Does the Glasgow pact make climate finance available to us?

Photo: Bloomberg
Photo: Bloomberg


We must push hard for funds at next year’s CoP and do what’s possible at home to enhance flows of capital into green projects

CoP-26 has made a significant contribution to controlling climate change by getting nearly 140 countries to agree to reduce emissions. In this article, we consider how far it has moved the needle forward on making finance available.

The Glasgow pact has urged that the $100 billion per year which was promised in 2009 but has yet to be delivered should materialize by 2023. But the $100 billion figure dates back to a time when the full extent of the adjustment developing countries would need to make was not adequately known. The emissions reduction targets agreed in Glasgow will call for much larger investments.

Amar Bhattacharya and professor Lord Nicholas Stern have estimated that developing countries (excluding China) would need about $800 billion per year by 2025, going up to $2 trillion per year by 2030. This is a huge sum and the Glasgow text makes no mention of it.

It is possible that there is no mention of the finance needed because going beyond $100 billion per year was originally supposed to be considered only in 2024. The Glasgow text does say that climate finance will have to be mobilized “from all sources going beyond $100 billion per year".

Developing countries should actively push the financing agenda at CoP-27 next year in Egypt to ensure enough finance is made available. But we also need to be clear about what we can reasonably expect. We cannot expect the entire amount, $800 billion by 2025 rising to $2 trillion by 2030, to be provided by the international community. A large part will have to come domestically from both public and private sources, reflecting the investments that would normally go into the energy sector in a growth environment. Some could come from international private flows (both equity and debt) and a third component could come from bilateral and multilateral public flows. This part would depend critically upon international agreements.

We should recognize that the need for international public flows is not universally accepted. Although the Glasgow text talks of mobilizing flows from all sources, some analysts in developed countries argue that there is no need for international public flows since there is ample private capital available. With renewable energy having become economically competitive, compared with traditional energy sources, it is argued that private capital markets should be able to provide the money needed, provided investment-ready projects are available and domestic policies are appropriate.

The scope for attracting global private capital is indeed substantial. The Glasgow Financial Alliance for Net Zero, which was active in CoP-26, includes over 450 firms controlling about $130 trillion in private assets. If a small proportion of these assets are re-directed to green energy projects, which are now viewed favourably in financial circles, they would provide significant support for mitigation efforts.

However, this argument ignores the fact that risk perceptions about investing in developing countries are high. Risk perceptions will go down over time as new energy projects are established and seen to work well, electricity markets mature, and the risk arising from arbitrary government intervention in energy markets also reduces. Until that happens, additional public international finance could help build momentum for the transition. This involves using imaginative financial engineering to reduce risk perceptions and thereby leverage a substantial volume of private finance to help countries meet their climate goals.

Bhattacharya and Stern have suggested that bilateral concessional finance could be doubled and multilateral finance trebled (from $50 billion per year to, say, $150 billion). The two together could generate a little over $200 billion per year of international public climate finance from 2025 onwards. Together with private flows leveraged by these funds, this could contribute $350 billion per year.

The poorest countries will need flows on near-grant terms, like from the International Development Association. Middle-income countries such as India do not need aid, but long-term loans at modest rates of interest, which could add to private flows from international institutional investors.

Expanded lending by multilateral institutions (i.e., the World Bank, Asian Development Bank, International Finance Corp, etc) would call for appropriate capital increases, which involve a fiscal cost. If that is currently difficult to commit, it may be possible to use the substantial special drawing rights given recently by the International Monetary Fund (IMF) to developed countries, which they do not actually need for balance-of-payment purposes. This would provide resources without the need for specific approval from the legislature.

We should work to push a strategy along these lines at CoP-27 in Egypt and more importantly also in the G-20, where critical decisions on financing are actually taken. As it happens, Indonesia will chair the G-20 in 2022, India in 2023 and Brazil in 2024. A coordinated effort by this threesome would help, with our ministry of finance taking the lead.

As we push for more international finance, we have to recognize that a successful transition to clean energy will also require domestic action. Perhaps the most important aspect is to fix the financial weakness of India’s electricity distribution companies. Private investors will not invest in electricity generation—whether based on coal or renewable energy—if distribution companies as sole power-buyers are financially unviable. Public sector companies may be willing to take the payment risk, but since the scope for public investment is severely limited, we must ensure that the distribution segment becomes financially viable.

Domestic policy action is also needed for the removal of fuel subsidies. The Glasgow text, which we accepted, calls for a phasing down of inefficient fuel subsidies and a similar formula was also agreed in the last G-20 Summit. This is a politically-sensitive issue, but progress towards this end is essential.

Another area worth exploring is a differentiated carbon tax proposed by the IMF to be levied at $75 per tonne of CO2 for the US and EU, $50 for China, and $25 for India. This is also a politically-sensitive issue, but we should be willing to experiment with such a system, provided it is universally applied. Different levies would protect our competitiveness while raising much-needed resources for climate adaptation. Petrol and diesel are already heavily taxed and the proposed carbon tax would be subsumed within these taxes. The existing environmental tax on coal is about $3.5 per tonne of CO2. Raising it to $15 would increase the price of coal and therefore of coal-based power substantially. But it would also accelerate the shift to renewable energy and generate resources that could be used for climate adaptation.

Montek S. Ahluwalia & Utkarsh Patel are, respectively, former deputy chairman, Planning Commission and currently distinguished fellow at the Centre for Social and Economic Progress (CSEP); and associate fellow, sustainability & climate change, at CSEP

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