Accessing climate finance

Published October 19, 2023
The writer is an expert on climate change and development.
The writer is an expert on climate change and development.

THE global landscape for international climate finance has in recent years undergone a transformational change. Fundamentally, it has moved away from grants to lending and investments. It has become overly complex, complicated, and competitive for Pakistan’s lethargic policymaking processes.

The present government machinery is constrained when it comes to optimally accessing and exploiting opportunities without first clearly understanding the nature of available finances, their intended purpose, and the distinct roles and responsibilities of national and provincial institutions. To do this, Pakistan will need to adopt a reform agenda that is driven by the need for climate-smart development.

It will, however, require burying some old thinking habits and shedding some myths. As Pakistan has extremely narrow fiscal space, it is imperative to diversify the sources of financial inflows. Forging partnerships with private-sector enterprises to access domestic and international climate finance has become essential, particularly since climate risks to the economy add to macroeconomic volatility.

Let’s identify four myths that have restrained Pakistan’s access to climate finance:

Myth 1: Pakistan’s climate vulnerability is so high that the world community is obligated to extend a helping hand.

There are at least four myths that have restrained Pakistan’s access to climate finance.

In reality, there is no international mechanism to support countries facing climate disasters. The 2005 Paris Declaration on Aid Effectiveness that had committed 0.7 per cent of gross national income (GNI) as official development assistance has no comparable instrument in the realm of climate disasters.

Developed countries do not accept any historical responsibility to support victims of climate-induced disasters and they have gradually reduced their humanitarian assistance budgets. So, portraying Pakistan as one of the most vulnerable countries will not always attract international finances. In fact, the opposite may be true: showing half the country under floodwaters can scare away potential investors.

Myth 2: Pakistan can invoke the ‘polluter pays’ principle that was adopted at the Earth Summit in Rio in 1992 for accessing international finance when the Loss and Damage finance facility is operationalised.

The principle has indeed found place in several multilateral environmental agreements and has evolved as an important legal doctrine in several domestic jurisdictions. But presently, it has little to no utility in multilateral contexts.

The Paris Agreement has not accepted the principle of historical responsibility nor have Western countries agreed upon the notion of compensation under any arrangement. In any case, the size, governance structure, and eligibility criteria for accessing the proposed Loss and Damage fund are still up in the air.

Myth 3: Developed countries are duty-bound to support Pakistan under the principle of Common But Differentiated Responsibilities, also adopted at the Earth Summit.

The assumption that Pakistani policymakers brought home then was that international support would be in the form of grants. The subsequent evolution of the global climate finance architecture has all but buried the CBDR principle. The DNA of climate finance has undergone profound changes. It now emphasises blending and leveraging private-sector finances.

We in Pakistan did not recognise it, but the world system began to move away from CBDR even before the Kyoto Protocol came into force in 2005. The most significant step was taken by president George W. Bush in 2002 when he committed $10 million to the World Bank for multilateral development banks to proactively develop responses to the financing needed for climate costs. This paved the way for all MDBs to jointly set up four specialised funds on clean energy, renewable energy, forestry, and climate resilience, under the umbrella of Climate Investment Funds (CIFs).

Managed by all six MDBs, the CIFs have emerged as important instruments to test and mobilise non-grant climate finances. Collectively, the CIFs have supported investments in 72 countries, mobilising over $12 billion by using a combination of grants, concessional finance, co-financing, and private-sector leveraging to finance their projects.

Having served as a civil society representative from Asia on its board and on its advisory group on learning and evaluation, this writer has observed first-hand how CIF projects have included co-financing from an array of public and private sources including MDBs, bilateral official agencies, international and national development banks, recipient government national and municipal budgets, and commercial and investment banks.

The CIF funds offered important learning for the MDBs’ climate portfolio. In fact, the World Bank, ADB and other MDBs now record the climate-related co-benefits of their lending. Building on the CIFs’ experience, the Green Climate Fund has also used a combination of grants, concessional finance, co-financing, and private-sector leveraging to finance their projects.

According to a 2021 report by the Heinrich-Böll-Stiftung, only 9.5pc of GCF financing is based on grants, while 69.8pc is based on loans, and 18pc on equity financing. The report also notes that the majority of GCF private-sector finance takes the form of loans.

Despite the invites, Pakistan did not sign up to the CIFs as its priorities then were focused on US finances flowing from the ‘war on terror’. Pakistan has, therefore, missed any direct exposure to the complexity and changing nature of international climate finance.

The global climate finance agenda is robust and constantly changing. CIFs, for example, has launched new focus areas on accelerating coal transitions, renewable energy integration, industry decarbonisation, and the development of climate-smart cities. The Updated Strategic Plan of GCF underlines private sector co-financing. IMF’s brand new Resilience and Sustainability Facility commits financing to undertake reforms to help reduce risks to prospective balance-of-payments stability from climate change and other long-term structural challenges.

Myth 4: A well-written grant proposal by consultants can help create perennial streams for financial flows.

About a dozen government institutions at the federal and provincial levels are vying for donor support to set up climate centres, but in an uncoordinated fashion. Working in silos will not help them create a coherent financing framework or a national climate finance strategy, complete with sectoral investment plans and specifying national/ provincial roles and responsibilities.

In the present situation, the country cannot afford desperate measures. Instead, what Pakistan needs is a set of deliberated, measured steps enabling it to develop its own capacity rather than outsourcing its thinking on climate finance.

The writer is an expert on climate change and development.

Published in Dawn, October 19th, 2023

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