GS Paper III

News Excerpt

At COP28, climate finance is a key topic of discussion among the governments of nearly 200 countries.

More details about the news

• Ongoing global challenges persist in securing sufficient climate finance for vulnerable nations, hindering their ability to effectively address and adapt to climate change impacts.
• The United Arab Emirates, host of COP28, declared a significant financial contribution of $30 billion to a new fund.
• This fund is strategically designed to attract private sector capital towards climate investments and enhance financial support for the Global South.
• The announced fund aims to address the climate finance gap, which has been a contentious issue between low-income countries and developed nations.

About climate finance

• Definition: Climate finance refers to financial resources and instruments that are used to support action on climate change.
• Critical to address climate change: Climate finance is critical to addressing climate change because of the large-scale investments that are needed to transition to a low-carbon global economy and to help societies build resilience and adapt to the impacts of climate change.
• Sources of climate finance: Climate finance can come from different sources: public or private, national or international, bilateral or multilateral.
• Instrument: It can employ different instruments such as grants and donations, green bonds, equities, debt swaps, guarantees, and concessional loans.  And it can be used for different activities, including mitigation, adaptation, and resilience-building.
• The Paris Agreement set a global plan to limit global warming below 2 °C, emphasizing climate finance for mitigation, adaptation, and sustainable development.
• Multilateral funds: Some multilateral funds that developing countries can access include the Green Climate Fund (GCF), the Global Environment Facility (GEF), and the Adaptation Fund (AF).  These funds were established throughout the years as financial instruments of the UNFCCC to provide resources to developing countries.

What activities does climate finance fund?

Need of climate Finance

• UNFCCC Estimate: Developing countries need at least $5.8 trillion by 2030 ($600 billion annually) to meet their Nationally Determined Contributions (NDCs).
• Nicholas Stern's Estimate (2022): Approximately $2 trillion annually by 2030 to cut emissions and cope with climate breakdown.
• Historical Responsibility: Developing countries argue that developed nations should provide financial assistance due to the historical emissions that caused the climate problem.
• UNFCCC Requirement: The 1992 United Nations Framework Convention on Climate Change required high-income countries to provide climate finance to the developing world.
• Paris Agreement: In 2015, developed countries pledged to provide $100 billion a year to developing countries by 2020, extended to 2025.

India’s initiatives in climate finance:

• The establishment of the National Adaptation Fund for Climate Change (NAFCC) and the National Clean Energy Fund serve as shining examples of India's commitment to promoting clean energy and supporting climate-resilient infrastructure.
• India collaborates with the Global Environmental Facility (GEF) to access funding for projects addressing biodiversity conservation, climate change mitigation, and other environmental issues.
• India has set ambitious targets for increasing its renewable energy capacity, including solar and wind power. Investments in renewable energy projects receive support from both domestic and international sources.

Criticism of developed country:

• OECD Figure (2020): Developed countries reported providing $83.3 billion in climate finance, but discrepancies in accounting methods are contested.
• Oxfam's Contention: Oxfam estimates the 'true value' to be between $21-24.5 billion, accusing developed countries of using misleading accounting.
• Nature of Funding: Criticism for providing most funds as non-concessional loans, adding to debt pressures globally.
• CARE International Study: 52% of climate finance provided by rich countries from 2011 to 2020 diverted from development budgets, impacting health, education, women's rights, and infrastructure.

Way forward:

• Adequate Pricing of Climate Risks: Implement effective carbon pricing mechanisms to incentivize investors to allocate funds towards climate-beneficial projects.
• Innovative Financing Instruments: Develop and promote innovative financing instruments such as green bonds tailored to the unique challenges of emerging economies.
• Broadening Investor Base: To provide a stable and sustainable source of private climate finance, encourage the participation of a broad spectrum of investors, such as global banks, investment funds, institutional investors (e.g., insurance companies).
• Multilateral Development Banks' Role: Strengthen the role of multilateral development banks in financing low-carbon infrastructure projects, particularly in less-developed economies.
• Equity Finance Utilization: Increase the utilization of equity finance by multilateral development banks, as it has the potential to attract larger amounts of private finance.

Prelims PYQ

Q. Which of the following statements regarding ‘Green Climate Fund’ is/are correct? (UPSC 2015)

1) It is intended to assist the developing countries in adaptation and mitigation practices to counter climate change.

2) It is founded under the aegis of UNEP, OECD, Asian Development Bank and World Bank.

Select the correct answer using the codes given below:

(a)    1 only

(b)    2 only

(c)     Both 1 and 2

(d)    Neither 1 nor 2