Climate finance dominates the international discourse as the next meeting of the 29th session of the UNFCCC COP is known as the ‘Finance COP,’ will take place in Baku within several months. This landmark will concern the fresh determination of a climate finance mobilization target for developing countries in terms of the new collective quantified goal (NCQG). At the same time, there is a rather active debate about adjusting MDBs to increase their potential to finance global challenges, including developing-country climate action. Thus, it is critical to emphasize that the need to develop climate finance has grown stronger due to the growing socio-economic losses resulting from extreme weather events mainly in the developing world.
Reducing emissions, and constructing climate resilience in developing countries is paramount for the fulfillment of the goals of climate change as most of the global incremental energy and material demand is expected to emanate from these countries in the future decades. For instance, developing countries are pegged to provide 88 percent of the incremental electricity demand in the world over the 2019-2040 period. These nations are, however, ill-prepared to fund change to low-carbon and resilient economies on their own. As shown by previously presented financial studies, the lower the income level, the bigger the relative disadvantage in the ability to mobilize credit for the investment by the private sector as indicated, meaning that public capital alone is insufficient for taking climate action.
Real risks and perceived risks connected with investment in developing nations restrict climate finance transactions to developing nations. Also, developed countries failed to achieve the UNFCCC target of providing $100 billion annually to developing nations by 2020. This goal was said to have been attained two years later, however, the issue of reliability and the strength of the method of getting at these figures still arises.
Developing Countries, that is excluding China, require an estimated US $2. Climate Finance of $4 trillion per year by 2030 for climate action, out of which about $1 trillion or 40% per year needs to be mobilized from international sources. Considerably smaller is actual developing country climate finance flows ranging from $7-15, which is only 15 percent from the estimated $1. Total net climate finance of $27 trillion per annum for the global climate amounts to $190 billion for the emerging markets and developing economies except for China. Since the level of additional climate flows needed from developing countries is considerably higher, improvement of the NCQG and MDB reform would be favorable steps to enhance the capability of existing outlets to provide funds. On the other hand, the symmetric combined efforts on three fronts could contribute to enhancing actual climate finance implementation.
Finance for International Public Climate: The Role of De-Risking Instruments
According to published OECD climate finance statistics for 2022, the total amount signed is $91. Concerning international public finance, $21 billion was mobilized from only 6 billion. The indicative amount of private flows proposed in the country was up to 9 billion USD. This implies that international public capital is used in providing direct loans and not through leveraging instruments whereby public capital provides the risk coverage to attract private capital. It illustrates that with public capital delivered through de-risking instruments, far more private capital mobilization can be attained.
Some of the mentioned de-risking instruments, such as Performance Finance, are employed by the World Economic Forum’s Mobilizing Investment for Clean Energy in EMDEs (MICEE) initiative, co-led by the Council on Energy, Environment and Water. One among them is to overcome the issue of limited financing options for utility-scale RE deployment in India. The MICEE aimed at a credit enhancement which is a subsidized domestic debt for the renewable energy market that would generic Gigawatt Scale Bonds and free up bank credit for new lending.
The second one is a solution formulated to address difficult scenarios associated with financing battery energy storage systems in the power sector applications. Lack of a long history and experience with these technologies increases the risk perceptions and the capital prices. The MICEE suggested a technology de-risking fund, which would assist and guarantee repayments to the lenders who finance a developing but possibly risky new technology and this kind of fund may decrease the cost of capital for storage projects.
Towards the formation of a favorable business environment through the articulation of sectoral and cross-cutting policies
This paper finds that developing countries have an opportunity to prepare ways for accessing international climate finance by making the climate investment environment more open. The above can be done through policy intervention at sectoral and cross-cutting levels. Policies of individual sectors in green sectors including the renewables and sustainable transport sector may offset the investment risks. Similarly, other regulations even within the same field, like sustainable finance taxonomies and corporate sustainability disclosures, can connect capital with sustainable investment opportunities. These frameworks should be in line with international standards as a way of enhancing the flow of capital across the globe.
In this context, it is possible to engage Sustainable Finance Hubs in emerging economies as gateways to the Global South.
New sustainable finance destinations in large EMs such as GIFT IFSC in India may be designed as local stock exchanges for markets outside their location. These hubs stand to perform a vital role in harnessing foreign capital to the investment opportunities in the developing countries of the Global South, especially where the domestic savers’ appetite for organized capital markets is yet to be well developed.
The countries that are classified as developed need to combine their efforts with those of the developing countries.
A colossal amount needs to be invested in climate change intervention, particularly in developing nations. Although the lion’s share of this quantity is expected to be supplied internally, there will still be a significant demand for imports by 2030, approximately 40 percent as it stands. These include opening up investment forums that enable developing countries to foster conditions that would encourage the said flows. Thus it may be suggested that acting on the aforementioned three-pronged approach is a good strategy.
In conclusion, knowledge of the need for the flow increase in developed countries and the ways to accelerate it in developing countries are critical. Thus, only joint actions can be effective in providing the necessary climate finance by developed and, in particular, developing countries to prevent the worsening of the consequences of global warming.