Climate Change

Climate ambition requires reform of current financial system: CSE report

Current form of financing is adding burden on developing countries, CSE and other experts discuss at webinar

By Rohini Krishnamurthy
Published: Tuesday 20 June 2023

Climate ambition cannot be raised if the world continues to operate in a financial system that is inequitable by design, according to a new report from the New Delhi-based think tank Centre for Science and Environment.

The Global South faces multiple financial barriers such as high costs of capital and debts, which, in turn, hinder climate ambition, the report Beyond Climate Finance highlighted.

“The way we are providing climate finance, we are adding burden on developing countries. Reforming global financial architecture is critical,” Director General CSE, Sunita Narain said.

Also read: Access to financial services can help rural India cope with climate risks: Study

Narain was speaking at an online webinar Beyond Climate Finance: Climate ambition in the Global South requires financial system reforms conducted by CSE on June 19, 2023. The report comes ahead of the Paris Summit on a New Global Financing Pact, which will be held June 22-23, 2023. 

In 2009, developed countries committed to mobilising $100 billion per year by 2020 to support climate action in developing countries. The goal has not been met yet.

“The common issue many multilateral events like Group of 20, 28th Conference of Parties to the United Nations Framework Convention on Climate Change will be looking into is how to enhance mobilisation finance for achieving UN-mandated Sustainable Development Goals and addressing transboundary challenges like climate, conflict and pandemic,” Anoopa S Nair (International Economic Relations), director for department of economic affairs, Union Ministry of Finance, said at the webinar.

The global community, despite all its knowledge and technical expertise, has not been able to arrive at a consensus on this key agenda even after years of deliberations, she added.

Developing countries face a higher cost of capital as they are perceived to be a high-risk environment. Though renewable project costs are dropping, it is still unaffordable for the developing world due to high-cost barriers, the report noted.

For example, unsubsidised solar power costs 140 per cent more in Ghana than in the United States solely because of differences in the cost of capital.

The financing costs can be up to seven times higher in emerging and developing economies than in countries in Europe and the US, the report read. This hinders countries from making new investments and generating growth.

The differences in the cost of capital between developed and developing countries could be due to a country’s sovereign credit rating and whether the country’s currency is considered a safe asset.

Also read: COP28 head calls for ramping up renewables, carbon capture and climate finance

Further, the borrowing cost (interest and other costs incurred during borrowing of funds) of countries goes up when their currencies weaken. As many as 90 developing countries saw their currencies weaken against the dollar in 2022, according to the UN Conference on Trade and Development.

Also, the cost of capital for nascent green technologies such as battery storage, electric vehicles and green hydrogen are higher in developing countries.

Another problem is debt payments by low-income countries, which have been the highest since 1998. The debt burden, according to the report, exceeds the annual cost of achieving the Nationally Determined Contribution (NDC) for many low and middle-income countries.

About 50 per cent (27 of 55 low-and middle-income countries) face higher debt servicing costs in one year than what it would cost to achieve their NDC, CSE analysis showed.

 “Climate ambition in these countries is being hindered by debt obligations,” Avantika Goswami, programme manager for  climate change at CSE and one of the report’s authors, said at the webinar.

Countries with high debt spending end up channelling less money to public spending.

For example, nations that allocated 15 per cent of government revenue towards debt payments saw a three per cent fall in public spending between 2019 to 2023, while countries with the lowest debt payments saw a 14 per cent increase in public spending, according to Debt Justice, a UK-based campaigning organisation.

Another hindrance is multilateral development banks (MDB), which provide concessional finance only to the poorest countries, those with a gross domestic product per capita of less than $1,253 per year. However, 62 per cent of the world’s poor live in middle-income countries and thus must be eligible for concessional money.

Also read: Environmental & social responsibility of financial institutions must go beyond green initiatives

The report calls for more concessional finance flowing into developing countries from developed countries and MDBs for climate mitigation, adaptation and loss and damage.

“There is a need to stop the ‘divide and conquer tactic’ against the poor and allow middle-income countries to access concessional finance and debt relief. We need a multi-lateral, rules-based approach to solving the debt and climate crisis,” the report read.

The report also discusses various proposals on MDB lending and the flow of concessional finance to the developing world.

“2023 must be the year that civil society and scholars build pressure and scale up demands for the urgent systemic reforms that the Global South needs. The urgency of correcting the broken financial system cannot be overemphasised,” Goswami said at the webinar.

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