Financing Climate Transition: The Real Challenge

As all countries on a global stage gear up to fight climate change, a big question emerges- “Who is going to finance this transition?” While the role of each country is critical in ensuring a smooth transition to a cleaner and greener Earth, there is also an immediate need to have substantial and sustained funding for climate action. 

If the 29th session of the United Nations Climate Change Conference (COP29) in Baku was any indicator, it showed more than ever that the financial needs far exceed the target of $300 billion by 2035,  promised by the developed nations. According to estimates given by IEA (International Energy Agency), investment in the transition to cleaner energy would need to reach nearly $4.5 trillion per year by 2030. This calls for robust financing mechanism and solutions to develop and deploy climate mitigation technologies, promote adaptation, and build resilience.

1. New Technologies and Costs

While technologies like green hydrogen, carbon capture and battery storage are critical for achieving Net Zero and helping with the transition, their deployment remains expensive. The cost of developing, scaling and deploying these technologies need substantial push and investments. India, with its PLI (Production-Linked Incentive) scheme has given a significant push to manufacturing and export in green energy, making it a leader in this sector. However, research and innovation funding remains low globally, hampering advancements. The cost curve of these new climate technologies must be bought down through public-private partnerships (PPP), better funding mechanisms, market connectivity and encouraging startups. 

2. Global Impact of Climate Change

Climate change disproportionately affects developing and low-income countries despite contributing least to global emissions. Climate financing must focus on mitigating these vulnerabilities of at-risk communities and helping them better adapt to their impact. Currently public and private financial flows for fossil fuels far exceed those directed towards climate adaptation and mitigation, a reality that contradicts and undermines our climate goals. For this, there is a need for collaboration between governments, central banks, commercial banks, institutional investors, private finance actors and development organisations to innovate and rethink how resources are mobilised and distributed. 

Even with mechanism like Net Zero Banking Alliance (NZBA) in place, many banks globally do not have a net-zero pledge, leaving capital market activities unchecked for Net-Zero transition. 

3. Role of Multilateral Development Banks (MDBs)

MDBs are pivotal players in climate financing, but their current funding capacity must increase multi fold to meet global needs. They need to optimise their balance sheet and introduce de-risking instruments to scale to meet the financing demands of member countries. Green bonds, balanced finance mechanisms and guarantees can make climate projects more attractive to private investors and helping countries achieve their climate goals. 

MDBs also have a responsibility to ensure fair access to finance for countries who are at different stages of developments and prioritising countries in South Asia and Africa who are the most impacted. 

4. Renewable Energy Financing

In the last few years, financing has picked up in the renewable energy sector through capital availability in both debt and equity. This has helped countries scale up their renewable energy projects like solar, wind and hydroelectric power as they need massive investments in infrastructure, grid modernization and energy storage solutions. In India, renewable energy financing has seen a major push from the Government and made attractive through sovereign green bonds and concessional loans, which in turn has fuelled more private equity investments. 

5. International Collaboration and Climate Funds

Initiatives like the Green Climate Fund (GCF), Clean technology Fund, Global Climate Partnership Fund (GCPF), Global Environment Facility (GEF), and Adaptation Fund must be strengthened to provide financing to vulnerable nations. These funds are some of the largest sources of international public finance and play a critical role in financing the climate transition. 

Financing climate change is not an isolated task or sole responsibility of a country, but it is imperative that countries prioritise domestic mechanisms such as carbon taxing or carbon trading, green taxes and public and private partnerships to achieve their NDCs (Nationally Determined Contributions). Segments like green energy, waste management, circularity might not look that attractive right now, but with correct support, scalability and innovation, there will be growth in these sectors as well. Combined efforts from all stakeholders and external funding mechanisms are critical and to develop a comprehensive strategy and integrated policy approach that aligns the financial systems with the long-term needs of the economy while incorporating climate risks.