Climate Finance

What is climate finance?

  • Climate financerefers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions to address climate change.
  • The Convention (UNFCCC), the Kyoto Protocol and the Paris Agreement call for financial assistance from Parties with more financial resources to those that are less endowed and more vulnerable.
  • This recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously – common but differentiated responsibility and respective capabilities.
  • It is important for all governments and stakeholders to understand and assess the financial needs of developing countries, as well as to understand how these financial resources can be mobilized. Provision of resources should also aim to achieve a balance between adaptation and mitigation.

Why climate finance?

  1. Threats due to climate change– The threat posed by climate change to the development gains made over recent decades demands an urgent, comprehensive and global response.
  2. To limit the rise of world’s average temperature-Climate finance is one of the most important requirements in keeping the global temperature below 1.5 degree Celsius.
  3. Faster Changes in the environment– The world is already experiencing changes in average temperature, shifts in the seasons and an increasing frequency of extreme weather events and other climate change impacts and slow onset events. The faster the climate changes, and the longer adaptation efforts are put off, the more difficult and expensive it could be.
  4. For Mitigation– Climate finance is needed for mitigation, because large-scale investments are required to significantly reduce emissions.

 

What is mitigation?

  • Mitigation deals with reducing GHG emissions and is mostly identified with renewable energy and energy efficiency.
  • They include policies, incentive schemes and investment programmes which addresses
  • all sectors, including energy generation and use, transport, buildings, industry, agriculture, forestry and other land use, and waste management.
  1. For Adaptation– Climate finance is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.

What is Adaptation?

  • Adaptation refers to adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts.
  • It refers to changes in processes, practices, and structures to moderate potential damages or to benefit from opportunities associated with climate change. In simple terms, countries and communities need to develop adaptation solution and implement action to respond to the impacts of climate change that are already happening, as well as prepare for future impacts.
  • Adaptation solutions take many shapes and forms, depending on the unique context of a community, business, organization, country or region. It can range from building flood defences, setting up early warning systems for cyclones and switching to drought-resistant crops, to redesigning communication systems, business operations and government policies.
  1. To implement the objectives of UNFCCC– In accordance with the principle of “common but differentiated responsibility and respective capabilities” set out in the Convention, developed country parties are to provide financial resources to assist developing country parties in implementing the objectives of the UNFCCC.
  2. To push countries to take action– Effective spending of multilateral climate finance and delivery of successful outcomes are critical in building consensus on the imperative to take action in response to climate change.
What Are The Available Climate Financing Mechanisms?  
Global Environment Facility (GEF)• The Global Environment Facility was established on the eve of the 1992 Rio Earth Summit to help tackle our planet’s most pressing environmental problems.
• GEF is an international partnership of 183 countries, international institutions, civil society organizations and the private sector that addresses global environmental issues.
• GEF has hitherto provided over $17.9 billion in grants and mobilized an additional $93.2 billion in co-financing for more than 4500 projects in 170 countries.
Green Climate Fund (GCF) –• GCF is a new global fund created to support the efforts of developing countries to reduce their greenhouse gas (GHG) emissions and adapt to climate change.
• GCF aims to catalyze a flow of climate finance to invest in low-emission and climate-resilient development, driving a paradigm shift in the global response to climate change.
• It was set up by the 194 countries who are parties to the United Nations Framework Convention on Climate Change (UNFCCC) in 2010, as part of the Convention’s financial mechanism.
Special Climate Change Fund (SCCF) – • The SCCF was established under the UNFCCC in 2001 to finance projects relating to: adaptation; technology transfer and capacity building; energy, transport, industry, agriculture, forestry and waste management; and economic diversification.
• This fund was meant to complement other funding mechanisms for the implementation of the Convention.
• The Global Environment Facility (GEF) has been entrusted to operate the SCCF.
Least Developed Countries Fund (LDCF)-• The LDCF was established to support a work programme to assist Least Developed Country Parties (LDCs) carry out, inter alia, the preparation and implementation of national adaptation programmes of action (NAPAs).
• GEF has been entrusted to operate the LDCF.
Adaptation Fund (AF)• Adaptation Fund was established under the Kyoto Protocol in 2001 to finance concrete adaptation projects and programmes in developing country parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change.
• The Adaptation Fund is financed with a share of proceeds from the clean development mechanism (CDM) project activities and other sources of funding. The share of proceeds amounts to 2% of certified emission reductions (CERs) issued for a CDM project activity.
• The Adaptation Fund is supervised and managed by the Adaptation Fund Board (AFB).
Climate Investment Fund by World Bank• The CIFs have been designed to support low-carbon and climate-resilient development through scaled-up financing channeled through the regional development banks.
• The CIF’s large-scale, low-cost, long-term financing lowers the risk and cost of climate financing.
• It tests new business models, builds track records in unproven markets, and boosts investor confidence to unlock additional sources of finance.
Clean Technology Fund (CTF)• CIF was established in 2008, 14 donor countries have contributed over $8 billion in support of scaling up mitigation and adaptation action in developing and middle-income countries.
• These precious public resources are held in trust by the World Bank, and they are disbursed as grants, highly concessional loans, and risk mitigation instruments to recipient countries through multilateral development banks (MDBs).
• The CIF is the only multilateral climate fund to work exclusively with MDBs as implementing agencies.
Dedicated Private Sector Programs• The private sector is critical in mobilizing the financing volumes needed to help developing countries move towards low carbon economies.
• The Dedicated Private Sector Programs (DPSP) are dedicated funding windows of the CTF that provide risk-appropriate capital to finance high-impact, large-scale private sector projects in clean technology, such as geothermal power, mini-grids, energy efficiency, and solar PV.
• Launched in 2013, the programs serve as a platform for CIF partner MDBs to work together and identify DPSP funding opportunities that can be deployed rapidly, efficiently, and in large enough volumes to move markets in CIF target countries.

Issues with climate financing

One of the major tasks before the 24th CoP is to finalize the implementation guidelines for 21st Paris CoP, in which finance is a key component. The developed countries had committed to $100 billion per annum for climate adaptation and mitigation by 2020.

  1. Lack of Clarity– There has been a continuing lack of clarity on how this climate finance should be defined and accounted, as serious concerns have been raised over self-reporting by the developed country parties.
  • Need of robust accounting framework– Underlining the need for a robust accounting framework for transparent reporting of climate finance, the modalities for accounting of financial resources cannot be at the discretion of a particular country.
  • Also, scaling up efforts would require massive investment, but historical emitters–the rich, industrialised countries–have failed to make good their commitments to provide funds under the Paris Agreement.
  • Major Issues with National Level Climate Funds –
    • Susceptible to clientilism and corruption.
    • National climate funds remain largely in their pilot stages.
    • National climate funds create another level of bureaucracy and require human capacity.
  1. Definition of climate finance varies in reports– The definitions of climate change finance used in various reports were not consistent with the UNFCCC provisions and the methodologies used were also questionable.
  2. Bias towards mitigation– Climate financing till recently had a clear bias towards mitigation: in 2013 and 2014, 70% of climate change aid from climate funds and 82% of MDBs funding were directed to mitigation efforts.
  3. Threat to contributions by major polluters– For example, US’s threat to pull out of the Paris Agreement and its refusal to continue US contributions to climate funds.
  4. Inadequate corpus of fund – Climate finance goal of $100 billion is a meagre amount in size in contrast to the actual needs assessed for developing countries in trillions of dollars.
    • “The present scope, scale and speed of climate finance are not only insufficient but not even being discussed properly,” said a paper released by India’s finance ministry on December 4, 2018.
    • Up to 2017, developed countries had met only 12% of their financial obligations, according to the Indian finance ministry paper.
  5. Uncertain end-use – It is difficult to guarantee the funds will be spent on climate priorities.
  6. Fiscal Deficit related constraints-Difficulty of incorporating cost uncertainties into budgets and fiscal frameworks along withtightened fiscal environment makes new climate change focused loans unlikely.

India and Climate Financing

Climate Change and its Implications for India

  • Intergovernmental Panel on Climate Change (IPCC) (2007) has affirmed India’s high vulnerability and exposure to climate change.
  • It has argued that climate change will slow India’s economic growth, impact health and development, make poverty reduction more difficult and erode food security.
  • The number and intensity of extreme weather events is likely to increase. India is already one of the most disaster-prone nations in the world and many of its people live in areas vulnerable to hazards such as floods, cyclones and droughts.
  • Extreme weather events will not only affect agricultural output and food security, but will also lead to water shortages and trigger outbreaks of water and mosquito-borne diseases such as diarrhea and malaria.
  • Climate impacts will also adversely affect the natural ecosystems that sustain lives of rural households in several places. India, like many other developing nations, is likely to suffer losses in all major sectors of the economy including energy, transport, farming and tourism.
  • These observations have been reiterated by the IPCC (2014) Fifth Assessment Report, arguing that climate change will have widespread impacts on Indian society and its interaction with the natural environment.
  • Climate change will impact settlements and infrastructure through flooding, human health, and contribute to food and water shortages in the country.
  • Climate change will progressively threaten economic growth and human security in complex ways in India.
  • Sustainable development in India would not be possible with the natural disasters and other disruptive climate impacts threatening economic growth and social progress in the country.
  • India (in INDC) has put a figure of USD 2.5 trillion (at 2014-15 prices) as its price for achieving its mitigation and adaptation targets by 2030.

Domestic initiatives on climate finance: Policies and Institutions

Domestic initiatives on climate finance: Policies and Institutions 
Climate Change- Institutional and Policy responsesAt the National Level:
• 2008- The then PM appointed PM’s Council on Climate Change to coordinate and oversee India’s climate response.
• Climate Change Finance Unit established in 2011 in the Ministry of Finance. It is the nodal agency that represents MoF in all climate finance platforms- national and international
• Planning Commission (now NitiAayog) was primarily responsible for assessing the finance requirements for the country, including that required for climate action.
• India’s climate change policy is located within the framework provided by National Environment Policy, 2006.
• National Action Plan on Climate Change (NAPCC), 2008 - The most comprehensive response to climate change. It comprises of (8+4 missions).
At the sub-National Level:
• In 2009- State governments were asked by MoEFCC to formulate State Action Plans on Climate Change (SAPCC) in line with NAPCC.

Climate Finance in India

Domestic Public Finance1. Budgetary Support for NAPCC “missions”.
2. Budgetary support to other climate strategies like:
a. National Clean Energy Fund (NCEF)
b. National Adaptation Fund (NAF)
c. Compensatory Afforestation Funds (CAMPA fund)
d. National Disaster Response Fund (NDRF)
Domestic Public Finance (other sources)The government apart from the making budgetary allocations supports climate action through the cuts in subsidies, increase in taxes on petroleum and diesel, marketmechanisms such as Perform Achieve and Trade (PAT) and Renewable Energy Certificates (RECs) and regulatory regimes such as Renewable Purchase Obligations (RPOs).
Private Climate Finance in IndiaIn this regard, Green bonds, Blue Bonds,Debt Swaps,Concessional and Non-Concessional Loans, National Carbon Markets,etc. areother fast emerging mechanisms to finance green initiatives.
From multi-lateral agencies:International climate finance flows to India through a number of channels.The primary route is the multilateral climate funds established by the UNFCCC such as the Global Environment Facility (GEF),

Adaptation Fund (AF),and Green Climate Fund (GCF).Climate Investment Funds (CIFs), established and operated by the World Bank, also finance climate action in India but do not operate under the purview of UNFCCC.
From bilateral agencies:The key sources of bilateral assistance in form of grants are United States Agency for International Development (USAID), Canadian International Development Agency (CIDA), International Development Research Centre Canada (IDRC), etc.These are largely in form of grants.

Indian Government has signed bilateral agreements with Norway, Finland and France on issues such as clean technologies, including waste management, water, renewable energy, energy efficiency and sustainable forestry.

Way forward

  • Climate finance has to be predictable, assured and transparent to be part of the planning process and to make a difference.
    • Climate finance has to bepredictable to ensure sustained flow of climate finance, preferably for multi-year funding cycles at least between 5-10 years.
    • It has to be assured, because action will depend on knowing that climate finance will be available for a certain time period and in certain quantities.
    • It has to be transparent to be accountable publically and to ensure good governance of the funds and their outcomes.
  • India must put in place a process to asses and monitor the total quantum of climate finance required with identified sources.
  • Climate finance must fall into the purview of accountability institutions like the Comptroller and Auditor General, or judicial bodies such as the National Green Tribunal, with clear guidelines on its scrutiny.
  • Given the myriad programmes, schemes, institutions and actors involved in climate finance, there is a need to evolve a system to centralize climate change portfolios, both financially and policy wise in a national climate change program.
  • Climate financing must be guided by three principles:
    • Equity considerations in line with climate justice so that climate finance is needs-based rather than results-based;
    • Gender-budgeting of climate finance is nonnegotiable; and,
    • Climate finance is part of all decentralized plans made by village panchayats, urban local bodies and (integrated) district planning authorities.
  • Aside from these innovative mechanisms, countries should look into clarifying and strengthening traditional line item spending for climate change. For example, “climate change” as a category in the budget would be a useful way for countries to begin.
  • Given the level of specificity and technical expertise required, creating a climate change unit within the Ministry of Finance will better equip it to understand, manage, and finance climate change priorities.
  • Create a group or designate an individual within the executivebranch that can oversee all of the climate change mechanisms supported by the government.
  • Climate change capacity building should not only be focused on the government, but also on civil society organizations; the Ministries of Finance should work to build relationships with national civil society organizations.
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