Climate Risk and Climate Finance

Introduction

Almost all the countries around the world are facing a common problem in the form of climate change The issue is not usual or gradual climate changes due to natural evolution, but rather the unusual climate changes caused directly or indirectly by human beings in the name of advancements and development These unusual climate changes are due to reckless approaches, over exploitation of natural resources, high levels of pollution, population explosion, erosion of forest cover, excessive mining or excavation of soils and mountains, extinction of several living creatures, etc Unusual climate changes result in unendurable risks Due to the involved risks and dangers, the world at large is deliberating and working on the measures to address unusual climate changes The impact of climate risks, referring to a few major instances with costs, the agreed and actual contribution from developed countries to developing countries, and the composition of climate finance warrant at least a brief critical discussion to highlight the significance of the concept

Impact of climate change & climate risks

Uncontrollable calamities, irreversible environmental losses, untimely rains, scorching heat and heat waves, extinction of certain flora and fauna, and deaths of human beings and other living creatures are the consequences of climate changes The results of adverse climate changes include heat stress, pollution, crop losses, undernutrition, natural calamities and many other disasters Additionally, there are several other impacts that affect cultures, heritage, mobility, biodiversity, territory, indigenous knowledge, and poverty Any unusual climate change causes climate risks and may pose dangerous threats to the world People are affected not only by climate change but also by the impacts of climate action The green transition requires restructuring economies and radical shifts in some sectors to move to carbon neutrality If not designed and implemented properly, mitigation and adaptation policies could significantly widen inequalities, within and between countries Therefore, the design, structure, funding and manner of implementing measures also play a key role in addressing climate risks Climate finance targets could influence the volume and pace of measures to address climate risks and these are deliberated at designated forums such as the COP

Welcome COP29

The awaited UN Climate Meetings of United Nations Environment Programme (UNEP), scheduled from 3rd to 13th June 2024, had its deliberations as expected This event was considered a critical preparatory meeting for the upcoming 29th Conference of the Parties (COP29) of the United Nations Framework Convention on Climate Change (UNFCCC), which was held in November 2024 Since deliberations in the June 2024 meeting will influence the decisions at COP29, where new climate finance targets will be set, climate change and related aspects are high on the global agenda

Climate finance is needed for mitigation and adaptation by all nations committed to reducing greenhouse gas emissions Developed nations are expected to meet the climate finance requirements of other countries committed to the objectives of the UNFCCC

Climate change incidents and costs

Climate changes and climate risks determine the volume of the required climate finance According to a publication by the World Health Organization (WHO), climate change could cause about 250,000 additional deaths per year, and about 3.6 billion people live in areas vulnerable to climate change

WHO states that the annual costs of direct damage to health would range between US $2 billion to $4 billion by the year 2030 These costs do not include those associated with agriculture, water, sanitation, and other sectors related to health In fact, if the costs of damage which are indirect and caused from the latter sectors are also included, the volume of annual costs would be much higher Besides causing huge annual costs both directly and indirectly, climate changes play a key role in causing natural disasters

According to a report by a Zurich insurance company titled \'Climate loss and damage cost $16 million per hour\', the economic losses due to global natural disasters in 2023 aggregated to US $380 billion The World Economic Forum (WEF) states that between the years 2000 and 2019, the world incurred cumulative losses and damages of US $2.8 trillion due to climate change, translating to US $16 million per hour The WEF also states that the global annual cost due to climate change affecting infrastructure, property, agriculture and human health is expected to range between US $1.7 trillion to US $3 trillion by 2050

Climate Finance

There is unanimity on the need for climate finance as the main source to address climate change issues \"Climate finance\" refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change

Climate finance flow and volume

It is public information that developed countries have caused much more climate damage than developing countries Therefore, it is almost unanimously agreed that most of the climate finance requirements for developing countries should be contributed by developed countries As the convention continues, the COP15 of UNFCCC determined that by 2020, the goal of annual contributions from developed countries to developing countries should be US $100 billion This funding is required for climate action towards achieving the climate goals established in the Paris agreement, which is an international treaty on climate change mitigation, adoption, and finance

However, a report by the United Nations Conference on Trade and Development (UNCTAD) finds that $100 billion is a fraction of what is needed to support developing countries to achieve the stated climate goals

Climate finance has various channels and forums One of the key entities is the Global Environment Facility (GEF), formed in the year 1991 as a multilateral environment fund to support climate change issues GEF operates the financial mechanism of United Nations Framework Convention on Climate Change (UNFCCC) With the guidance of UNFCCC, GEF decides policies, programme priorities, and eligibility criteria for funding climate finance GEF manages several funds, including the Green Climate Fund, the Special Climate Change Fund, the Least Developed Countries Fund, the Long-term Climate Finance and the Adaptation Fund GEF has been performing as per its mandate for the benefit of its 186 member countries However, GEF\'s budget of US $5.25 billion for five years i.e., 2022 through 2026 is paltry compared to the actual total requirement Therefore, more such funds and higher budgets are needed to meet the huge and increasing needs of climate finance

The world bank claims that it is the largest provider of multilateral climate finance According to a report by the Bretton Woods Project, the World Bank Group has provided significant amount of climate finance The volume and purpose for which climate finance is made available are more important than which agency leads in channelling these funds There is also a need to set new finance targets to meet the increasing climate finance needs At COP26 in 2021, the process began for setting new finance targets by the end of the year 2024 through technical expert dialogues (TED) If consensus is reached by the end of 2024, the new finance targets for climate finance will be revealed at COP29

Purpose of climate finance

The objective of climate finance is to support projects and activities that address climate damage If sufficient funds are extended in the form of climate finance, the ongoing climate damage could be contained while also working to avoid further damages Such endeavours could create a trend of declining climate damage and potentially necessitate lower climate finance in the future If the purposes are not solely to address climate damage, neither the current damage nor the future potential damage could be effectively managed

Climate finance from developed countries is intended to support developing countries, benefiting both developed and developing nations Therefore, climate finance is required at the minimum for mitigation and adaptation purposes Mitigation purpose facilitate funding for projects such as renewable energy and energy efficiency Adaptation purposes facilitate funding for projects creating resilient infrastructure and climate friendly agriculture

Climate related projects often have lower returns, making them commercially less attractive and necessitating higher-cost debt Projects with higher cost debt create debt stress on other projects and even on the economy If climate finance helps retire existing higher-cost debt and avoids the need for higher-cost debt for new climate projects, then these climate projects will have more scope to fruition Therefore, climate finance should also be provided to retire some debt of the developing countries to provide relief from their debt stress

Forms of climate finance

Climate finance from developed countries is intended to support developing countries, benefiting both developed and developing nations Ideally, climate finance should not carry any interest cost, have no repayment obligations, and be in the form of pure grants Since developing countries often face capital scarcity, unless climate finance is provided as pure grants, they may not have the latitude to spend the amount for climate purposes In fact, the Paris Agreement\'s letter and spirit include the provision that climate finance shall be in the form of grants with conditions directing the spending solely for climate purposes

However, as per information in the public domain, approximately 70 percent of climate finance is in the form of loans, with only the remaining balance in the form of grants Even more concerning is that a significant share of these loans is non-concessional In the first place, non-concessional loans for climate purposes may not be availed by developed countries and secondly, even if they avail them, the debt burden could be higher resulting in a compromise of yet other projects involving climate risks There are also apprehensions that some of the climate finance is not additional and may replace existing commitments

Details from the Bretton Woods Project reveal the forms in which climate finance is provided Although these details specifically pertain to the climate finance provided by the World Bank Group, the trend has been consistent across various sources

Limitations on quantifying climate damage

Climate change is occurring globally, affecting both developed and developing countries However, the adverse impact of climate change is more significant in developing countries Despite this, the impact of climate change and associated risks cannot be accurately quantified for either developed or developing nations The inability to effectively and completely quantify the loss and damage from climate change and climate risks is a primary drawback in planning programs to counteract these changes Due to diversity in climate risk portfolios, their immeasurability makes periodic monitoring and evaluation extremely difficult Additionally, data integrity poses a problem due to the universal nature of the issue

Debt and climate finance for developing countries

Developing countries are at a disadvantage when it comes to combating climate change due to their limited resources In contrast, developed countries are better equipped to provide financial support for climate risks, owing to their advanced practices and stronger financial positions The challenges faced by developing countries include insufficient funds to adopt alternative and safer practices, a lack of public awareness about climate change, and limited resources for low-return, climate-friendly projects Additionally, these countries often struggle with mobilizing funds for climate finance Many developing nations are already burdened with significant debt and find it difficult to service their existing obligations Given their financial constraints, taking on additional debt for climate-related initiatives is impractical As a result, these countries may be compelled to neglect climate change, exacerbating their vulnerability to its impacts This situation underscores the need for developed countries to contribute more significantly to climate finance for developing nations, benefiting both parties in the process

Approaches towards climate finance

For centuries, insufficient attention was paid to climate change, resulting in significant damage Although recent efforts have increased focus on climate finance, this funding may still fall short of addressing the full scope of climate challenges Mobilizing and spending climate finance alone is not enough It needs to be clubbed with measures avoiding or minimizing the activities causing climate changes Such measures may certainly cause huge inconvenience to the presently existing comforts and conveniences of the people These measures may also stifle the ongoing development and advancements, be they technological or infrastructural The measures may call for additional taxes and duties, and additional safety measures

All the countries, all human beings, and all components on the earth are stakeholders of the climate Therefore, climate change issues should be tackled with a sequential and concerted effort than with disconnected and isolated efforts of various stakeholders Human beings should ensure that the efforts benefit all stakeholders and should implement the same in a concerted approach

The sequence should be in the order of quantification of the climate risks and damages, identifying the sources and reasons of climate change, identifying the ways and means to discontinue the ongoing activities causing climate change, estimating the climate finance required for implementing the measures, mobilizing the required amounts of climate finance, endeavouring to reinstate or recoup climate changes, undertaking projects that could avoid further climate change damages, and finally measuring the outcomes of the implemented projects This should be a continuous process until the overall desired outcomes are achieved

Conclusion

Climate change has been causing huge risks, but all of the risks and damages could not be adequately quantified Select incidents, details of which are referred, reveal how alarming the adverse impacts, loss of lives, and damages to properties are The institutional deliberations under the aegis of the United Nations are in the right direction but the actions of the suggested measures appear to be lagging Until now, the purposes for which climate finance is provided is appropriate and there need not be any apprehensions towards the purpose However, between the mitigation and adaptation which should receive priority and what proportion should be allocated to which segment deserves a judicial approach From the developments until now, it appears that the distribution is not optimal In any case, the need to address climate change risks and mobilize climate finance cannot be overstated It is ubiquitously felt across the countries and sections of people Climate risks must be addressed in a planned and phased manner These measures should not stifle the economic development of the least developed countries (LDCs), economic growth of the developing countries, and the stability of the developed countries Towards this, the mobilization of climate finance and addressing climate risks must be undertaken in a judicial and a sustainable manner

When measures are implemented to contain or avoid climate changes, they may or may not benefit the current generation but will surely benefit the future generations The climate finance spend should balance between mitigation and adaptation measures Further, it is not uncommon that when such measures are implemented, there could be significant impact on the sustenance of the current lives Therefore, to the extent possible, the pace, direction, and magnitude of such measures should balance between the present life and future life

Climate finance should be mobilized in a timely manner, in sufficient volumes, and from affluent countries, should be disbursed timely, meant for genuine climate related projects, and measurable projects Competent agencies should handhold developing countries and LDCs in implementing climate related projects To ensure ownership of all the stakeholders, in addition to public finance, private finance should also be encouraged as much as private parties are involved in the implementation

The form of climate finance should be predominantly in grants, and if inevitable, on concessional terms and convertible to grants on performance outcomes Climate finance should also be used to promote the awareness on risks and damages due to climate changes Climate finance should be subject to suitable climate audits The climate finance related guidelines by several multilateral agencies including the UN Group, the World Bank Group, OECD, etc., should be completely codified

COP29 should take note of the existing anomalies, the developing and developed countries should be transparent in raising and deliberating the issue along with statistics and plan to increase the targets to the extent required The revised targets could be more ambitious if required so that the catch-up program can be implemented In fact, the climate finance planned could be directed on the distribution towards the mitigation and adaptation measures as well than merely stating the targets of climate finance Further, since the loan form of climate finance would not help the developing countries meet their requirements and indeed has the risk of dissuading them against focusing on climate measures, it is imminent that developed countries extend grant-based climate finance and also streamline their fund delivery and support mechanisms towards the developing countries

It is only by prioritizing equitable, accessible, and effective climate finance that we can hope to mitigate the far-reaching impacts of climate change and secure a sustainable future for all