Climate Governance is Likely to Fail Without a Discourse on Climate Finance

Proposals to curtail greenhouse emissions and effectively tackle climate change are castles in the air so long as climate financing remains a nebulous and elusive feature of the climate action agenda.

Ahead of the Climate Action Summit in 2019, the Ministry of Finance released a discussion paper on India’s financial perspective with respect to climate change, and called attention to the fact that though India is doing its best to meet promises on climate action, finance continues to portray a significant obstacle. This is true for all developing countries. Commenting on the larger discourse of climate finance (or rather, the lack of it), the paper noted that a matter of grave concern was the “trend of developing countries being denied their right to financial resources for climate actions.”

The paper estimated that the cost of implementing intended nationally determined contributions (INDCs) by developing countries amounts to over $4 trillion. However, given the current withdrawal of promises from the Copenhagen Green Climate Fund (GCF), the largest dedicated climate fund, meeting the ambitiously calculated INDCs would remain a castle in the air if climate financing continues to be a nebulous and elusive feature of the climate action agenda. The ministry commented,

The commitments made by the developed countries for enhancement and support in relation to climate finance as mandated in the UNFCCC and its Paris Agreement are not clearly translated into reality. The means to achieve the climate goals is not commensurate to the urgency shown, nor there is any seriousness in the discourse on climate finance. The Summary Report of the Standing Committee on Finance of UNFCCC (2018) outlines a picture, where it was indicated that total climate specific finance flows from Annex II Parties in 2016, amounts to around US$ 38 billion, which is less than 40 percent of the US$ 100 billion per year target of climate finance. Clearly, the commitments and the ensuing actions over the years have not even attained a tangential relationship.

Fleshing out the numbers further, the paper emphasised that as of 2019, only $10.3 billion have been pledged to the GCF. Of this, only $7.23 billion has been deposited, $4.60 billion approved and $0.39 billion actually disbursed. In light of this, the paper concluded that India’s ability to meet its INDC requirements, along with other developing countries, hinges on the availability of adequate climate finance. 

We explore the EPW archives to highlight various aspects of climate financing, not only with respect to developed nations and their respective international commitments, but also India’s own stance on accounting for climate finance and its pursuit of it.

International Commitments on Climate Finance

T Jayaraman notes that international commitment on climate finance, a cornerstone to achieving climate justice, has remained a rather shifty matter. At the 23rd Conference Of Particles (COP23) in Bonn in 2017, for instance, developed countries put up a united front in their attempt at reneging on their commitments to developing countries, particularly on issues of finance, loss and damage. Though developing countries did gain on the issue of reporting financial assistance to be provided by the developed countries under the terms of the Paris Agreement, this alone does not constitute a win for developing countries with respect to finance. 

However, this procedural outcome should not obscure the fact that this is one success in a mixed bag of ups and downs across a number of negotiating tracks that revolve around the issue of finance. And, it should be remembered that, as things stand today, neither the pre-2020 commitments on finance nor the promise to ramp up climate finance to the figure of $100 billion is anywhere near being adequately addressed. Finance is also one of the key issues that the US, under Trump, has squarely in its sights.

Analysing the recently concluded COP25 2019 , T Jayaraman observes that the rift between developing and developed nations has deepened, with the onus of non-cooperation largely falling on the latter. With respect to finance, he emphasises that there is a continuous bid by the developed nations to renegade on their commitments and escape future pressures of compliance by citing 2020 as the expiry date on previous obligations. 

The C&S reports [compilation and synthesis report] also showed how little the developed countries had done in meeting their other obligations. In the matter of finance for climate action, the Copenhagen pledge by the developed countries of mobilising $100 billion annually by 2020 is nowhere near being kept. The total financial support cited in the reports amounted to only $37.5 million in 2016. This figure, while far short of the target, is not even entirely credible, as the method of accounting is far from transparent. Taking the numbers at face value, it turns out that almost 80% of even this ‘assistance’ to developing countries is mitigation-linked with only 15% for adaptation, while the major part of what has been disbursed is in the form of loans rather than grants.

It is not only financing, but the source of financing that matters in climate governance. With the United States (US) pulling out of the Paris Agreement, the COP23 saw the introduction of an unofficial US coalition named “We Are Still In,” which claimed to be the “real” US representation. Though led by political representatives, the coalition was made up of 2,500 businesses and political leaders, arguing that non-state action would be sufficient to meet US targets. The coalition received tremendous publicity from the United Nations Framework Convention on Climate Change (UNFCCC). However, T Jayaraman points out that this turn towards private financing of climate action alters the fabric of global climate governance. That is, such a move away from public funding would depreciate the role of nation states and would thus “dwarf the meagre resources of a large number of developing nations.” Moreover, such financing would be more difficult to account for legally or in ensuring that there is equitable commandeering of resources. This would increase the gap between developing and developed countries, thereby delaying real steps to combat climate change.

In the negotiations, developing countries have always insisted on public action and accountability through state actors, especially in the arena of finance, wherein developed countries have sought to argue that private funds are fungible with public funds in terms of accounting for their financial support. Given this, it is indeed disturbing that the UNFCCC website on its pages gives ready publicity particularly to the promises and commitments of private global business actors, even when, as in insurance or banking, such commitments may be part of their regular for-profit activity.

India’s Accounting of Climate Financing

Kumar and Nair observe that though India has committed a great deal under the Paris Agreement and the UNFCCC, it lacks a comprehensive climate change policy document. The nebulous legislative outlook requires one to turn to India’s “general environmental policy” for clarity on aspects such as transportation, environment clearance, and finance. However, even the National Environmental Policy, 2006 remains blurry on the workability of any of these aspects. 

India’s domestic climate policy is further complicated by the country’s federal structure wherein the legislative domains of the central government and the state government are distinct. While “climate change” does not figure on either list as a distinct head of legislative competence, various related topics do find mention. Areas such as treaty-making, certain specific industries, atomic energy and regulation of interstate waters are in the Parliament’s domain. State legislatures, on the other hand, can make laws pertaining to local government, public health and sanitation, certain roads, bridges, and inland waterways, agriculture, irrigation, canals, water storage, regulation of mines, and certain industries. Some relevant overlaps exist under the Concurrent List, for example, in relation to subjects like electricity, forests, and protection of wild animals and birds. Climate change, and more broadly, environmental concerns, can be traced to a number of areas of legislative competence spread across the Seventh Schedule, with no overall authority or clear responsibility being identified at either the central or the state level.

Moreover, in its international proposals to combat climate change, there has been a gross overestimation of co-benefits as compared to cost. As part of the Paris COP in 2015, India submitted its INDCs to the UNFCCC. The submitted INDCs aimed at reducing the country’s emission intensity by 30%–35% by 2030. It stated that the targets could be achieved with low-cost finance and technology. However, Parikh and Parikh note that the estimated $2.5 trillion that the proposed INDCs was valued at, underestimated the cost of the ambitious targets. They additionally do not take into account the fact that the geographical limitation of renewable energy would incur transmission costs, which would eat up investments in other parts of the Indian economy, such as education, healthcare, etc. Particularly in the case of India, they note, co-benefits of using renewable sources of energy may not actually compensate for their high price. 

We have to recognise that a renewable plant costs more. For example, a solar plant requires twice as much investment per KW [Kilowatt] as a coal plant.  Also, a 1 KW solar plant will generate 1,600 units of energy, whereas a coal-based plant could generate 6,000 to 7,000 units per year. Thus, to replace a 1 KW coal plant we need to invest in a solar plant of around 4 KW, requiring eight times as much investment. Thus, the co-benefits should be compared with the co-costs. For India, it is not obvious that co-benefits significantly reduce co-costs.

How Important Is Financial Aid for India?

At the outset, the Paris Agreement itself regulates financing climate change very loosely, and has also weakened past commitments by not laying down any minimum level for it. Parikh and Parikh note that the former Minister of Environment Jairam Ramesh as well as the previous Chief Economic Adviser Arvind Subramanian suggested that India not ask for either finance or technology for effecting climate change as it would be “obstructionist.” However, with the assistance from international finance, coal could become economically obsolete, without harming current production or employment levels. This could make the move to a renewable-energy system more sustainable and a reality for India. 

A conventional coal based plant with a capital cost of Rs. 3 crore/MW, a debt–equity ratio of 4:1, interest on debt of 12%, coal price of Rs. 1,000/tonne and a desired return on equity of 15% will provide electricity at around Rs. 1.48 per kWh. A supercritical coal plant with a capital cost of Rs. 5 crore/ MW and 10% lower specific coal consumption would provide electricity at Rs. 1.97 per kWh. Compared to this, a solar plant costing Rs. 6 crore/MW will provide electricity at Rs. 5.68/kWh. Now assuming that 20-year international finance is available at 4%, the electricity from the solar plant will cost only Rs. 3.23/kWh. This can be at least competitive with coal-based power. With availability of such finance, India’s INDC would not result in lower GDP. This is the importance of finance.

Read More: 

International Relations Impeding Equity and Global Climate Justice | Sreeja Jaiswal, 2019

Towards a Trade Regime that Works for the Paris Agreement | Kasturi Das, Harro van Asselt, Susanne Droege, Michael Mehling, 2019

Paris Agreement on Climate Change: Challenges of Urban Transition Remain | Mukul Sanwal, 2016

Paris Agreement Differentiation Without Historical Responsibility? | Kirit S Parikh, Jyoti K. Parikh, 2016

Ratification Politics: Climate Change Is a Social Problem | Mukul Sanwal, 2016 

 

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