Climate Finance Today: A Snapshot

By adminNovember 30, 2015

Co-Authored by Chirag Gajjar and Pankaja Balaji

India will walk the energy efficiency path aggressively, according to Prakash Javadekar, the country’s minister of environment and forests.  The nation’s current power generation capacity is 268GW, with the government targeting an additional capacity of 175 GW in renewable power by 2022. To meet these targets, India is estimated to need anywhere between USD 180 billion to USD 200 billion.

How is India going to attain these funds?

Developing countries are losing out

Since the Copenhagen summit in December 2009, at which this understanding was reached, the concept of climate finance has expanded in purpose. Differences in how it should be provided, as well as a lack of transparency and geo-politics have dogged the issue. Major financial investments will be needed from both public and private sources before more countries, especially developing countries where funding is scarce, can attain low carbon growth economies.

According to the World Economic Forum, USD 5.7 trillion investments in green infrastructure is needed by 2020 to ensure even a measure of success in keeping average global temperatures below 2 degree Celsius.  And, the scenario as of 2015 is not comforting. According to the Global Landscape of Climate Finance 2014 report, as of last year, annual global climate finance flows totalled approximately USD 331 billion, USD 28 billion below the previous year. Of this amount, only 10 percent or USD 31-37 billion flowed from developed to developing countries – roughly 20% lower than the climate finance flows of USD 39-46 billion, seen the previous year. Interestingly, USD 2 billion of climate finance went from developing to developed countries. And USD 10 billion travelled between the different developing countries.

Fast-tracking climate finance

The agreement in Copenhagen six years ago was that developed nations will contribute USD 100 billion per year by 2020 to help developing countries meet their climate goals. A “fast start” amount of USD 30 billion by 2012, was promised, to help kick-start efforts, a pool that came to be called Fast Track Finance.

So far, a convoluted network of donors and financial institutions makes it difficult to trace climate funds and their impact. Confusion over what proportion of climate finance counts as adaption finance further skews the picture. With USD 244 billion, or 74 percent of total climate finance, originating and being invested in the same country, it is clear that private donor perception is that investments in developing nations are risky.

Previous commitments for funds have hit major road blocks due to lack of credible channels for distributing funds and bottlenecks in existing financial mechanisms. Additionally, fund allotment has been skewed 90/10 in favour of mitigation over adaption – which goes counter to developing countries’ demand for a 50-50 break-up of funds. With the Fast Track Fund period of 2010-2012 over, there is a 5 year gap before the promised USD 100 billion annually from 2020 will be put into motion.

If things continue in this manner, it means that the required momentum to combat climate change consequences will not be met.

The role of private finance

With international investment missing the mark, climate funding remains a conundrum for India. Government funds on their own are woefully lacking – but a start needs to be made to access national funds available.

Encouraging private and institutional finance is a must. For this to happen, India needs to put in place finance mechanisms and institutional arrangements that blend interests, expertise and resources to reduce risk and address bottlenecks preventing private investment. In fact, several risks must be addressed for private green investments to take off: policy certainty despite changes in government, fluctuations in the economy, regulatory changes, technology and operational revisions, human capacity as well as the availability of development assistance at project level.

Several steps in the right direction have already been made:

  • The government of India has mandated compulsory use of renewable energy usage as percentage of the total.
  • The Reserve Bank of India (RBI) has notified renewable energy as a priority lending sector, which enables banks to lend up to INR 150 million for renewable energy projects and raise infrastructure bonds to do so
  • Project level aid is being provided in terms of subsidies on solar panel purchases
  • Energy efficient appliances are being distributed and sold at competitive market rates

Hope for the future

Global motivation to enable good solutions for climate finance is evident – at the Third International Conference on Financing for Development held in July this year, measures to make climate finance transparent and more accessible for developing nations were discussed. The COP21 is expected to tie up loose ends, and will hopefully also show that the developed world will back India’s ambitions by promising more money towards achieving them.

Lacking in healthy infrastructure, advanced technology and information, India has its work cut out in the war against poverty and climate change. More and affordable climate financing is likely to change the game. In fact, it will decide the fate of several developing countries in the same fix. However, given the urgency for action, India cannot afford to “wait” for much promised assistance and should forge ahead with the many laudable initiatives already underway to build a greener future.