For climate finance, create a level playing field

United States (US) climate envoy John Kerry visited India for a second time in six months, continuing the hardsell to get India to commit to net-zero greenhouse gas (GHG) emissions by 2050. 

The US also sees huge business opportunities in India's climate actions, particularly 450 GW of renewables by 2030. An India-US Climate Action and Finance Mobilising Dialogue was jointly launched by Kerry and India's environment minister Bhupendra Yadav. It rightly underlines the importance of financing.

Globally, financing is the bait held out to developing countries to come on board net-zero by 2050, but it has remained in limbo since the Copenhagen Conference of Parties (COP) of 2009 where then President Barack Obama and the leaders of Brazil, South Africa, India, and China (BASIC) hammered out the Copenhagen Accord.

However, the agreed figure of $100 billion a year is still a distant proposition. As things stand, larger developing countries in the G20, including India, may even find themselves effectively excluded from concessional financing and, instead, will have to pitch for market funding.

In this context, an essential step for these large developing countries is clarity on which activities and investments would be deemed green. The harmonisation of taxonomies (comprehensive classification systems) with relatively precise and consistent definitions, therefore, would be useful, if not imperative.

Moreover, agreed data disclosures regulations (mandatory versus voluntary) and standardised green ratings would create sufficient granularity needed in the project description, and positively impact the private sector's borrowing abilities in global markets.

In parallel, to protect the financial stability of developing countries, it is important to ensure that central bank regulatory systems are in place for green investments. Growing allegations of greenwashing need to be tackled by regulation, as the alternative would be the misallocation of global capital based upon false data between economies competing for funds.

Further, developing countries face fundamental financing barriers for investing in new green technologies and scaling up their climate actions.

First, green technologies have higher capital costs in comparison to conventional technologies, primarily due to their unproven status on the impact of the operational efficiency of production, often making it prohibitive to invest in these.

Second, developing countries lack capacities even towards the development of bankable projects beyond the renewables sector. But, perhaps, the most critical is that the cost of capital is significantly higher, making green investments more costly. This is projected to further increase due to the impact of climate vulnerability on a country's sovereign credit rating, worsening the financial burden and economic challenges.

Caption: Even though the US is pressuring India and other developing economies to go green, the financing of this transition remains vague. PHOTO: REUTERS

Moreover, the cost of hedging, ranging from around 3% to 6% for Indian companies, negates the cost advantage of raising climate finance from international markets.

A de-risking mechanism, particularly on lowering the currency risk, is, therefore, another imperative, more so as developing countries fear the costs of bearing the risk of currency movements which can have a severe impact on their fiscal deficits. Such an effort — coupled with the harmonisation of taxonomy at a global level — would also encourage the floatation of green bonds, decidedly better for long-term infrastructure projects than commercial finance from banks.

Additionally, equal attention needs to be paid to adaptation given that the warming effects of most GHGs occur with a lag of 20-50 years. This means that even if annual emissions fall to zero now, temperatures will keep rising. Indeed, as extreme weather events propel large-scale loss of physical assets and the loss of agricultural productivity, their handling is likely to be beyond the abilities of insurance companies and, maybe, even governments.

The need of the hour is, therefore, not just the $100 billion a year pledged more than a decade ago, but even more. Anchoring such funding in multilateral development banks (MDBs) may allow their higher ratings to potentially play a pivotal role in reducing the risk perception in projects. It could at least provide seed finance to help accrete low-cost funds from other sources, including long-term bonds.

Such facilities could be both in the form of fund-based products and non-fund based products such as first-loss guarantees and assist in the exit from fossil fuels, while meeting the need for development with equity in developing countries.

In recent years, India has seen the raising of a fair amount of green finance, but this has been primarily from domestic sources and aimed at mitigation, mainly towards renewables.

The need for finance now extends beyond low-hanging fruit such as efficiency enhancement and into other activities such as the large-scale deployment of green hydrogen in industries and adaptation. This will need longer-term and lower-cost finance, and better access to global capital markets in addition to grants and multilateral financing.

Given the scale of climate finance requirements, the collaboration of the developed world would have to go beyond somehow totalling up all its development cooperation and ensure a clear segue for better access to its capital markets for developing countries.

Kerry has been strongly committed to global action on the climate crisis. He must put his weight behind this enhanced access to financial markets for developing countries along with hugely stepped-up grants and multilateral financing. This is, in fact, a sine qua non for a just transition.

Manjeev Singh Puri is former ambassador and distinguished fellow, TERI. Sharmila Chavaly, adviser, National Institute for Smart Government and Manish Chourasia, managing director, Tata Cleantech Capital Ltd, contributed to the piece

Disclaimer: This article first appeared on the Hindustan Times, and is published by special syndication arrangement.