As the heat and dust settle around COP26, the new commitments made to accelerate action on climate change must be implemented. And that means rapidly evolving an economic and development agenda in which increased financing and a global multilateral interface have become a core element. Climate finance has become the new buzzword.
Given the massive investments required, all the engines of capital mobilization will need to come on. The expert opinion is that it is not possible for domestic, foreign, private or public capital to meet the requirements alone.
As Anjal Prakash, Research Director and Adjunct Associate Professor at the Bharti Institute of Public Policy, Indian School of Business, Hyderabad puts it: “India has called for technology transfer and adaptation finance for countries that do not have not historically contributed to climate change but bear the brunt of it. The $100 billion commitment, long seen as a minimum for climate finance, must increase over time. India’s demand is now based on failure to deliver the $100 billion in 2020.” According to him, the demand is $500 billion over five years for the countries of the South.
At the COP26 meeting in Glasgow, Prime Minister Narendra Modi pledged that India will achieve net zero carbon emissions by 2070 through a balance of emission and mitigation efforts . In the absence of global climate finance, India would have to divert its development finance to combat climate change and for adaptation.
The little over $12 billion currently in grants for adaptation finance is woefully insufficient. By 2025, this figure must at least double and, ideally, triple. The industrialized north and former polluters have more carbon space than the global south. Moreover, the little climate finance that has been secured takes the form of loans more than grants. The global north is also reluctant to share green technology that can help developing countries in the south fight climate change.
According to Gagan Sidhu, director of the CEEW Center for Energy Finance: “It is important to recognize that much of what climate finance seeks to finance are long-lived assets on the ground. And these types of assets are typically predominantly debt-financed through a credit extension, like any other class of infrastructure. From this point of view, the ratio of domestic credit to the private sector as a percentage of GDP is a fairly good indicator of the good or bad position of countries in terms of raising capital.
Compared to this ratio, World Bank data shows that for high-income countries it is 165%, for middle-income countries it is 120%, and for lower-middle-income countries it is is only 47%. Thus, developing countries are clearly at a disadvantage when it comes to mobilizing the necessary financing.
In a recent study, CEEW’s Center for Energy Finance (CEF) assessed India’s investment needs to reach net zero by 2070. total over the next 50 years would be $10.1 trillion. While a substantial portion of this can be met through conventional sources, CEF found that a shortfall of $3.5 trillion would remain. The study found that investment support of $1.4 trillion would be enough to raise capital to close the investment gap,” adds Sidhu.
The overseas green bond market has been a solid source of capital for Indian renewable energy developers. In the first six months of 2021, more money ($3.6 billion) was raised in overseas debt capital markets than in any previous calendar year.
Overseas green bonds issued since 2014 have debt financed around 10% of the total installed solar and wind capacity in India.
In contrast, among the domestic sources of (debt) capital, it is banks and non-bank financial companies that have so far largely financed India’s energy transition. The domestic bond market was more or less absent from the picture. This must change.
Vibhuti Garg, Energy Economist, Head of Indian Institute of Energy Economics and Financial Analysis, says: “In 2021, India attracted about $20 billion in energy investments. renewable. However, it needs to accelerate its deployment of renewable energy to meet its 2030 targets. Access to cheap finance will play a key role in this.
According to Garg, India needs to look at green bonds, sustainability bonds and “environmental, social and corporate governance” or ESG financing. Infrastructure funds will contribute more to the monetization of assets.
With countries and financial institutions announcing fossil fuel exit policies, there will be no shortage of investment. What the government needs to do is provide a supportive policy and enabling environment to reduce the risks of investing in clean energy.
January 24, 2022