Brief on Climate Change Finance

Brief on Climate Change Finance
Climate change is a complex policy issue with major implications in terms of finance. All actions to address climate change ultimately involve costs. Funding is vital in order for countries like India to design and implement adaptation and mitigation plans and projects. The problem is more severe for developing countries like India, which would be one of the hardest hit by climate change, given its need to finance development. Most countries do indeed treat climate change as a real threat and are striving to address it in a more comprehensive and integrated manner with limited resources at their disposal. But financial ways and means must be found to enable developing countries to enhance their efforts in this direction, especially to to enhance their adaptive capacity. Thus climate change is an environmental issue, an economic cost and a developmental issue.
Lack of funding is a large impediment to implementing adaptation plans. The scale and magnitude of the financial support required by developing countries to enhance their domestic mitigation and adaptation actions are a matter of intense debate in the multilateral negotiations under the UNFCCC. The Convention squarely puts the responsibility for the provision of financial support on the developed countries taking into account their contribution to the stock of GHGs in the atmosphere
Internationally Climate change finance forms one of the core issues of climate change negotiations from the developing country perspective. As per the Convention under the framework of UNFCCC, provision of adequate climate change finance by the developed countries to developing countries is a commitment/obligation of developed countries (responsible for historic emissions and causing climate change). Developed country parties have to mobilize and provide funds for addressing adaptation and
mitigation at the required scale through the Financial Mechanism of the Convention.
One of the mandates of the Convention is that the finance provided by developed countries will be ‘new and additional’, i.e. over and above the development assistance in form of ODA. Moreover, climate change finance has to be in the form of grant and concessional finance. The Convention also puts various other finance imperatives of the developed countries towards the developing countries through the articles of the Convention listed below
The developed country Parties and other developed Parties included in Annex II shall provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations under Article 12, paragraph 1. They shall also provide such financial resources, including for the transfer of technology, needed by the developing country Parties to meet the agreed full incremental costs of implementing measures that are covered by paragraph 1 of this Article and that are agreed between a developing country Party and the international entity or entities referred to in Article 11, in accordance with that Article.”
Article 4.5: “The developed country Parties and other developed Parties included in Annex II shall take all practicable steps to promote, facilitate and finance, as appropriate, the transfer of, or access to, environmentally sound technologies and know-how to other Parties, particularly developing country Parties, to enable them to implement the provisions of the Convention. In this process, the developed country Parties shall support the development and enhancement of endogenous capacities and technologies of developing country Parties.”
Article 4.7. “The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.”
Article 11.1.“A mechanism for the provision of financial resources on a grant or concessional basis, including for the transfer of technology, is hereby defined. It shall function under the guidance of and be accountable to the Conference of the Parties, which shall decide on its policies, programme priorities and eligibility criteria related to this Convention. Its operation shall be entrusted to one or more existing international entities.
Countries like India that are on the path of development would need access to finance and technology, if the world is to achieve emission standards in line with the stabilization and sustainable development goals. The funds that are currently available under the Convention and Kyoto Protocol are small compared to the magnitude of need assessed by many studies. The UNFCCC has estimated a requirement of US$ 200-210 billion in additional investment in 2030 to return GHG emissions to current levels. Further, additional investment needed worldwide for adaptation is estimated by the UNFCCC to be US$ 60-182 billion in 2030, inclusive of an expenditure of US$ 28-67 billion in developing countries. As various estimates point to the enormity of funds needed for meeting the long-term finance requirements for adaptation and mitigation, developing countries including India have
been arguing that a global mechanism for generating and accounting for additional resources, mainly from public sources, is essential. There should be a multilateral financial mechanism under the Convention that should be set up with resources provided by developed countries on the basis of assessed contributions
Attempts are being made to design appropriate institutions and mechanisms for this purpose at the global level. This is evident in the setting up of a GCF under the Convention, developed countries’ announcement of US $ 30 billion as fast start funds, US $ 100 billion (to be mobilized) as long-term finance, etc. However, these attempts do not suffice to address the challenge. On the other hand, efforts are being made by the developed countries to shift the discussion on ‘sources of long-term finance’ to the G20 forum where the emphasis is on evolving new and innovative financial instruments involving both developed and developing countries. This idea is strongly resisted by many developing countries in the multilateral negotiations. The high-level panel appointed by the UN Secretary General in 2010 had attempted to address some of these issues but its recommendations which favour dependence on market-related instruments (not public funding) and private-sector resources have not found favour in the multilateral negotiations
A major part of the adaptation and mitigation needs of developing countries can be met by accessing international finance. The mobilization of the requisite amount of climate finance for the developing countries will be one of the biggest challenges in the times to come. Though alternative sources including the private sector can be explored to fill the gaps between the demand and supply of climate finance, public finance should
be at the core to ensure predictability and reliability of flow of funds to the developing countries
Given the magnitude of the task and the requirement of funds, domestic finances will likely fall short of the current and projected needs. Global funding through the multilateral mechanism of the Convention will enhance domestic capacity to finance climate-related efforts. To facilitate financial support, the Convention established a financial mechanism to provide funds to developing country Parties. Currently, GEF which is the operating entity of the financial mechanism of the Convention provides grants to developing countries for projects that benefit the global environment, linking local, national, and global environmental challenges and promoting sustainable livelihoods. With the COP finalizing the design of the GCF at the recent Durban conference after protracted negotiations, it is expected that the GCF will be the main channel of finances to address climate change in future. There are specific funds established under the multilateral climate change regime(Box12.9).There are also funds administered by the World Bank, Asian Development Bank, African Development Bank, etc. with clear climate change components.
At Cancun Conference (December 2010), a decision was taken that developed countries will provide fast start finance of US $30 billion and a Green Climate Fund will be set up to mobilize resources up to US$100 billion per year by 2020. A Transitional Committee has been formed to design the Green Climate Fund. A Standing Finance Committee has also been formed to cohere the work of the GCF with the various financial institutions, operating entities and work under the advice and direction of the Conference of Parties in the interest of achieving the objectives of the
financial mechanism of the Convention. While the Cancun decisions have recognised the need of having a separate Fund and reaffirmed that funding for adaptation will be prioritized for the most vulnerable developing countries, such as the LDCs, SIDS, and Africa and the Durban meeting finalizing the design of the fund, the work relating to climate finance is far from complete. While the debate on climate finance continues, actual flow of money has been insignificant.
Long-term finance is another issue that is very much part of the on-going negotiations. The Cancun Agreements also recognized the commitment of developed country parties to a goal of jointly mobilizing US$ 100 billion per year by 2020 to address the needs of developing countries from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources. At the Durban conference, these issues were further deliberated upon. Another point of concern is that various innovative sources of finance, for example, aviation tax, being deliberated upon may have incidence on developing countries. Hence the multilateral negotiations must ensure that incidence (of innovative sources of financing) should not fall on developing countries which is in violation of the principle of CBDR.
At Durban, a work programme on long-term finance has been launched, with the aim of contributing to the ongoing efforts to scale up mobilization of climate change finance after 2012, and analyse options for the mobilization of resources from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources. The work programme will draw upon relevant reports including that of the High-level Advisory Group on Climate Financing and the report on mobilizing climate finance for the G20 and the assessment criteria in the reports.
Though the Durban Conference has led to several positive outcomes, there are still some areas of concern in which further work will be needed to safeguard the interests of developing countries in future climate change deliberations. The sources and channels of providing long-term finance by developed countries have not been clearly identified. It is necessary to expeditiously identify the sources of finance and provide initial capital to the GCF for its operations. Further, it is necessary to include the obligations of developed country parties under the Convention to provide finance, technology, and capacity building as part of the new arrangements to be developed under the Durban Platform. Also the issues of mobilization and provision of necessary resources on a predictable basis and relationship of these mechanisms with the financial mechanism of the convention remain to be addressed.
On its part, India is strongly committed to engage constructively and productively with the international community in the global efforts to preserve and protect the environment and collectively deal with our common global challenge of climate change. India is also committed to spend large resources through its planning process on meeting the domestic mitigation goal of reducing the emissions intensity of its GDP by 20-25% by 2020 in comparison with 2005 level.
India recognizes that a strategy for addressing climate change has to be based on the strategy of sustainable development. This is reflected in many of the major programmes addressing climate variability concerns. Current Government expenditure in India on adaptation to climate variability
exceeds 2.6 per cent of the GDP, with agriculture, water resources, health and sanitation, forests, coastal zone infrastructure and extreme events, being specific areas of concern.
India has prepared a comprehensive National Action Plan on Climate Change (NAPCC) with a view to achieve sustainable development with co benefit in terms of climate change. Eight national missions in the area of solar energy, enhanced energy efficiency, sustainable agriculture, sustainable habitat, water, Himalayan eco-system, increasing the forest cover and strategic knowledge for climate change form the core of National Action Plan. Besides, there are several initiatives envisaged in the sectors pertaining to energy generation, transport, renewable, disaster management and capacity building that are to be integrated with the development plans of the Ministries. The Prime Minister’s Council on Climate Change, set up in June, 2007 monitors the implementation of the national Missions and related actions in India.
While India has taken a number of steps, on its own, to adapt to climate change and mitigate its emissions in the interest of its energy security and sustainable development, increased domestic momentum for addressing climate change also critically depends on multilateral negotiations taking place at international forums and actual disbursement of fast start and long term finance promised at Cancun.