Mobilising Green Funds
- 30 Nov 2022
- 10 min read
Why in News?
Recently, at the United Nations Framework Convention on Climate Change Conference (UNFCCC) of Parties 27 in Sharm el-Sheikh (Egypt), countries agreed that a complete transformation of the international financial system was needed to significantly scale up resources for Climate Action.
- The money currently being channelised for climate action is barely 1%-10% of the estimated requirements.
What is Climate Finance?
- It refers to local, national, or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.
- The UNFCCC, Kyoto Protocol, and the Paris Agreement call for financial assistance from Parties with more financial resources (Developed Countries) to those that are less endowed and more vulnerable (Developing Countries).
- This is in accordance with the principle of “Common but Differentiated Responsibility and Respective Capabilities” (CBDR).
- CBDR is a principle within the UNFCCC that acknowledges different capabilities and differing responsibilities of individual countries in addressing climate change. The principle of CBDR is enshrined in Earth Summit 1992, held in Rio de Janeiro, Brazil.
How much Fund is Needed for Climate Action?
- The global transition to a low-carbon economy would likely require about USD 4-6 trillion every year till 2050.
- About USD 4 trillion would need to be invested annually in the renewable energy sector till 2030 if the net-zero emissions targets were to be achieved.
- The cumulative requirement of the developing countries, just for implementing their climate action plans, was about USD 6 trillion between 2022-2030.
- It means that at least 5% of the global Gross Domestic Product (GDP) would need to be directed into climate action every year.
- Just a few years ago, the estimated requirements ranged between 1 and 1.5% of global GDP.
- The USD 100 billion amount that the developed countries have promised to mobilise every year represents practically the entire money in play right now.
- Even this USD 100 billion has not yet been fully realised.
- Developed countries say they would reach this target by 2023. As of now, all that is flowing in is about USD 50-80 billion every year.
What are the Challenges in Mobilization of Climate Fund?
- Even if developed countries increase their contributions, it will likely result in only a marginal increase in the overall pie.
- The more significant jump would come from businesses and corporations investing money into green projects.
- In climate finance till now, private investments have lagged behind public money.
- Barely 30% of current financial flows are coming from private sources.
- The current rules and regulations of the global financial system make it extremely difficult for large numbers of countries to access international finance, particularly those with political instabilities, or weaker institutional and governance structures.
- Climate finance flows through a maze of channels — bilateral, regional, multilateral.
- It is in the form of grants, concessionary loans, debt, equity, carbon credits, and more.
- There are differences of opinion over whether a particular sum of money is actually climate-related. There are widely differing assessments of the quantum of climate finance currently being mobilised.
What can Tax be a source to the Climate Fund?
- Bulk of the additional financial resources to fight climate change would come from the pockets of the common citizen, in the form of taxes.
- The use of petrol and diesel, and other fossil fuels can be taxed.
- The production of coal is already being taxed for several years in India, and it has been generating valuable resources for the government, which has utilized it mainly for investing in clean technologies.
- Newer forms of Carbon Tax are likely to be imposed on businesses as well.
- In many cases, these would filter down to the common person of the country.
What are India’s Initiatives for Climate Finance?
- National Adaptation Fund for Climate Change (NAFCC):
- NAFCC was established in 2015 to meet the cost of adaptation to climate change for the State and Union Territories of India that are particularly vulnerable to the adverse effects of climate change.
- National Clean Energy Fund:
- The Fund was created to promote clean energy, and funded through an initial carbon tax on the use of coal by industries.
- It is governed by an Inter-Ministerial Group with the Finance Secretary as the Chairman.
- Its mandate is to fund research and development of innovative clean energy technology in the fossil and non-fossil fuel-based sectors.
- National Adaptation Fund:
- The fund was established in 2014 with a corpus of Rs. 100 crores with the aim of bridging the gap between the need and the available funds.
- The fund is operated under the Ministry of Environment, Forests, and Climate Change (MoEF&CC).
- There is a need to sustain a political commitment to raising new finance, besides,
- 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 penalising, dirty investments should also be practiced.
- The funding transformation also involve simplification of practices, changes in the way risks to investments are assessed, and an overhaul of the credit rating systems.