A summit with substance – on improving the international climate finance mechanisms | 20th June 2023 | UPSC Daily Editorial Analysis

What's the article about?

• Its talks about the problems of climate finance and ways to address it in the backdrop of the Global Finance Summit which will take place in the coming days.

Relevance:

• GS3: Environment: Climate Change;
• Essay;
• Prelims

Context:

• The effects of climate change are different for different countries. Developed countries can successfully tackle these impacts whereas the most vulnerable countries are developing and poor.
• For them, to tackle impacts of climate change, substantial amounts of international funding is required. In the various climate change related summits, the developed countries promised to help these most vulnerable and poor countries financially.
• To develop a mechanism the Summit for a New Global Financing Pact is going to take place in coming weeks.

Analysis:

Problems in present climate financing:

• Huge gap:
  • According to One Planet Lab’s white papers released for the Summit, the scale of investment needed to meet the UN SDGs, climate COP21 and Biodiversity COP15 objectives set at the global and national levels is to the tune of an additional $4 trillion every year.
  • But the hard truth is that only $204 billion of official development assistance came last year.
  • This gap between promises and payment goes to show that international funding is unpredictable and poorly structured, and does not address the liquidity challenges of developing countries.
• Unbalanced nature of funding:
  • Only 25% of global climate investment goes to South Asia, Latin America, and Africa, which house some of the most vulnerable regions.
• Impact on fiscal independence:
  • Global funds clamp down on the fiscal independence of these countries by posing several conditions before the money comes in. Domestically, too, the tax structures of developing countries lead to institutional weakness, illicit finance flows, and higher risk perceptions.

Solutions:

• The summit will be successful if it can serve as a critical point for the transformation of international financial and development architecture. It must, therefore, include three components: Pact, platform, and pathway.
  • First, create a pact for global flows of finance that covers two levels of social contracts — domestic and international.
    • At the domestic level, high debt limits the fiscal space of developing countries.
      • Increasing this space of countries would need modernising and standardising existing tax structures, clamping down on illegal cross-border money movement, empowering tax administrations and curbing ineffectual fossil fuel subsidies.
      • These efforts should be accompanied by proportionate taxation of actors and goods involved in emission-intensive global flows.
    • At the international level, finance is needed for adaptation as well as loss and damage stemming from climate change.
      • Therefore, the international social contract must rest on a strong foundation of global solidarity rather than empty pledges.
      • New resources can be mobilised by tapping into global flows, such as taxing the production of fossil fuels, shipping of goods, and transportation of fossil fuels.
  • Second, create a global platform to de-risk finance and mobilise large volumes of private investment in sustainable infrastructure.
    • Vulnerable countries need several types of blended finance – for scaling renewables, clean tech for livelihoods, transitioning away from fossil fuels, and the co-development of emerging clean technologies.
  • Finally, chart a political pathway that creates time-bound deliverables on climate finance from one summit to another.
    • Everything won’t be achieved in a single finance summit but the France summit can prevent the can from being kicked further down the road.
    • The summit must outline the maths of finance, the mechanisms of delivery, and establish the momentum for real investment over the next two years.

Way Forward:

• The upcoming summit must focus on these above mentioned solution in order achieve the real progress for climate financing.