Explainer: Why climate finance will be the buzzword at COP27

Climate finance is needed to stop deforestation and scale up reforestation, among other things (Photo by Nandini Velho via Wikimedia Commons)

Coal and gas. Methane emissions. The carbon budget. Renewables. There’s a lot on the agenda at the COP27, which begins in Egypt on November 6, 2022. Delegates from almost every country on Earth will come together to discuss global climate goals and how they plan to accomplish them. It will require money. A lot of it.

That’s why climate finance will be a key topic at the upcoming summit. India has already announced its intention to raise the issue. So has Pakistan, which was recently hit by devastating floods brought on by climate change. African leaders have also called for more financial assistance to go green.

What is climate finance and why does it matter? Let’s find out.

Understanding climate finance

Climate change is a global problem. It has already had a devastating impact on people, biodiversity and infrastructure. If greenhouse gas emissions are not brought down and at scale, it could push the world down a catastrophic path.

To do so, countries must transform their manufacturing and consumption patterns as soon as possible. This is where climate financing comes in. It refers to the money - from private, public and alternative sources - that supports a reduction in greenhouse emissions, and helps build a country’s resilience to the negative impacts of climate change. In other words, it allows for mitigation and adaptation.

Both can be costly, particularly for developing countries. For example, as per the UN Environment Programme, the annual adaptation costs in developing countries alone are estimated at $70 billion. This figure is expected to reach $280-500 billion in 2050.

There’s another facet to climate finance. Some of the countries most vulnerable to climate change are those that cause the least pollution. Pakistan, for example, accounts for only 0.9% of global greenhouse gas emissions, but damage from its recent flooding exceeds $10 billion. At the same time, green growth needs to be inclusive, especially when it pertains to developing countries. So there needs to be a fair and equitable distribution of the burdens of climate change, and responsibilities to combat it.

Making adequate finance available to such countries therefore becomes crucial to reach global goals. To this end, an agreement on climate finance was reached in 2009 at COP15. Developed countries promised to channel $100 billion per year to developing countries to assist with mitigation and adaptation no later than 2020. The Paris Agreement in 2015 reiterated the agreement, extending this aid until 2025.

What’s the India connection?

India is the third-largest emitter of carbon dioxide, after China and the US. It is also vulnerable. By 2050, one in every four people impacted by climate events globally could be based in our country.

It was in 2021, at the COP26 summit in Glasgow, that Prime Minister Narendra Modi announced his intention to pursue a goal of net-zero emissions. To get there, as per Climate Policy Initiative’s 2022 report, our country requires approximately $2.5 trillion from 2015 to 2030. This fund flow could help accelerate the coal phase-out, end deforestation and promote reforestation, enable a switch to electric vehicles, and give investment in renewables a big boost.

Some progress has been made. From 2017-18 to 2019-20, green finance saw a jump of 150 percent. The funds flow in mitigation are mostly in clean energy (42 percent) and energy efficiency (38 percent). Adaptation funding was $5 billion in 2019-20. The private sector has made large climate commitments. Most funding, however, still comes from the government. The adaptation sector, for example, is heavily dependent (94 percent) on Central and state budgets.

To fund a variety of public sector projects, India has already issued green bonds. These are debt securities used to finance environment-friendly projects. As of February 2020, the country had an outstanding debt of $16.3 billion in green bonds. It plans to issue green bonds worth $2 billion by March 2023 to meet its net-zero goal. The Reserve Bank of India, too, has suggested financial institutions scale up green lending and voluntarily set up green finance targets to mitigate risks arising from climate change.

It isn’t enough though. Green finance flows are falling far short of the country’s current needs. In 2020, tracked green finance was $44 billion per year (approximately a fourth of what India needs). International sources accounted for only 17 percent of this.

India needs to invest more in renewable energy to meet its green goals. (Photo via Wikimedia Commons)

Why does international finance matter?

While public and private funding needs a boost, international finance also has a big role to play in directly supporting developing countries, like India’s green transition.

The $100 billion annual target announced at COP15 has yet to be reached. The US and many other developed countries remain firmly opposed to any agreements that require financial payouts for loss and damage due to climate change. There is also growing scepticism that the $100 billion pledge will even be substantial enough to protect the world’s most vulnerable populations.

UN Secretary General Antonio Guterres has already called on developed countries to clarify their intentions to uphold the $100 billion climate finance pact. It’s why financial assistance for developing countries would be one of the top priorities at the upcoming summit.

It’s also why COP27 may be all about follow through.