How Pakistan can leverage international climate financing

In order to achieve the 2030 emissions target, and make our cities liveable, Pakistan will need to attract investment in climate change initiatives.
Published September 14, 2022

Imagine it is 2030, and a chilly November morning. You step out of your house and are welcomed by a clear sky and not a pervasive smog, a common occurrence not so long ago that required you to mask up and forced schools to close down.

You start the car and the engine revs up noiselessly and without fumes — you recently replaced the older petrol version with an electric vehicle. Many people you know have made a similar switch as it has become easier to purchase electric vehicles and charging stations are now within easy access.

Shifting to a solar home system reduced monthly electricity bills and generated savings allowed you to invest in the electric vehicle. The image of a dense tree-lined street, with the green contrasting magnificently against the blue sky, reflects on your rear mirror as you reverse the car and head to work.

This can be Lahore in 2030 if the government realises its vision of drastically reducing greenhouse gas (GHG) emissions under the climate action plan, the Nationally Determined Contributions (NDCs).

Mission green

The aim is to reduce GHG emissions by 50 per cent by 2030 from the projected levels through shifting to 60pc renewable energy and 30pc electric vehicles, banning imported coal, and sequestering (or capturing) carbon (a common GHG) through natural resource restoration initiatives such as the Ten Billion Tree Tsunami Programme (TBTTP) and the Protected Areas Initiative.

It is common knowledge that Pakistan contributes minimally to global GHG emissions — 2020 emissions of CO2 accounted for less than 0.7 per cent of global emissions.

Why then, you may ask, did the government decide to set such ambitious plans to reduce local GHG emissions?

It is because being in the category of low emitters, sadly, does not make the country immune to the consequences of global GHG emissions. Between 2000 and 2019, the Global Climate Risk Index ranked Pakistan the 8th most vulnerable nations affected by climate change. The recent floods will probably bump it further up the vulnerability rank when the index is calculated next.

GHGs are problematic because they trap heat, leading to increased global temperatures, and like Covid-19, do not respect national boundaries. If global warming were to exceed 2 degrees Celsius beyond pre-industrial levels, it is expected to cause rising sea-levels, extreme and unpredictable weather, and damage to ecosystems and human settlements at a scale that has not been observed before.

It is precisely due to the global nature of the problem that 196 countries (including Pakistan) became signatory to the legally binding Paris Agreement in 2015, an international treaty on climate change that established the goal of limiting global temperatures below 2 degrees Celsius, and preferably 1.5 degrees Celsius. The same agreement also requires signatories to submit their NDCs every five years to show their commitment towards achieving this goal.

The question then is: how will Pakistan’s climate targets be financed?

Show me the money

In the NDCs’ view, 15pc of the reduction in 2030 GHG emissions will be financed from domestic sources, and the remaining 35 per cent should be financed from international sources.

In other words, the ability to meet the 2030 commitments will hinge upon the availability of international climate finance, ideally on a concessional (lower market rate, generous terms) basis.

Broadly speaking, climate finance refers to local, national or transnational financing that is targeted towards supporting mitigation and adaptation actions that address climate change.

The United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and the Paris Agreement call upon parties with more financial resources to assist those that are less endowed and more vulnerable, so that progress towards the global objective of stabilising GHG concentrations in the atmosphere can be made. There is also an added expectation that developed countries will take the lead in mobilising climate finance.

To date, Pakistan’s access to international climate flows has been very limited. Its profile of relatively high climate vulnerability and relatively low income per capita may allow it to attract concessional climate finance but, nonetheless, will require meeting stringent qualifying criteria.

Globally, the volume of concessionary finance has been modest. Of the total climate finance of $632 billion available in 2019-20, $65 billion was concessionary finance by multinationals to East Asian economies and only $20 billion was grants to the poorest countries. The Ukraine war may further cloud prospects for a substantial increase in the overall volume of funds at least for the foreseeable future.

Furthermore, the great majority of Pakistan’s planned mitigation spending is for renewable energy. For instance, the NDCs anticipate $101 billion for energy transition alone (the energy sector accounted for 41pc of Pakistan’s 2018 GHG emissions) by 2030. As the costs of renewable alternatives fall within the range for fossil fuel options, non-concessional financing for renewable investments has become the norm.

Investors expect renewable energy investments to cover their costs and provide an adequate return on investment and hence, not qualify for concessionary climate finance. Recent trends show the same. Of about $324 billion in recent worldwide annual funding for renewable energy, a large proportion was market-rate debt and private equity.

The opportunities

Faced with such challenges, what options are available to attract substantial quantities of international climate finance? Well, Pakistan can explore two strategies.

One, it should look at cases of innovative financing instruments and apply those relevant to the local context. Two, and more broadly, it should look to improve structural issues to make itself a more attractive destination for international climate finance. A few examples are shared as follows.

In November last year, Belize committed to protecting 30pc of its ocean (as well as a range of other conservation initiatives) in exchange for a $362 million debt-for-nature swap that reduced Belize’s debt by 12pc of the GDP. This was the largest debt financing to date for ocean conservation and was negotiated with The Nature Conservatory, an environmental organisation.

Pakistan can also explore financing nature conservation projects, such as the TBTTP, through a similar settlement. In April 2021, the government issued 30-year bonds for $500 million. If the government can borrow to redeem the outstanding April 2051 bonds, initial calculations show that debt servicing savings generated could potentially fund 5.7 billion trees over the bonds’ remaining maturity period.

Debt-for-nature swaps can also be applied to subsidising green technology to make farming practices more eco-friendly. For three weeks straddling October and November, farmers in the Punjab province resort to stubble burning of the harvested rice crop to prepare the fields for wheat sowing.

As a consequence of this (and also of low-grade fuel, industrial emissions and dust particles), many cities in Punjab experience a sharp deterioration in air quality. One known technology for eliminating stubble burning is the “happy seeder” which breaks down rice stubble (mulching it to the ground), and plants wheat seeds simultaneously.

Options to subsidise this technology to make it financially viable for the farmers by approaching environmental organisations (such as the TNC above) to fund crop stubble burning abatement can be explored.

Pakistan’s coal fleet is fairly young when compared to coal-fired plants in the US, Russia, and Europe, which have a higher average age of 30-40 years. The government can use this to its advantage when negotiating coal plant retirements.

Who would de-commission a young coal-fired plant without some sort of concessional financing? It should be possible to borrow enough from multilateral/ bilateral development financial institutions to (i) buy out the investors for major coal-fired plants and pay de-commissioning costs, and (ii) generate revenue from carbon credits for future emissions prevented to pay off this borrowing.

Potential climate financiers will appreciate a more fully developed presentation of emission reduction plans. It will be important to show specifically what changes would be needed in Pakistan to reduce 2030 emissions to 50pc below the baseline projection.

For example, major increases in renewable energy are contemplated, however, goals for achieving these targets have not been laid out clearly. Specific projects, and the emissions cut contribution for each, should be identified and grouped by suitability for receiving concessional climate finance.

It will also be important to generate credible investment costs projections, for example, the estimate for buying out new coal power plants and Thar coal mines is placed at $18 billion, which is significantly greater than the investments in the five electricity generation public-private partnerships (PPPs) that reached financial close since 2016 and totalled only $6.6b.

The International Capital Market Association (ICMA) is a non-profit association and is responsible for the development and monitoring of the Green Bond Principles that provide guidelines on transparency, disclosure and reporting on funding to projects that contribute to environmental sustainability.

Ease of doing business

In September 2021, the Securities Exchange Commission of Pakistan’s (SECP) approved the national guidelines for green bonds. These guidelines recognise, but go beyond the ICMA principles for green investment requiring more work for the issuer and regulator. THE SECP should refine domestic guidelines for green bonds to minimise the burden on investors.

A country’s risk rating can affect the overall credit rating for a public private partnership (PPP) project company, and hence the cost of its debt and the rate at which it can profitably sell an infrastructure service (for example, electricity) within the country.

Pakistan currently ranks at around the 25th percentile from the bottom on rule of law indicators, well below the averages for South Asia and other regions. To raise Pakistan’s attractiveness to potential foreign investors, it will be important to work to improve the country’s rule of law rating on contract enforcement, property rights, and physical security indicators to enhance investor confidence.

To summarise, in order to achieve the 2030 emissions target, and make our cities liveable, Pakistan will need to attract investment in climate change initiatives.

This will require Pakistan to de-commission coal plants, expand renewable sources of energy, invest in green technology more broadly and deepen the green finance market for bonds by improving perceptions about country risk.

More importantly, it will be critical to build capacity and technical expertise within the Ministry of Finance, which is leading the country’s climate finance efforts, so it can identify and mobilise financing from the range of climate finance instruments and means available internationally.

In recent weeks, there has been much talk about the developed world compensating the developing nations for catastrophic climate-related events — the current floods are a case in point — fuelled by their high-emitting economic activities. The time is here to work with international partners to support the country’s climate change efforts.

This article draws from research funded by the International Growth Centre.

Header image: VectorMine/