Climate Financing

The 2022 United Nations Climate Change Conference, known as COP27, focused on Climate financing, sustainability transitions, and improvements. What does Climate financing mean? What are the different mechanisms it has? Continue reading to learn about Climate financing.

The term climate financing is a global trend nowadays.

But most of us don’t have a clear understanding of the term.

What are the various aspects of climate financing?

COP27 focus will include adapting to extreme natural events, financing sustainability and climate goals, especially in emerging markets, and continuing to lock down international progress on the Paris Agreement.

Climate finance refers to local, nationwide, or international financing derived from public, private, and alternative sources to support climate change mitigation and adaptation strategies.

The UNFCCC, the Kyoto Protocol, and the Paris Agreements all call for financial assistance from Parties with greater financial resources to those with less and more susceptible resources.

Read: COP29: UN Climate Change Conference 2024

Why is Climate financing required?

The scope of climate financing is very big. The following are the main requirements why climate financing is required.

• Climate change is already causing unpredictability. An increase in the number of cyclones, rainfall and their destructive powers, an increase in extreme weather events, and glacier melting. As a result, large financial resources are required to adapt to the detrimental effects and mitigate the effects of climate change.
• To keep global warming below the goal level, rapid, large-scale emissions reductions are required, as well as a matching transition away from high-carbon production and consumption across all sectors. This requires a considerable upfront cost.
• Countries’ contributions to climate change and their ability to prevent and manage its repercussions differ greatly. So to help the least developed countries climate financing is required.
• Only rapid mitigation efforts will be able to keep global warming below 1.5 degrees Celsius. It requires significant expenditures on green technology.
• A small number of high-income countries are to blame for climate change, its effects are disproportionately severe in low-income countries. Many of these were once developed-world colonies. Financing from the developed to developing worlds is critical for resolving this historical injustice.

Also read: Microfinance Institutions

Global Climate Finance mechanisms

Let us move on to various mechanisms under global climate financing.

Mechanisms under the Kyoto Protocol

These mechanisms allow Parties to accomplish emission reductions or carbon removal from the atmosphere in other countries at a low cost.

• CDM (Clean Development Mechanism): It is a United Nations-run carbon offset scheme that allows governments to fund projects that reduce greenhouse gas emissions in other countries while claiming the avoided emissions as part of their own efforts to fulfil international emissions objectives.
• Collaboration in Implementation: As an alternative to decreasing emissions domestically, any Annex I country can invest in emission reduction projects in any other Annex I country under the Joint Implementation.
• The Global Environment Facility (GEF) is a multilateral financial instrument formed during the 1992 Rio Earth Summit to provide loans to developing nations for initiatives that benefit the global environment and promote sustainable livelihoods in local communities.
• Green Climate Fund (GCF): The GCF is the world’s largest environmental fund, and it aims to assist developing countries in reducing their greenhouse gas emissions while also requiring them to adapt to climate change.
• The Special Climate Change Fund (SCCF): It is a specialised trust fund run by the Global Environment Facility that aims to catalyse and leverage additional financing from bilateral and multilateral sources.
• The Least Developed Countries Fund (LDCF): It was established in 2001 to support the work programme of the LDCs under the UN Framework Convention on Climate Change (UNFCCC), including the development and implementation of national adaptation plans (NAPAs). The Global Environment Facility manages it (GEF).
• Adaptation Fund: The UNFCCC’s Kyoto Protocol established the Adaptation Fund. It provides funding for projects and programmes that assist vulnerable communities in developing nations in adapting to climate change. Initiatives are based on the needs, perspectives, and priorities of the country. The fund is primarily supported by government and corporate donors, as well as a 2% share of the proceeds from projects funded by the Kyoto Protocol’s Clean Development Mechanism.
• Standing Committee on Finance: At COP 16 in 2010, Parties to the UNFCCC agreed to establish the Standing Committee on Finance (SCF) to assist the COP in carrying out its functions in regard to the Convention’s financial framework.
• Cancun Agreements: The Cancun Agreements, signed in 2010, committed developed country parties to mobilising a total of USD 100 billion per year by 2020 to address the needs of developing countries. Parties confirmed this goal when they signed the Paris Agreement.
• Data hub for climate finance: The UNFCCC website contains a climate finance data portal with useful explanations, visuals, and numbers for a better understanding of the climate finance process and a portal to information on climate action actions sponsored in developing countries.
• CIFs (Climate Investment Funds): It was founded in 2008 and is managed by the World Bank.
• China’s Kunming Climate Fund: China announced the establishment of the USD 230 million Kunming Biodiversity fund to help developing nations safeguard biodiversity.

India’s initiatives in Climate financing

The following are India’s Intended Nationally Determined Contributions (INDCs) under the UNFCCC:

• Reduce the carbon intensity of its GDP by 33 to 35 per cent from 2005 levels by 2030.
• By 2030, non-fossil fuel-based energy resources will account for around 40% of installed electric power capacity.
• To do this, India has been steadily expanding its climate finance channels.

The Climate Change Finance Unit

It was established by the Finance Ministry in 2011 and gave shape to the climate finance framework. The nodal institution represents the MoF on all national and international climate finance platforms.

The NITI Aayog

Niti Ayog is largely in charge of estimating the country’s financial needs.

From multilateral agencies

International climate money flows to India through a variety of sources, including multilateral institutions. The principal channel is the UNFCCC’s multilateral climate funds, such as the Global Environment Facility, Adaptation Fund, Global Climate Fund, and so on.

Bilateral agencies

The United States Agency for International Development (USAID), the Canadian International Development Agency (CIDA), and others are the primary providers of bilateral aid in the form of grants. These are mostly in the form of grants.

The National Adaptation Fund

Established in 2014 with a budget of Rs. 100 crore, the fund aims to bridge the gap between need and available money. The Ministry of Environment, Forests and Climate Change manages the fund.

The National Clean Energy Fund

The Fund was established to encourage clean energy and was initially supported by a carbon tax on companies’ use of coal. Its mission is to fund research and development of new clean energy technology in both the fossil and non-fossil fuel industries.

Compensatory Afforestation Fund

The Compensatory Afforestation Fund Act creates a National Compensatory Afforestation Fund under the Public Account of India, as well as a State Compensatory Afforestation Fund under the Public Account of each state. When forest land is diverted for non-forest purposes such as mining or industry, the user agency pays for planting forests over an equal amount of non-forest land, or, if such land is not available, twice the extent of degraded forest land.

National Disaster Response Fund and State Crisis Response Fund (SDRF)

Its purpose is to fund the costs of emergency response, relief, and rehabilitation in the event of a disaster or threatening disaster situation.

The National Mission for Enhanced Energy Efficiency

It is  a part of the National Action Plan on Climate Change (NAPCC), which provides practical financing mechanisms through programmes such as

• PAT- Perform, Achieve, and Trade.
• Market Transformation for Energy Efficiency (MTEE)
• EEFP stands for Energy Efficiency Financing Platform.
• FEEED is an acronym that stands for Framework for Energy Efficient Economic Development.

Private Climate Finance

Private companies contribute to climate finance by issuing green bonds, making concessional and non-concessional loans, and participating in national carbon markets, among other things.

Challenges

• Different organisations define climate finance in different ways, making it difficult to synergize operations. There is no conventional accounting structure.
• Climate finance has long been chastised for inflating estimates by incorporating subsidies for development programmes such as health and education that only nominally target climate mitigation.
• Despite repeated demands for maintaining a balance between adaptation and mitigation, climate finance has remained tilted toward mitigation.
• Currently, available adaptation money is much lower than the demands outlined in developing nations’ Nationally Determined Contributions.
• The disproportionate delivery of climate funding through loans risks exacerbating many low-income nations’ financial crises.
• The focus of developed-country climate finance is on attracting private-sector investment. Public finance is only helping to “de-risk” investment. Climate funding raised by the private sector, on the other hand, will be channelled to projects deemed “bankable,” rather than those chosen based on developing nations’ priorities and needs.
• Climate change projects have a longer gestation period, which discourages financial institutions from investing in them.

Way Forward

Climate finance must be led by equitable concerns by climate justice so that it is needs-based rather than results-based. All decentralised plans developed by village panchayats, urban local bodies, and district planning authorities must include climate finance.

Creating a national-level climate finance regulatory authority will better enable us to comprehend, manage, and finance climate change goals, given the precision and technical competence required. It can supervise all of the climate change mechanisms that are supported by the government.

Risk reduction for investors is a critical condition for increasing private climate investment. Government assistance for the viability gap could aid in risk reduction. The global financial sector must build markets for instruments to invest in climate resilience initiatives.

Instruments such as catastrophe risk insurance, disaster relief funds, rehabilitation funds, contingent credit at preferential rates, climate bonds, social protection bonds, and so on must be well-designed and appropriately targeted to the needs of recipients.

Article Written By:  Atheena Fathima Riyas