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By Somit Dasgupta,
As the next session of the Conference of the Parties (COP) draws near, the discussions on financial transfers (or the lack of it) from developed to developing nations is gathering momentum. There has been no breakthrough on the issue (entirely expected) despite discussions in several meetings of COP in the last decade and a half. The next edition (COP29) will be held in Baku, Azerbaijan, around mid-November. Everyone wants to be seen as doing something, irrespective of the outcome, and the host nation for COP29 is no exception. Azerbaijan has announced a new fund to tackle climate change to aid developing nations. The fund is expected to be of the order of $1 billion and the proposal is to seek contributions from fossil fuel-producing countries and companies, which will be completely voluntary. There is speculation that Azerbaijan will be the first country to contribute to this fund.
We now have an ironical situation where a couple of funds are in place, especially designed for battling climate change, but the coffers of each is almost empty in comparison to what is required ($1 trillion-$6 trillion). First, we have the 15-year-old, back-of-the-envelope estimate of $100 billion in aid a year, which, of course, never materialised. The Organisation for Economic Co-operation and Development may claim that they reached almost $100 billion in 2020, but these figures are contested by developing countries who accuse the developed nations of statistical jugglery. Incidentally, the figure of $100 billion has been rechristened as the new collective quantified goal. Second, we have the loss and damage fund, mooted during COP27 (2022) in Egypt. Only about $800 million has been committed till now. The nuts and bolts of this fund are yet to be finalised and one is not sure which countries are going to be the donors and who the recipients. There is a lot of clamour that the oil-rich countries and China should also contribute to the fund. Luckily, India has not yet been cited as one of the potential donors, but who know what will happen next? Finally, the third fund has now been announced by Azerbaijan, which would be discussed at the COP29.
One thing is crystal clear — or at least it should be — that there won’t be any substantial transfer of funds from the developed to the developing world even in the long term. The developed world has fought tooth and nail against making the transfer of resources mandatory, shamelessly refused to acknowledge that they are the perpetrators when it comes to cumulative emissions, made laughable contributions to the loss and damage fund, openly refused to transfer technology to developing nations, created a web of deceit when estimating the actual transfers made that are either in the form of grants or concessional loans, and so on. In fact, the entire objective of the developed world is to delay decision-making so that the transfer of resources can be pushed further to the future. This explains why there is not much progress of the loss and damage fund and deliberate confusion is being created by raising questions as to who all should contribute to the fund among other issues.
In such circumstances, what should the developing world do? Can they wait endlessly for the desired sum of money to be made available while in the meantime they are swamped by the adverse effects of climate change? It is the developing world and especially the small island states which are most affected, be it in terms of lives and livelihood or healthcare. Time is clearly running out with 2023 being designated as the hottest year ever with several cases of flooding, cyclones, heatwaves among other calamities. India, by the way, is no exception. It is time for the developing countries to look for resources domestically. Just for the record, according to the government, about 5.7% of India’s GDP (2021-22), mostly indigenous, is used for adaptation related activities.
The solution lies in seeking funds from the private sector. If one were to see the quantum of funds invested by the public and private sectors for climate change (inclusive of mitigation and adaptation) one finds them neck and neck, about $333 billion each (Climate Policy Initiative, 2022). The problem is that most of the funds go into mitigation simply because there is an income stream for such projects which can take care of debt servicing. Only 7.5% of the total climate funds are going into adaptation and the share of the private sector in this is a mere 1.6%.
There are several reasons for this poor contribution. First, the private sector lacks access to data and there is information asymmetry. It is clueless about where to invest. Second, there are institutional and regulatory issues which prevent private sector participation in adaptation measures. Not having an adaptation plan itself is an example of an institutional barrier. It would be interesting to note that less than 60 countries (out of 198 under the United Nations Framework Convention on Climate Change) have prepared an adaptation plan and India is not one of them. India’s adaptation plan is a work in progress and will be ready towards the latter half of 2025. Third, there are peculiarities when it comes to investment in adaptation. There is no defined income stream, upfront costs are usually huge, and the time horizon for adaptation projects to bear fruit are long whereas the private sector wants quick returns, etc.
A part of the solution lies in co-financing. The government should step in and invest along side in order to reduce the risk of the adaptation project. This, of course, requires resources and some portion can be filled in by multilateral development banks/multilateral climate funds. Incidentally, India has received or got commitment of a little over $1 billion from various climate funds. Additional resources can be raised through the imposition of carbon tax or by issuing green bonds. Incentives can be given in the form of tax breaks. In addition, there are some innovative finance options which have already been tried out in some countries. Examples are debt for climate swaps, climate derivatives, and the adaptation benefit mechanism. The lesson to be learnt is that when it comes to climate funds, developing nations have to find their own resources.
Somit Dasgupta, Senior visiting fellow, ICRIER.
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