment requirement for renewable energy will be higher than the business-as-usual alternative of fossil-fuel based power plants. However, because of the dependence on free energy sources the costs of power supply may be lower, an outcome that is already evident.  This means that this part of the climate mitigation action could well be left to the dynamics of the market, though some substantial changes in power system management will be required. However, there are other areas where the modification of the development path to cope with climate change cannot rely entirely on technological developments that make the modification privately profitable and hence can be left to the market.  For instance, the promotion of electric vehicles to reduce fossil-fuel demand may require subsidies, at least initially, to push demand to a viable scale. 

The need for concessional finance will be even greater in the changes required to cope with higher temperatures, substantial variations in water flows, sea level rise, more climate crises, and other impacts of climate change even if the mitigation actions keep the temperature increase to the agreed level of 1.50-2.00C. For instance, providing barriers against a rising sea-level in coastal settlements or shifting them to higher ground cannot be left to individual initiatives and will require community level action which will not happen without concessional support from public authorities. The financing needs of these adaptation and resilience requirements are generally a net addition to what public and private spending would be if climate change did not take place and hence the most important element in any global agreement on climate finance linked to climate liability.

Given this perspective any significant movement on climate finance in the UNFCC must consider the following:

  • A clear distinction between the investment required for acceptable levels of development in developing countries and the additional investment required to do this in a manner that would cope with the impact of climate change.
  • An assessment of the sectors in which the additional investment can be met by the normal process of investment funding and the sectors where some measure of concessional funding would be required to ensure the shift to climate friendly development.
  • An assessment of the financing requirements of community level action required in urban and rural settlements and ecologically sensitive areas to cope with emerging climate risks. These assessments must be made separately for each country on the basis of agreed methodological principles, preferably by each country itself and subject to scrutiny by a globally agreed expert group.

An agreed framework for global financial flows can follow a modified blended finance approach that combines domestic and international commercial funding, voluntary and obligatory development assistance flows, and voluntary philanthropic funding.  The international commercial flow can be directed a little by the private corporate and finance institutions accepting environmental principles and climate mitigation targets.  This is already happening in initiatives like the Science Based Target Initiative (SBTI),  the Glasgow Financial Alliance for Net Zero (GFANZ) and the Force for Good  Initiative (FFG). 

The agreement between governments should focus on the financial assistance required to cope with the net addition to development funding requirements because of the need to cope with emerging climate risks. A more difficult task is the country-wide allocation of obligatory funding requirement which would probably be mainly for adaptation and resilience measures and for unavoidable loss and damage. The logical basis for this would be the apportionment of responsibility defined by principles of climate justice based on the record of GHG emissions. Unfortunately, there is no agreement on such principles of climate justice which matters not just for the contributory obligations of each country but also for the recipient rights of each country.

Hence the discussion on inter-governmental climate finance flows can be made more productive by relying on the recent estimates from independent organisations, referred to above, and the NDCs as a basis for an agreement on the total amount required till 2030 and for the broad allocation of funds by per capita income category. As for the sharing of contributions by the developed countries, leave it to the politics of a dialogue between rich countries. Who knows, it may even lead to a dialogue between them on climate justice!

[1] Songwe V, Stern N, Bhattacharya A (2022) Finance for climate action: Scaling up investment for climate and development. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.

[2] World Bank Group. 2022. Climate and Development : An Agenda for Action - Emerging Insights from World Bank Group 2021-22 Country Climate and Development Reports. World Bank. http://hdl.handle.net/10986/38220

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