ED DAY-94 LUKMAAN IAS

1
 ED DAY-94 LUKMAAN IAS

2
 ED DAY-94 LUKMAAN IAS

THE OECD REPORT ON CLIMATE FINANCE

THE CONTEXT: Ahead of the UNFCCC COP28 (Dubai, UAE), the Organisa on for Economic Coopera on
and Development (OECD) has published a comprehensive analysis
of the status of Climate Finance between the years 2013-2021, in
a report brought out on 16 November 2023.

The Report holds much significance as it also comes against the

backdrop of a pledge by the bloc of developed na ons at the COP
26 talks in Glasgow, in 2020, to double adapta on finance. The
report tracks the progress made so far by the developed countries,
and also highlights the measures required to scale up the
mobilisa on of climate finance.

KEY FINDINDS OF THE REPORT

At the request of donor countries, the OECD has been tracking progress towards the goal of climate
finance since 2015.

 The total climate finance mobilised by developed countries for

developing countries amounted to USD 89.6 billion in 2021, marking
Progress in mobilisa on a significant hike of 7.6% over 2020.
of Climate Finance  Disappoin ngly, the economically developed countries fell short of
their promise to jointly mobilise $100 billion a year, towards the

3
 ED DAY-94 LUKMAAN IAS

climate mi ga on and adapta on needs of developing countries, in

2021 – one year past the 2020 deadline.

 Doubling of Public climate finance (bilateral and mul lateral), from

USD 38 billion to USD 73.1 billion was witnessed.
Share of Public sector  It made up the major chunk of the total USD 89.6 billion climate
finance in 2021.

 Mobilised private climate finance (USD 14.4 billion in 2021)

contributed 16% of the total climate finance mobilised in 2021.
Share of Private sector  The comparable data for private climate finance are only available
from 2016.

 Adapta on finance dropped by USD 4 billion (-14%) in 2021,

Decline in Adapta on resul ng in a decrease in its share of total climate finance from 34%
finance to 27%.

 While 60% of total climate finance was allocated towards

Gaps in Adapta on and mi ga on ac vi es, adapta on finance accounted for just 27% of
Mi ga on finance the total climate finance in 2021. The remaining 13% was mobilised
for cross-cu ng climate finance.

 Between 2016 and 2021, sectors with the highest climate finance
Sector-wise Alloca on investments were energy, transport and storage, agriculture,
forestry, and fishing; and water supply and sanita on.

 Two-third of the climate finance was extended in the form of loans

amoun ng to $49.6 billion. This implies the condi onali es on loans
and thus, lower accessibility for developing countries.
 Climate finance given as grants cons tuted less than 30% (at $20.1
billion), and equity investments remained marginal.

Public climate finance

by type of instrument

4
 ED DAY-94 LUKMAAN IAS

 The dominance of loans rather than more affordable sources of

finance from developed countries has remained a conten ous issue,
as it further increases the indebtedness of the low-income
countries.

The ar cle shall now throw some light on the history, examples, and challenges associated with climate
finance.

DEFINITION OF CLIMATE FINANCE

INSIGHTS INTO THE HISTORY OF
UNFCCC defines Climate Change as local, na onal or CLIMATE FINANCE
transna onal financing—drawn from public, private and
alterna ve sources of financing—that seeks to support It was at the 15th Conference of
Par es (COP15) of the UNFCCC in
mi ga on and adapta on ac ons that will address climate
Copenhagen in 2009 when the
change. developed countries commi ed to a
collec ve goal of mobilising USD 100
The Kyoto Protocol (Ar cle 11) and the Paris Agreement billion per year by 2020 for climate
ac on in developing countries.
(Ar cle 9) call for financial assistance from Par es with
more financial resources to those that are less endowed and The goal was formalised at COP16 in
more vulnerable. Cancun; and reiterated at COP21 in
Paris. During the COP21, the goal was
extended to 2025.
Examples of Climate Finance include Global
Environment Facility (GEF), Special Climate Change
Fund, Least Development Countries Fund, Adapta on Fund, Loss and Damage Fund, etc.

 At COP 16 held in Cancun, Mexico in 2010, the Par es to GLOBAL ENVIRONMENT FACILITY
UNFCCC established the Green Climate Fund (GCF). (GEF):
 The Special Climate Change Fund (SCCF) was The GEF (1990) has been opera ng
established under the UNFCCC in 2001 to finance as the financial mechanism of
UNFCCC since 1994. It provides
projects rela ng to adapta on, technology transfer, and
climate finance in the form of grants
capacity building; energy, transport, industry, and blended finance.
agriculture, forestry and waste management; and The GEF serves as "financial
economic diversifica on. mechanism" to five conven ons,
 The Least Developed Countries Fund (LDCF) was which are Conven on on Biological
established in 2001 to meet the adapta on needs of the Diversity (CBD), United Na ons
Framework Conven on on Climate
LDCs. The World Bank serves as the permanent trustee
Change (UNFCCC), Stockholm
of the LDCF. Conven on on Persistent Organic
 The SCCF and LDCF are both administered by the Global Pollutants (POPs), UN Conven on to
Environment Facility (GEF). Combat Deser fica on (UNCCD),
and Minamata Conven on on
 Since 2014, the GEF has invested more than $2.7
Mercury.
billion in climate mi ga on finance, programmed
jointly with $27 billion from other partners.
5
 ED DAY-94 LUKMAAN IAS

 The Adapta on Fund (AF) established under the Kyoto Protocol in 2001 to finance the
adapta on projects and programmes in developing countries that are par es to the
Kyoto Protocol.
 Climate Investment Fund (CIF) was established in 2008 by several mul lateral
development banks. It includes:
(a) Clean Technology Fund: Finances transfer of low carbon technologies
(b) Strategic Climate Fund: Targeted programs to pilot new approaches and
improvements.

RBI’s GREEN DEPOSITS FRAMEWORK: Domes c

Climate finance mechanism

The Central Bank of India has opened up an op on for both ins tu onal and retail
depositors to convert their Fixed Deposits (F.D.) into ‘Green deposits’, star ng from June 1,
2023.
This ini a ve allows banks and select NBFCs including Housing Finance Companies to raise
their fund-raising capabili es and establish a dedicated corpus of funds specifically
allocated to environment-friendly and sustainable products and ac vi es. It would also
facilitate easier access to green loans to support India’s transi on to carbon-neutral
economy by 2070.

WHY IS CLIMATE FINANCE NEEDED?

The latest Synthesis Report (AR6) of the IPCC

indicates that the Earth’s temperature has risen
by an average of 1.1 degree Celsius since 1880.
Two-third of the warming has occurred since
1975.

This points to the dangerous pping points in

the climate system that, once crossed, can
trigger self-amplifying feedbacks that further
increase global warming.

This puts several low-lying island and coastal

countries and LDCs, developing countries at
higher risks emana ng from CC-induced
disasters.

6
 ED DAY-94 LUKMAAN IAS

The need for climate finance can be summarised as follows:

Common but Differentiated Responsibilty (CBDR) Principle: Fixing accountability of

developed nations which contributed significantly in raising GHG cincentration in the
atmosphere since 1850.

Addressing Adaptation and Mitigation needs of resource-crunch nations like Sub-

Saharan Africa, Small Island Countries, Least Developed Countries and Developing
countries

Climate action: Investments in decarbonisation efforts of communities, countries and

private sector eg. e-mobility, solar power plants, green hydrogen projects, etc.

CHALLENGES ASSOCIATED WITH CLIMATE FINANCE

There are several conten ons and apprehensions regarding climate finance:
 Vague defini on: At present, there is no commonly agreed defini on of ‘climate finance’. In the
run up to the COP 26 in Glasgow, the developed na ons such as U.S., Switzerland, Sweden etc.
a empted to block debate on a common defini on since the ambiguity works in favour of
richer countries.
Therefore, the countries o en classify any funding, including Official Developmental Assistance
(ODA) and high-cost loans as climate finance and escape the scru ny that a clearer defini on
might bring.

The lack of defini onal clarity has reportedly led to situa ons where funding for chocolate
and gelato stores in Asia and a coastal hotel expansion in Hai were tagged as climate
finance.

 Inadequate funding: Climate Policy Ini a ve’s (CPI) report ‘Global Landscape of Climate
Finance 2023’ highlights that the overall rise in climate finance amounts to just 1% of the global
GDP which is insufficient. A total investment of USD 8.1 trillion is required between now and
2050 to meet the adapta on and mi ga on requirements of the countries.

According to the IPCC, developing countries alone will need $127 billion per year by 2030 to
adapt to climate change. India alone demands climate finance amoun ng US$ 1 trillion to fulfil
its obliga ons and targets set under the Na onally Determined Contribu ons (NDCs).

7
 ED DAY-94 LUKMAAN IAS

Business as Usual (BAU) Scenario- In the context of environmental studies, a BAU scenario
is used as a benchmark to measure the impact of interven ons. For instance: It represents
the land use and emissions profile for a forest carbon project area prior to interven on.

 Funding bias towards mi ga on: An es mated 80% of the climate finance alloca on goes
towards mi ga on, with a meagre 20% or less le for the adapta on needs of the vulnerable
countries. The UNEP’s Adapta on Gap Report 2023 reveals that the current adapta on finance
gap is now es mated to be US$194-366 billion per year.
 Geographical and Sectoral funding bias: The United States, Europe, Brazil, Japan, China and
India received 90% the funds for clean energy; leaving the most vulnerable small island countries
and LDCs at loss.

Agriculture and industry are the second largest sources of emissions. Yet, they received less than
4% of total mi ga on and dual benefits finance.

 Accountability concerns: The developed countries have missed their commitments (given in
2009) to contribute $100 billion towards climate finance. Their contribu on was around $83.3
billion in 2020.
The lack of any proper mechanism to independently verify the flow of finance from donors is
a major concern. Countries self-report their expenditure.
 Apathy of Private sector: Private financing for climate ac on has stagnated for a decade. The
problem is par cularly worse for climate adapta on because investment in this sector can’t
generate the sort of high returns that private investors seek and which the mi ga on sector like
a solar or wind farm could generate.

8
 ED DAY-94 LUKMAAN IAS

 Neglect of loss and damage: Although the UNFCCC COP28 has decided to host the new Loss
and Damage Fund at the World Bank (and not GEF), the developing countries raise
apprehensions regarding the provision of ‘voluntary’ contribu on from the resource-rich
na ons.

 Greenwashing/Bluewashing: The prac ces of greenwashing or bluewashing by countries and

private sector o en result in over-repor ng of green finance contribu on from them. This is a
misleading prac ce which is gaining currency in the recent mes.

WAY FORWARD
Recent studies have indicated that the climate change has resulted in a loss of about 6% of world’s
GDP. Also, the frequency and intensity of climate change-related extreme weather events has been
increasing manifolds.

Thus, to save the sinking islands like Tuvalu, Fiji, Indonesia, Kiriba among others, the following
measures are highly recommended to strengthen the climate finance framework:

The UNFCCC must bring together the members to discuss and finalise
a clear and most acceptable defini on of Climate Finance so as to
Clear Defini on prevent the issues of under-coun ng or over-accoun ng in climate
finance.

The share of the developed na ons and other stakeholders in climate

finance must be specified as mandatory targets, drawing inspira on
Mandatory Targets
from the interna onal frameworks like Montreal Protocol and its
Kigali Framework.

9
 ED DAY-94 LUKMAAN IAS

On the lines of Global Stocktake, a robust accountability mechanism

Accountability must be put into place by the UNFCCC. The ‘Polluter Pays Principle’
Mechanism must be enforced strictly.

Supplemen ng the public climate finance with raised contribu on

from private financing mechanisms would help in mobilisa on of
adequate amounts of climate finance to protect and save the planet.
Incen vising the private finance ins tu ons is necessary to encourage
their involvement.
Private Climate Finance
There is a need for interna onal providers to adapt and evolve the
financial products and mechanisms they offer to enhance the reach
and effec veness of climate finance.

Interna onal providers should collaborate more coherently and

systema cally, notably through country and regional pla orms and
other long-term arrangements.

The Green Developmental Pact of G20 has emphasized on the

importance of scaling up the mul lateral climate finance to invest in
Mul lateral Climate adapta on and mi ga on projects like Green Hydrogen, Electric
Finance Mobility, Renewable Energy etc.

Climate financing in the form of equity and grants must guide the
future distribu on of climate finance instead of loans to make real
impact.

Ensuring equity in alloca on of climate finance flowing towards

Ramp up Adapta on adapta on and mi ga on is of utmost importance.
Finance
The modelled costs of adapta on in developing countries are
es mated at US$215 billion per year this decade as per the
Adapta on Gap report 2023 by the UNEP.

The OECD is of the opinion that support for building capacity in terms
Capacity building of of project development, financial literacy, and opera onal efficiency
developing na ons and strengthens developing countries’ abili es to access, absorb, and
LDCs effec vely u lise climate finance.

10
 ED DAY-94 LUKMAAN IAS

The following sugges ons have been put forward by the Climate Policy Ini a ve (CPI) to
accelerate climate finance deployment and create real economy impact:

THE CONCLUSION: The context in which climate finance is being mobilized is evolving rapidly.
Mul ple ongoing crises vie for poli cal and financial a en on, while raising the cost of capital.
Yet, the pressure to turn climate commitments into deployed climate finance, both public and
private, is growing on all fronts.
MAINS PRACTICE QUESTIONS:
1. What do you understand by Climate Finance? Iden fy some of the important financial
mechanisms in this regard. (150 words)
2. Climate finance is essen al to prevent the worst impacts of climate change. However,
current levels of investment are far below what is needed. In this context, discuss the
challenges associated and also, suggest how the reach and effec veness of climate
finance can be improved. (250 words)
3. Evaluate the need for climate finance and analyse the problems which hinder its
effec veness. How can the climate finance framework be strengthened to truly benefit
those in dire need? (250 words)

REFERENCES
Climate finance goal of $100 billion close to achievement, but s ll not met, shows OECD report
(downtoearth.org.in)

What the OECD report says of climate finance ahead of COP 28 | Explained - The Hindu

Climate Finance and the USD 100 Billion Goal - OECD

11
 ED DAY-94 LUKMAAN IAS

Introduc on to Climate Finance | UNFCCC

Global Landscape of Climate Finance 2023 - CPI (climatepolicyini a ve.org)

As climate impacts accelerate, finance gap for adapta on efforts at least 50% bigger than thought
(unep.org)

Top Findings from the IPCC Climate Change Report 2023 | World Resources Ins tute (wri.org)

12
 ED DAY-94 LUKMAAN IAS

13
 ED DAY-94 LUKMAAN IAS

14