Does the Glasgow Pact provide us with climate finance?
The Glasgow Pact demanded that the $ 100 billion a year that was pledged in 2009 but has yet to be delivered should materialize by 2023. But the $ 100 billion figure dates back to a time when all the extent of the adjustment that developing countries would need to make was not sufficiently known. The emission reduction targets agreed at Glasgow will require much more investment.
Amar Bhattacharya and Professor Lord Nicholas Stern estimated that developing countries (excluding China) would need around $ 800 billion per year by 2025, rising to $ 2 trillion per year by 2030. C ‘is a huge sum and the Glasgow text makes no mention of it. .
It is possible that there is no mention of the necessary financing because going beyond 100 billion dollars per year was initially supposed to be considered only in 2024. The Glasgow text does say that climate financing will have to be considered. be mobilized “from all sources going beyond per year”.
Developing countries should actively promote the funding program at COP-27 next year in Egypt to ensure that sufficient funding is available. But we also need to be clear about what we can reasonably expect. We cannot expect the full amount, $ 800 billion by 2025 and $ 2 trillion by 2030, to be provided by the international community. Much will have to come from both public and private sources, reflecting the investments that would normally be made in the energy sector in a growing environment. A part could come from international private flows (both equity and debt) and a third component could come from bilateral and multilateral public flows. This part would depend critically on international agreements.
We must recognize that the need for international public flows is not universally accepted. Although the Glasgow text speaks of mobilizing flows from all sources, some analysts from developed countries argue that there is no need for international public flows since there is ample private capital available. As renewables have become economically competitive with traditional energy sources, it is argued that private capital markets should be able to provide the necessary money, provided that ready-to-invest projects are available and policies national policies are appropriate.
The possibilities of attracting global private capital are indeed considerable. The Glasgow Financial Alliance for Net Zero, which was active in CoP-26, includes more than 450 companies controlling around $ 130 trillion in private assets. If a small portion of these assets were redirected towards green energy projects, which are now well regarded in financial circles, they would provide significant support for mitigation efforts.
However, this argument ignores the fact that risk perceptions of investing in developing countries are high. The perception of risk will diminish over time as new energy projects are established and function well, as electricity markets mature, and as the risk resulting from arbitrary government intervention in energy markets. will also decrease. Until that happens, additional international public funding could help boost the transition. This involves using imaginative financial engineering to reduce risk perception and thereby mobilize a substantial volume of private finance to help countries meet their climate goals.
Bhattacharya and Stern have suggested that bilateral concessional funding could be doubled and multilateral funding tripled (from $ 50 billion per year to, say, $ 150 billion). The two together could generate just over $ 200 billion per year in international public climate finance from 2025. With the private flows mobilized by these funds, this could bring in $ 350 billion per year.
The poorest countries will need flows on terms close to subsidy, such as those from the International Development Association. Middle-income countries like India do not need aid, but long-term loans at modest interest rates, which could add to private flows from international institutional investors.
The expansion of lending by multilateral institutions (ie World Bank, Asian Development Bank, International Finance Corporation, etc.) would require appropriate capital increases, which implies a budgetary cost. If this is currently difficult to initiate, it may be possible to use the substantial Special Drawing Rights recently granted by the International Monetary Fund (IMF) to developed countries, which they do not really need for balance of payments purposes. . This would provide resources without needing specific approval from the legislature.
We should work to advance a strategy in this direction at COP-27 in Egypt and, more importantly, in the G-20, where crucial decisions on funding are indeed made. As it turns out, Indonesia will chair the G-20 in 2022, India in 2023, and Brazil in 2024. A coordinated effort from this trio would help, with our finance ministry in the lead.
As we call for more international funding, we must recognize that a successful transition to clean energy will also require national action. Perhaps the most important aspect is to address the financial weakness of India’s electricity distribution companies. Private investors will not invest in power generation, whether based on coal or renewables, if distribution companies as exclusive buyers of electricity are not financially viable. Public sector companies may be willing to take the payment risk, but as the possibilities for public investment are very limited, we need to ensure that the distribution segment becomes financially viable.
National policy measures are also needed to remove fuel subsidies. The Glasgow text, which we accepted, calls for a gradual reduction in inefficient fuel subsidies and a similar formula was also agreed at the last G-20 summit. This is a politically sensitive issue, but progress in this direction is essential.
Another area worth exploring is a differentiated carbon tax proposed by the IMF at $ 75 per tonne of CO2 for the US and the EU, $ 50 for China and $ 25 for India. This is also a politically sensitive issue, but we should be prepared to experiment with such a system, provided it is universally applied. Different levies would protect our competitiveness while mobilizing resources essential for climate adaptation. Gasoline and diesel are already heavily taxed and the proposed carbon tax would be incorporated into these taxes. The current environmental tax on coal is around $ 3.5 per tonne of CO2. Raising it to $ 15 would significantly increase the price of coal and therefore of coal-based electricity. But it would also speed up the shift to renewables and generate resources that could be used for climate adaptation.
Montek S. Ahluwalia and Utkarsh Patel are, respectively, former Vice-Chairman of the Planning Commission and currently Distinguished Fellow of the Center for Social and Economic Progress (CSEP); and Associate Researcher, Sustainability and Climate Change, at CSEP
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