The impact of climate change has become increasingly visible to our generation. It is now overwhelmingly clear that climate change poses a significant threat to humanity. Countries worldwide are mobilising resources and capital to tackle this challenge. As part of the global fight against climate change, significant achievements have been made. These include commitments to the Glasgow Climate Pact, enhanced Nationally Determined Contributions (NDCs) and achieving net zero emissions.
Emerging economies need to significantly improve their infrastructure to transition towards the goal of zero emissions over the next few decades. These economies contribute to around two-thirds of the world's total greenhouse gas emissions. The estimated global investment needed to achieve this net-zero target varies widely, but according to the McKinsey Global Institute, approximately US$275 trillion is needed to invest in infrastructure assets by 2050. Financial resources and strategic investments are necessary to combat climate change, reduce emissions, facilitate adaptation to already occurring impacts, and build resilience. However, many of these economies lack the financial resources needed to transition to clean energy, a pivotal step in mitigating climate change.
At the COP15, most developed nations committed to generating an annual fund of US$ 100 billion by 2020. This fund was to be allocated to developing nations for Climate Finance. The promise was reiterated in Article 9 of the Paris Agreement in 2015. However, as we moved beyond the 2020 deadline, the actual contributions to this fund have been substantially less than the agreed target. While developed countries assert that they have met their commitment, there appears to be a divergence in viewpoints.
The “New and Additional” Climate Finance
There is a significant discrepancy between the amount that developed nations claim to contribute and the actual flow of funds. For instance, the annual OECD report on 'finance flows in 2020' stated that US$83 billion had been mobilised for climate finance. However, an Oxfam report indicated that no more than US$25 billion could be classified as climate finance. Article 4.3 of the Convention, along with several other documents from climate change conferences, stipulate that this money should be "new and additional". While these documents do not explicitly define "new and additional", it is generally interpreted to mean that existing financial flows, such as aid, cannot be reclassified as climate finance. The discrepancy in claims between developed and developing nations has made climate finance one of the most contentious issues in climate negotiations.
Escalation of required Climate Finance
Nations from the Global South have voiced their demands for a new global climate finance target by 2024 (known as the New Collective Quantified Goal on Climate Finance (NCQG)). As a part of this goal, governments decided to set the NCQG from a floor of US$100 billion per year, considering the needs and priorities of developing countries. The process began in early 2022 and is set to conclude by the end of 2024. These nations argued that the magnitude of climate finance should be in trillions, as the costs of addressing and adapting to climate change have grown significantly. They have also been demanding that a large part of climate finance should be in the form of grants or concessional loans, and not just loans on existing market rates.
COP28 Emphasized Role of Private Capital
The objectives outlined at COP28, which include tripling renewable energy capacity, doubling energy efficiency gains by 2030, and moving away from fossil fuels, align with the scientific goal of restricting global warming to 1.5°C. Achieving this ambitious plan necessitates a major shift in global private sector funding. Despite some reservations about the role of private finance in climate funding, it's projected to provide the majority of the funds needed to combat climate change. Success lies in aligning the financial goals of both investors and borrowers. Bankable projects with a clear return on investment and balanced risks are needed to stimulate private investment.
The commitments made at COP28 underscore this shift in financial focus. A hopeful move was the allocation of US$720 million to the Loss and Damage Fund, affirming the global commitment to climate finance. The Green Climate Fund's replenishment with US$12.8 billion is also a positive sign. The UAE’s US$30 billion fund ‘ALTERRA’ is a major step with an aim to mobilize around US$250 billion investments by steering private and institutional investors, especially in emerging markets. It includes US$5 billion for mitigating risks and incentivizing investments in the Global South.
These financial commitments signify a global move towards sustainability. They emphasize the need for greater private sector involvement and larger-scale financing to meet climate goals. Substantially, more funding is necessary to foster usage of new technologies. Climate-friendly measures such as using Green Hydrogen in process industries to replace grey hydrogen or developing renewable energy projects with storage solutions will require substantial subsidy and low-cost capital support.
Clearly defining ‘Climate Finance’
The necessity of climate finance for developing countries to achieve their climate objectives is indisputable. Most nations recognise the demand for climate finance, but the absence of a precise definition creates a discrepancy between claims and actual fund mobilisation. There is a call for a unified framework and distinct guidelines to define terms like 'new and additional,' allowing for the accurate measurement of the climate finance contribution made by developed nations. Additionally, as requested by the Global South, climate finance should be provided as grants or concessional loans, rather than just loans with market interest rates.
Enable Private Financing
The need of the hour is to establish a suitable risk-return ecosystem to stimulate private incentives in green projects. Immediate focus should be placed on asset-based project financing and the transition of high-emitting industrial sectors towards energy-efficient and green technology. Innovative technologies such as Green Hydrogen, Carbon Capture, battery storage and offshore wind should be advanced for large-scale implementation, facilitated by private finance in collaboration with public finance. DFI’s including the World Bank and other regional development banks have a crucial role to play here including leveraging resources from the private sector.
The heightened attention on Climate Finance and the role of private investment at COP28 is setting the stage for the next wave of initiatives to combat climate change. Innovative financing tools such as debt-for-climate swaps, first-loss guarantees and credit enhancement mechanisms could be a key player in mobilising climate finance. These innovative tools could potentially mobilise private capital, ensuring a reduced cost of capital while guaranteeing acceptable risk-adjusted returns for investors and project developers.
In conclusion, Climate Finance is pivotal in our pursuit of a sustainable future. The focus on accelerating climate finance brought about by COP28 is much needed. The collective efforts of private investors, governments, businesses, financial institutions, and civil society are vital in mobilising finance for impactful climate action. Despite the challenges of profitability and high risks associated with green investments, collaborative efforts and bankable projects are essential for sustainable climate solutions. In essence, climate finance serves as a catalyst to achieve the ambitions of COP28, propelling our planet towards a future where economic prosperity aligns with environmental stewardship. The stakes are high, and the time for decisive action is now.
This article is co-authored by Navdeep Gupta and Sunil Dayal.
Disclaimer: The article represents the personal views of the authors and not necessarily of the institutions they represent.
Navdeep Gupta is an expert in the Indian energy sector with over 17 years’ experience in consulting the renewable energy industry. As the General Manager at ReNew, he supports the development of Green Hydrogen and Carbon Markets ecosystems in the country.
Sunil Dayal is an Energy & Climate Finance Specialist with over 17 years of experience in investment, advisory and development roles across the energy transition sector. At the World Bank, he advises the Infrastructure Finance Secretariat of the Government of India, on the development of Power Infrastructure Financing Landscape.