Climate Finance

• Countries recently agreed at the United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties 27 in Sharm el-Sheikh (Egypt) that a complete transformation of the international financial system was required to significantly increase resources for Climate Action.
• The current funding for climate action amounts to only 1%-10% of the estimated needs.

What is climate finance?

• It refers to local, national, or transnational financing derived from public, private, and alternative sources to support climate change mitigation and adaptation actions.
• The UNFCCC, Kyoto Protocol, and Paris Agreement all call for financial assistance from Parties with greater financial resources (Developed Countries) to those with fewer and more vulnerable resources (Developing Countries).
• This adheres to the principle of "Common but Differentiated Responsibility and Respective Capabilities" (CBDR).
• CBDR is a UNFCCC principle that recognizes individual countries' varying capabilities and responsibilities in addressing climate change. The CBDR principle was enshrined in the Rio de Janeiro Earth Summit in 1992.

How Much Money Do We Need for Climate Action?

• The global transition to a low-carbon economy is expected to cost between USD 4-6 trillion per year until 2050.
• If net-zero emissions targets are to be met, approximately USD 4 trillion must be invested annually in the renewable energy sector until 2030.
• Between 2022 and 2030, the cumulative requirement of developing countries for implementing their climate action plans was approximately USD 6 trillion.
• It means that every year, at least 5% of the global Gross Domestic Product (GDP) must be directed toward climate action.
• Only a few years ago, the estimated requirements ranged from 1 to 1.5% of global GDP.
• The USD 100 billion that developed countries have promised to mobilize each year represents nearly the entire amount of money in play right now.
• Even this $100 billion has yet to be fully realized.
• Developed countries say they will meet this goal by 2023. Currently, the total amount flowing in is around USD 50-80 billion per year.

What are the Obstacles to Climate Fund Mobilization?

• Even if developed countries increase their contributions, the overall pie will likely only grow marginally.
• The more significant increase would result from businesses and corporations investing in green projects.
• Until now, private investments in climate finance have lagged behind public funds.
• Only about 30% of current financial flows are from private sources.
• The current rules and regulations of the global financial system make it extremely difficult for a large number of countries, particularly those with political instabilities or weaker institutional and governance structures, to access international finance.
• Climate finance flows through a tangle of bilateral, regional, and multilateral channels.
• Grants, concessionary loans, debt, equity, carbon credits, and other forms of assistance are available.
• There are differing views on whether a specific sum of money is truly climate-related. The amount of climate finance that is currently being mobilised is widely disputed.

What taxes can be used to fund the Climate Fund?

• The majority of additional financial resources to combat climate change would come from the pockets of ordinary citizens in the form of taxes.
• Petrol and diesel, as well as other fossil fuels, can be taxed.
• Coal production has already been taxed in India for several years, generating valuable resources for the government, which has primarily used it to invest in clean technologies.
• These funds have also been used for projects related to the Clean Ganga Mission and the Covid-19 pandemic.
• Newer forms of carbon taxation are also likely to be imposed on businesses.
• In many cases, these would reach the average citizen of the country.

What are India's Climate Finance Initiatives?

• National Adaptation Fund for Climate Change (NAFCC): The NAFCC was established in 2015 to cover the costs of climate change adaptation for Indian states and union territories that are particularly vulnerable to the effects of climate change.
• The National Clean Energy Fund was established to promote clean energy and was initially funded by a carbon tax on industries that use coal.
• It is governed by an Inter-Ministerial Group, which is chaired by the Finance Secretary.
• Its mission is to fund innovative clean energy research and development in both the fossil and non-fossil fuel sectors.

Fund for National Adaptation:

• The fund was established in 2014 with a corpus of Rs. 100 crores to bridge the gap between need and available funds.
• The Ministry of Environment, Forests, and Climate Change manages the fund.

The Way Forward

• A political commitment to raising new finance must be maintained, as well as ensuring that finance is better targeted at reducing emissions and vulnerability.
• Learning and improving from recent experiences, particularly as the Green Climate Fund gets to work.
• International Financial Institutions can engage with governments, central banks, commercial banks and other financial players operating at national or regional levels to create the right environment for investments in green projects.
• Incentivising climate-friendly investments and discouraging, or even penalizing, dirty investments should also be practiced.
• The funding transformation also involves simplification of practices, changes in the way risks to investments are assessed, and an overhaul of the credit rating systems.