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Climate finance refers to the financial resources that are allocated to address climate change and its impacts. It encompasses a wide range of financial instruments and mechanisms that support climate mitigation and adaptation measures. Climate finance is critical in enabling countries to transition towards low-carbon and climate-resilient economies and achieving the goals set out in the Paris Agreement. The funding is essential to support developing countries in reducing greenhouse gas emissions, adapting to the impacts of climate change, and pursuing sustainable development. According to the Climate Finance Working Group, 118 trillion rupees are required to address climate change, 64 trillion rupees are available, while 54 trillion rupees are unrestricted. This gap has to be met by way of domestic and foreign debt. Indian Development Financial Institutions (DFIs) and commercial banks have to contribute by raising domestic funds and channelling resources from abroad. To address the challenges of Climate finance, India needs to develop its own framework and a variety of funding systems, rather than work on terms laid down by the Western countries.


What are the Challenges in Climate Financing

  • Lack of Funds from the West: The developed countries are historically responsible for the majority of greenhouse gas emissions that have caused climate change. However, many developed countries have failed to provide adequate financial support to developing countries for climate action. This has led to a significant funding gap, making it difficult for developing countries to implement climate change mitigation and adaptation measures.
  • Lack of Access to Finance: Many developing countries and small island states have limited access to financing due to various factors such as weak financial systems, inadequate regulatory frameworks, and limited access to international markets.
  • High Cost of Financing: Climate-related projects often require significant upfront costs and long-term financing, which can be difficult to obtain at affordable rates. This can deter investors from financing such projects, particularly in developing countries.
  • Uncertainty and Risk: Climate-related investments can be risky due to uncertainty around regulatory and policy frameworks, changing technology, and natural disasters. This can make it difficult for investors to accurately assess the potential returns on their investments.
  • Lack of Capacity and Technical Expertise: Many developing countries lack the technical expertise and capacity to design and implement effective climate projects, which can lead to delays and inefficiencies in project implementation.
  • Political and Policy Barriers: Political and policy barriers such as political instability, corruption, and lack of political can hinder climate financing efforts.
  • Inadequate Private Sector Engagement: Private sector investment is crucial for scaling up climate financing, however, there is still inadequate private sector engagement due to various factors such as limited market incentives, lack of regulatory frameworks, and limited awareness of climate risks.

Solutions for Climate Financing

  • Raising resources from DFIs: The banking system is unlikely to finance climate mitigation and adaptation investments due to lower commercial appeal, so it is important to sharply define the priority sector to include climate finance. However, long-term resources will need to be raised from Development Financial Institutions (DFIs) as there is a large financing gap. DFIs have previously avoided foreign currency loans due to competition from domestic funds and high hedging costs. The government may need to step in to manage hedging costs in order to encourage DFIs to provide the necessary funding for climate investments.
  • Investments from the Private Sector: Private sector investments are crucial for financing climate mitigation and adaptation projects. Some investments can be financed through access to bank credit, but many others cannot meet the interest costs due to below-par returns, long gestation periods, and higher financial risks.
  • Promoting Blended Financing: Blended finance can be used in various ways to support climate financing. Blended finance is an innovative financing approach that combines public and private capital to achieve development objectives. For example, it can be used to finance renewable energy projects, green infrastructure, and climate-smart agriculture. It can also be used to provide financing for climate adaptation projects, such as building sea walls or improving water management systems.
  • Catalytic or Start-up Funding: Catalytic funding should be utilised for ‘re-purposing’ key economic activities into green activities — something that western finance and its frameworks may not recognise as per their taxonomy. Re-purposing, supported by a simple and inviolable classification framework, oversight and capacity building mechanisms can transform existing economic activities to green activities, crucially with smaller amounts of investments.
  • Need for Innovative Financing Mechanisms: There is a need for innovative financing mechanisms that can provide funding for climate-related projects, particularly in developing countries. Some of these mechanisms include green bonds, climate funds, and carbon markets.