LocationsScaling new heights for climate
May 17, 2024
The 2024 Istanbul Development Dialogues are focused on scaling up climate action and finance.
To address the climate crisis, we need solutions that impact all aspects of development. In the lead up to COP29 in Azerbaijan, this blog series reflects on climate action and approaches around the region.
In late 2023, the first global stock take of countries’ climate efforts revealed that the world was not on track to achieve the collective climate goals of the Paris Agreement. To course correct, at the global climate conference in Dubai in December 2023, countries agreed to transition away from fossil fuels by 2050, and triple renewable energy capacity and double energy efficiency by 2030.
UNDP is supporting countries achieve this ambition through its National Determined Contributions (NDCs). Simon Stiell, the UN’s climate change leader, points out that these ‘NDCs need to incorporate investment plans that give a clear signal to the world, to investors, and to donors, of how countries plan to tackle climate change.” They must provide an integrated vision, incorporating a whole-of-economy approach.
Estimates of the costs vary greatly depending on which methodology is applied.
The high-level expert group on climate finance estimated needs at US$2.4 trillion a year by 2030 (6.5 percent of GDP) for developing countries, excluding China, for the energy transition, adaptation and resilience including loss and damage; and the restoration of natural capital. UNCTAD puts the price tag at $1.55 trillion/year. The World Bank estimates financing needs of lower middle-income countries – which make up the large majority of countries in the Europe and CIS region – to 5.1 percent of GDP/year. At the top end of the scale, the Climate Policy Initiative estimates around $9 trillion/year globally by 2030.
Source: Financial Times
By 2025, countries will have forged the new collective quantified goal on climate finance (as negotiated under the UNFCCC). Up for discussion are the quantity of the goal, its composition and degree of concessionality, who should contribute and its transparency arrangements to ensure that progress towards it can be adequately measured.
Will it be a transfer from developed to developing countries? Or will it encompass the provision and mobilization of finance through domestic, international, public and private sources? Should contributors be the original developed countries or also include newly high-emitting countries with high economic capacities, or all high-income economies, to reflect the evolving economic landscapes since the 1990s?
Given the current levels of climate finance, estimated at $1.3 trillion in 2021-22, scaling up climate finance is thus emerging as the critical factor to drive climate ambition for the upcoming COP29. This will be a veritable steep climb.
A few salient points emerge.
Private sector climate finance will have to be significantly scaled, potentially to 70 percent of the total. Given the much higher cost of capital in developing countries, the elevated risk perceptions and lack of appropriate local currency financing instruments (or their high cost), coupled with a high-debt and inflationary global environment suggest that this is going to be particularly challenging in developing country contexts.
To allow private sector investments to advance in these adverse conditions means raising the level of concessional finance to mitigate risks or credit enhance to achieve an acceptable risk-return proposition for private sector investors. In other words, blended finance needs to rise.
This is already happening. Analysis shows that the blended market is growing. The main driver of market growth was the presence of a development finance institution or multilateral development bank (MDBs) in blended deals, which reduces the amount of official development assistance necessary to draw in private sector investment. However, given their limited asset bases, there is also a limit to how far they can drive this growth. Therefore, far greater amounts of risk-bearing capital are needed to tap into the vast sum of private sector assets.
Second, governments will have to further scale their domestic resources for green infrastructure investments, especially grids, and for climate change adaptation, such as building sea walls or flood defenses. However, in contexts of high debt distress, fiscal sustainability can become a constraint on the fiscal space needed to invest in ambitious NDCs. This will require more grant transfers to these countries.
To date, the IMF has two instruments that can provide vulnerable countries with either loans with zero interest or longer maturities, but they are only partly adequate for dealing with climate change adaptation and mitigation issues. In this regard, MDBs need to reform the eligibility rules to allow middle-income countries to access cheaper financing for climate projects and raising more capital through rechanneling IMF Special Drawing Rights.
Third, governments need to consider ‘innovative financing instruments’ to raise their revenue bases for climate spending. Based on the ‘polluter pays’ principle, this could be taxing the fossil fuel industry’s $4 trillion-a-year profits, a levy on the emissions of the shipping industry, and surcharges on business and first-class flights, but also includes carbon pricing. About 40 countries have introduced carbon pricing mechanisms, and there are good examples of these revenues being ring-fenced to fund climate efforts. Various taxes and levies could generate some $2.2 trillion a year. Other countries are backing efforts to phase-out fossil fuel subsidies, worth at least $7 trillion per year, to free up resources for greener uses.
Finally, governments need to put into place key regulatory measures that will redirect spending and investment to support the green transition. A popular choice in emerging economies with underdeveloped secondary security markets and, hence, limited refinancing options for banks, are dedicated credit allocation instruments. Green-targeted refinancing lines by central banks offer commercial banks refinancing at preferential terms for certain green asset classes, thereby compensating financial institutions for lending at lower-than-market interest rates to green projects.
Fixed lending requirements set by the central bank and requiring commercial banks to allocate a percentage of their loan portfolio to specified classes of assets, industries, or geographical areas are also a prevalent instrument. Development banks have a role to play in implementing green finance standards or issuing green bonds, thereby encouraging private institutions to follow. They can be supported by central banks that subscribe to the initial equity or buy and create markets for bonds issued by development banks.
This year’s Istanbul Development Dialogues, hosted by UNDP and OECD, will gather climate change negotiators, policymakers from ministries of environment, economy and finance across the region, and international climate experts to discuss all these issues to scale up climate action and climate finance in the Europe and CIS region.