Relevance: GS-3: Conservation, environmental pollution and degradation.

Relevance: GS-2: Important International institutions, agencies and fora- their structure, mandate.

Key Phrases: Climate finance, IPCC Report, Mitigation, green transition, Paris Agreement, risk perceptions and macroeconomic, headwinds, GHG emissions, capital markets, institutional and policy frameworks, climate-related risks, Global Environmental Facility, Adaptation Fund, GCF, ESG.

Why in News ?

• Accelerated financial support from developed to developing countries and realigning the financial sector’s resources towards low-emission investments will help.

Context:

• Climate finance holds the keys to a safer world. Accelerating and scaling up climate finance is a critical enabler if the world is to collectively succeed in limiting global warming. This is a major conclusion of the latest IPCC Report on Mitigation. There are two questions.
  • By how much and where does climate finance need to flow?
  • What steps would unlock global climate finance, and support India’s accelerated green transition?
• Almost everyone knows that scaling up climate financing is crucial. Because such financing is required for large scale system changes. Current fossil-fuel reliant systems cannot be replaced without massive, continued investments in alternative energy sources, shifting to electric vehicles and low-emission transport, building our cities differently, harnessing our food production and land use sustainably, changing our industrial technologies, and managing our air, water, forests, and oceans better.

Multi-pronged approach

• The latest IPCC report looked through multiple data sources and modeled scenarios and pathways that capture the combined effects of climate, technologies, and social and economic drivers, to understand the scale of least-cost mitigation global investment required if we want to limit global warming to 2°C or lower (with high likelihood), the goal agreed to by all nations (under the Paris Agreement).
• The Report’s answer is that global annual climate finance flows would need to rise by a factor of three to six times annually, or from about $700-750 billion currently to about $3-4 trillion plus a year, starting now.
• The Report points to the biggest (relative) gaps in such investment funding needs in developing countries, such as India. The scale of climate investment requirements in developing countries are 4-9 per cent of their GDP annually, versus one-half in developed countries. India and other developing countries also face much higher costs of such finance compared to developed economies, for a variety of reasons.
• Global capital markets and accumulated financial savings are primarily located in developed regions.
• Home bias, risk perceptions and macroeconomic headwinds are some factors that limit the flow of stable, long-term capital.
• On top of this, equity, in terms of historical responsibility and per capita GHG emissions, require a just transition in such shift in climate financing towards developing countries.
• So, we know the problem that needs to be solved. It is in the collective interest of all countries to close these financing gaps as soon as possible because we are running out of time. This takes us to the next question. How are we to solve the collective action problem, given the inherent dilemma between individual self-interests and collective action?

The IPCC Report suggests two parallel tracks.

• The first is to accelerate financial support from developed countries to developing countries to meet the existing goal of $100 billion-a-year in public and publicly mobilised private climate flows, which is still falling short, and establish a new and credible higher post-2025 target, under the Paris Agreement. Several practical options are feasible.
  • First, accelerated public grants for low-income and most vulnerable regions such as in Africa and elsewhere to meet their basic energy needs (and allocate much greater sums to adaptation) would be cost-effective and have high social returns.
  • Second, where public budgets are constrained, developed countries could establish guarantee mechanisms to reduce risks and mobilise many times greater cross-border flows of private capital (the ‘multiplier-effects’ can be as high as 15:1) at significantly lower cost.
  • Third, clearer operational definitions and processes would help. This would improve the tracking and measurement of flows, provide greater confidence, and incentivise flows.
  • Fourth, promote local capital markets, especially to attract institutional investors, extend access and lower cost to long-term capital.
  • Fifth, foster institutional and policy frameworks that build trust and confidence among partners. There are large cooperative ‘win-win’ outcomes possible, instead of the current impasse. We need to build better bridges. India can play an important role to strengthen such partnerships.
• The second is resetting the financial sector, globally and at home, to better recognise rising climate-related risks. The global financial system has enormous command over resources, some $400 trillion in size (four times global GDP), growing every year, whose realignment towards low-emission investments can easily accommodate the gaps in climate finance flows.

Way Forward:

• The global financial system continues to be misaligned, one measure of which is the large financing it continues to provide to fossil-fuels that well exceeds financing of low-carbon climate investments. While some progress is happening, such as green bond markets and ESG (environmental, social and governance) investments, there are concerns about transparency and standards to avoid ‘green-washing’.
• Central banks and regulators also may need to be more involved, establishing climate aligned prudential rules, recognising systemic climate risks and helping establish low-carbon finance instruments. Multilateral institutions and specialised climate finance institutions have stepped up their activity but need governance improvements. Other steps include specialised banks and climate funds to improve access and costs of finance for vulnerable groups, women, and local communities. India can be the right place to showcase such improvements.
• Much remains to be done. Progress is happening but at a pace and scale that is falling well short of financing needed for a safer world, especially in ‘greening’ the post-pandemic recovery. The ‘science’ on climate finance is clear: credible collective commitments and actions are a small ‘cost’ for much greater benefits of avoiding globally catastrophic consequences. India’s role is important.

Source: The Hindu BL

Mains Question:

Q. “Accelerating and scaling up climate finance is a critical enabler if the world is to collectively succeed in limiting global warming”. Critically analyse.