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COP27: 1st time, compensating poor nations for climate disasters on the table

Why in News?

The issue of loss and damage, as it is referred to in the climate negotiations, was included in the formal main agenda of the climate conference for the first time ever, after being discussed in a separate track for years.

In a big positive on the opening day of the climate change conference here, negotiators agreed to discuss the creation of an international mechanism for compensating poor countries that suffer largescale damage due to climate disasters.

The decision to include loss and damage in the main agenda comes in the wake of a series of unprecedented climate disasters this year — Europe’s worst drought in 500 years, Pakistan’s worst ever flooding, extensive heat waves in several parts of the world. There had been strident demands from a growing number of countries to discuss loss and damage more seriously and with greater urgency than earlier.

What is the Need for Climate Finance?

• The Scale of Needed Investment Globally:
  • According to the World Economic Forum 2022, to avoid the worst fallout from the climate crisis, more funding must be dedicated to helping people adapt to climate change.
    • The world needs to invest an estimated $5.7 trillion annually in green infrastructure and other adaptation and mitigation efforts. This will require a generation-defining level of creativity and commitment, not just from governments, but also from the private sector.
  • Mitigation – Large-scale investments are required to significantly reduce emissions.
  • Adaptation – Significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.
  • It is also critical to support developing countries to build resilience to worsening climate impacts and to catalyzing private sector climate investment.
  • Climate Finance is needed to transition the world’s economy to a low-carbon path, as direct government funding is scarce in these countries.
• The scale of needed investment in India:
  • Under Paris Accord, India has planned to reduce its carbon emission intensity – emission per unit of GDP – by 33-35%. To achieve these targets and build its renewable capacity India needs climate finance.
  • India’s Green Bond market is in growth stage, first green bonds were issued in 2015 – indicating the need to explore more options for climate financing.
  • In India, banks and non-banking financial companies have a limited appetite for long-term debt due to asset-liability mismatch.
  • Along with problems arising out of climate change, India also face traditional problems like poverty, pollution, education and skill gaps etc.Hence there is a greater need for climate finance.

Global Climate Financing: What is the Scenario?

• Green Climate Fund (GCF): It was established to limit or reduce greenhouse gas (GHG) emissions in developing countries and to help vulnerable societies adapt to the unavoidable impacts of climate change.
• Adaptation Fund (AF): It was established under the Kyoto Protocol in 2001 and has committed US$ 532 million to climate adaptation and resilience activities.
• Global Environment Fund (GEF): It has served as an operating entity of the financial mechanism since the Convention came into force in 1994.
  • It is a private equity fund focused on seeking long term financial returns by investments in clean energy under climate change.
• Other Funds: In addition to providing guidance to the GEF and the GCF, parties have established two special funds:
  • The Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF).
    • Both funds are managed by the GEF.
  • At the Paris Climate Change Conference in 2015, the Parties agreed that the operating entities of the financial mechanisms – GCD, GEF, SCCF and the LDCF, shall serve the Paris Agreement.

Climate Financing and India: What is the Scenario?

• Intended Nationally Determined Contributions (INDCs) are nationally binding targets adopted under UNFCCC. India has to reduce GHG emissions under this, which requires climate financing.
• National Clean Energy Fund:
  • The Fund was created to promote clean energy, funded through an initial carbon tax on use of coal by industries.
  • Governed by an Inter-Ministerial Group with the Finance Secretary as the Chairman.
  • Its mandate is to fund research and development of innovative clean energy technology in the fossil and non fossil fuel based sectors.
• National Adaptation Fund for Climate Change (NAFCC):
  • It was established in 2015 to meet the cost of adaptation to climate change for the State and Union Territories of India that are particularly vulnerable to the adverse effects of climate change
• Clean Development Mechanism (CDM):
  • It allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2.
  • The CDM is the main source of income for the UNFCCC Adaptation Fund.
  • The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
• Internal Programmes:
  • Compensatory Afforestation Fund Management and Planning Authority (CAMPA), Disaster Management Fund etc.
  • A Climate Change Finance Unit was set up by Department of Economics in the Ministry of Finance to advise and guide the MoEF&CC as well as to lead on global climate finance issues.

What are the Principles of Climate Finance?

• Polluter Pays:
  • The ‘polluters pays’ principle is the commonly accepted practice according to which those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment.
  • This principle underpins most of the regulation of pollution affecting land, water and air formally known as the 1992 Rio Declaration.
  • It has also been applied more specifically to emissions of greenhouse gases which cause climate change.
• Common but Differentiated Responsibility and Respective Capability (CBDR–RC):
  • CBDR–RC is a principle within the United Nations Framework Convention on Climate Change (UNFCCC).
  • It acknowledges the different capabilities and differing responsibilities of individual countries in addressing climate change.
• Additionality:
  • Climate finance should be additional to existing commitments to avoid the diversion of funding for development needs to climate change actions.
  • This includes use of public climate finance and investments by the private sector.
• Adequacy & Precaution:
  • In order to take precautionary measures to prevent or minimise the causes of climate change as a stated goal under UNFCCC, the level of funding needs to be sufficient to keep a global temperature with in limits as much as possible.
  • A better level of adequacy might be increased in the national estimates of the needed climate funds, this will help build planned investments with respect to INDC.
• Predictability:
  • Climate finance must be predictable to ensure sustained flow of climate finance.
  • It can be done through multi-year, medium-term funding cycles (3 – 5 years).
  • This allows for adequate investment programs to scale up a country’s national adaptation and mitigation priorities.

What is the Significance of Climate Financing?

• Climate finance is needed for mitigation because large-scale investments are required to significantly reduce emissions.
• Climate finance is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.
• Climate Financing recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.
  • Hence, developed countries should also continue to take the lead in mobilizing climate finance through a variety of actions, including supporting country-driven strategies and taking into account the needs and priorities of developing country Parties.
• Climate finance is critical to tackle the issues posed by climate change and achieve the goal of limiting the rise in the earth’s average temperature to below 2 degrees Celsius over pre-industrial levels, something the 2018 IPCC report has predicted.

What are the Challenges Regarding Climate Finance?

• At global levels:
  • There is a gap between national needs and climate finance under Nationally Determined Contribution there is need for additional international financial support.
  • Least developed countries receive much less approved funding in per-capita terms from the multilateral climate funds.
  • The rate of approvals is time taking, due to which the drawee nation has insufficient funds to complete its target and leads to stalling of projects.
  • The uncertainties such as, the recent refusal of US to pay $2 billion of its pledge this has created shortage of funds at available GCF.
• At National levels:
  • In India the local market for climate finance are insufficiently involved in financial products that support climate change adaptation.
  • There is imminent failure in securing viability-gap funding either from governments, or multilateral development banks.
  • Projects in climate change have longer gestation periods which deter financial institutions from investing in them.
  • Shortage of funds due to insufficient budget allocation are often interfered due to any excess or additional grants which leads to stalling of green projects.

• The Conference of the Parties (COP):
  • COP is the apex decision-making authority of UNFCCC.
  • The COP meets every year, unless the Parties decide otherwise. The first COP meeting was held in Berlin, Germany in March, 1995.
  • The COP meets in Bonn, the seat of the secretariat, unless a Party offers to host the session.
  • The office of the COP President normally rotates among the five United Nations regional groups which are – Africa, Asia, Latin America and the Caribbean, Central and Eastern Europe and Western Europe and Others.
  • The President is usually the environment minister of his or her home country. S/he is elected by acclamation immediately after the opening of a COP session.

COP’s with Significant Outcomes

• 1995: COP1 (Berlin, Germany)
• 1997: COP 3 (Kyoto Protocol)
  • It legally binds developed countries to emission reduction targets.
• 2002: COP 8 (New Delhi, India) Delhi Declaration.
  • Focuses on the development needs of the poorest countries and the need for technology transfer for mitigating climate change.
• 2007: COP13 (Bali, Indonesia)
  • Parties agreed on the Bali Road Map and Bali action plan, which charted the way towards a post-2012 outcome. The Plan has five main categories: shared vision, mitigation, adaptation, technology and financing.
• 2010: COP 16 (Cancun)
  • Resulted in the Cancun Agreements, a comprehensive package by governments to assist developing nations in dealing with climate change.
  • The Green Climate Fund, the Technology Mechanism and the Cancun Adaptation Framework were established.
• 2011: COP 17 (Durban)
  • Governments commit to a new universal climate change agreement by 2015 for the period beyond 2020 (Resulted in the Paris Agreement of 2015).
• 2015: COP21 (Paris)
  • To keep global temperature well below 2.0C above pre-industrial times and endeavor them to limit them even more to 1.5C.
  • It requires rich nations to maintain USD 100bn a year funding pledge beyond the year 2020.
• 2016: COP22 (Marrakech)
  • To move forward on writing the rule book of the Paris Agreement.
  • Launched the Marrakech Partnership for Climate Action.
• 2017: COP23, Bonn (Germany)
  • Countries continued to negotiate the finer details of how the agreement will work from 2020 onwards.
  • First set of negotiations since the US, under the presidency of Donald Trump, announced its intention earlier this year to withdraw from the Paris deal.
  • It was the first COP to be hosted by a small-island developing state with Fiji taking up the presidency, even though it was being held in Bonn.
• 2018: COP 24, Katowice (Poland)
  • It finalized a “rulebook” to operationalise the 2015 Paris Agreement.
  • The rulebook covers climate financing facilities and the actions to be taken as per Nationally Determined Contributions (NDC).
• 2019: COP25, Madrid (Spain)
  • It was held in Madrid (Spain).
  • There were no concrete plans regarding the growing climatic urgency.