Date: 15/11/2022

Relevance: GS-3: Conservation, Environmental Pollution, and Degradation, Environmental Impact Assessment.

Key Phrases: UN Framework Convention on Climate Change (UNFCCC), Conference of the Parties (COP), Organisation for Economic Co-operation and Development (OECD), climate finance, mobilizing $100 billion per year, Standing Committee on Finance (SCF) report.

Why in News?

• Over the last few years, developed countries have insisted upon two points on the issue of climate finance.
  • First, they maintain that their commitment to reaching the target of $100 billion in climate finance a year for developing countries, first promised in 2009, is close to being met.
  • Second, they view the mobilization of private finance as the critical component of climate finance henceforth.

Unachieved goals:

• Shortly before the ongoing 27th Conference of the Parties (COP) of the UN Framework Convention on Climate Change (UNFCCC) began in Egypt, the UNFCCC Standing Committee on Finance (SCF) released a report on the progress made by developed countries towards achieving the goal of mobilizing $100 billion per year.
• The report makes two things clear —
  • While estimates vary, it is widely accepted that the $100 billion goal has not been achieved in 2020, and
  • An earlier effort to mobilize private finance by the developed countries has met with comprehensive failure.

UNFCCC Standing Committee on Finance (SCF) report:

• The SCF report relied mainly on the Organisation for Economic Co-operation and Development (OECD) and Oxfam reports for aggregate climate finance trends.
• OECD report:
  • The developed countries have mobilized $83.3 billion in climate finance in 2020 ($68.3 billion in public finance, $13.1 billion in mobilized private finance, and $1.9 billion in export credits).
• Oxfam report:
  • It challenges the OECD report figure with the claim that the actual value of the OECD-claimed climate assistance of $83.3 billion is only around $21–$24.5 billion.
  • The Oxfam values are much lower as it discounts the climate relevance of reported funds (that is funds targeting climate action) and grant equivalence (rather than cash face value).
• Low private finance mobilization:
  • In 2016, based on OECD analysis, the developed countries issued a “Roadmap to USD100 billion”, with forward-looking projections of climate finance in 2020.
  • The road map indicated that developed countries were on track to meet the goal by 2020, projecting that public finance would reach $67 billion while the remaining $33 billion would be provided by private finance under the assumption that mobilization rates increased.
  • The OECD 2020 data, however, shows that the mobilization of private climate finance has underperformed against the expectations of developed countries falling short by 60 percentage points, $13.1 billion in 2020 against $33 billion in the road map.

A challenge for low-income countries:

• Need for public funds:
  • Developing countries have for a long time insisted that a significant portion of climate finance should come from public funds as private finance will not address their needs and priorities especially related to adaptation.
• Profitability of climate finance:
  • Climate finance already remains skewed towards mitigation and flows towards bankable projects with clear revenue streams.
  • Adaptation is unlikely to offer commercially profitable opportunities for private financiers.
• Pushing of targets:
  • Following the dismal failure to meet the $100 billion goal, developed countries pushed the target year for achieving it to 2025 from 2020.
  • At COP26 (Glasgow), developed countries came up with a Climate Finance Delivery Plan (CFDP) to meet the goal, again using the OECD report accounting framework and the 2016 road map, claiming this time that the goal would be met in 2023.
• Difficulty in mobilizing private climate finance:
  • Vulnerable, debt-ridden, and low-income countries with poor credit ratings needing adaptation finance the most, find it challenging to access private finance.
  • CFDP Progress Report notes that “mobilizing private climate finance has proven to be challenging, and particularly limited for adaptation”.
  • Although many developed countries and multilateral development banks have emphasized the importance of private finance mobilized in their climate finance strategies, including by de-risking and creating enabling environments, “these efforts have not yielded results at the scale required to tap into the significant potential for investments by the private sector and deliver on developed countries climate ambition”.

Assumptions and the reality:

• CFDP report assumes a private-public finance mobilization ratio starting from 0.21 (0.21 unit of mobilized private finance per unit of public climate finance) in 2021 and ending with 0.177 in 2025, with the share of activities with low mobilization potential rising from 30% in 2021 to 50% in 2025.
• This implies that the composition of public climate finance portfolios will progressively change towards a larger share of activities with low to no private finance mobilization potential; this includes finance for adaptation, and capacity building, as grants, for least developed and small island developing countries.
• Thus, in these scenarios, financing the urgent adaptation needs of developing countries is pushed further into the future.

Conclusion:

• Addressing the urgent climate finance needs of developing countries cannot be left to the mercy of false promises of trillions of U.S. dollars in mobilized private climate finance.
• Many activities needing financing may have little or perhaps even no direct mobilization potential.
• The SCF report has rightly concluded that the mobilization of private finance as a means of achieving the $100 billion goal, should not come at the expense of, or involve a trade-off in addressing the needs of developing countries.
• Grant-based and concessional international public climate finance will continue to play a key role in addressing the needs and priorities of developing countries, especially in the face of growing challenges due to extreme weather, and food and energy crises.

Source: The Hindu

Mains Question:

Q. Due to the need for substantial expenditures in order to considerably reduce emissions, private finances are as important as public finances in combating climate change. Evaluate.