New climate finances

Published December 14, 2023
The writer is an Islamabad-based climate change and sustainable development expert attending COP28.
The writer is an Islamabad-based climate change and sustainable development expert attending COP28.

THE climate summit in the UAE had a dramatic start: the Loss and Damage Fund (LDF) was established, a pledge to replenish the Green Climate Fund (GCF) was made, and the UAE-led Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action was adopted. These were Pakistan’s major concerns in climate negotiations. If followed, these developments alone can keep us busy until the next summit, slated for the petro city, Baku.

There is more. Various other parties also made financial pledges on energy transition, agriculture and food security, water, urban planning, disaster risk reduction, the SDGs, regional collaboration, and philanthropic commitments. Most, however, will seek private sector leveraging and partnerships. This may not altogether be good news for Pakistan. We have for years struggled to attract foreign direct investment (FDI). A series of internal institutional and legal reforms are needed for an enabling environment for these pledges to flow into Pakistan.

The total pledges amounted to over $57 billion in the first four days of the conference, including $725 million for LDF, $3.5bn for GCF, $2.7bn for health, $2.6bn for nature-based solutions, $2.5bn for renewable energy, $1.2bn for relief recovery and peace, another $1.2bn to reduce methane emissions, $568m to encourage investment in clean energy manufacturing, and $467m for urban climate action. All these are areas of primary investment interest to Pakistan.

On another track, the UAE banking sector has pledged to leverage $270bn in green finance by 2030. This private investment fund, called Alterra, is aimed at financing climate projects in countries like Pakistan. COP28 president Sultan Al Jaber, who also heads UAE’s national oil company ADNOC, will chair the board of the new fund. The Arab Coordination Group that includes some countries close to Pakistan will allocate $10bn to support energy transition until 2030.

Can Pakistan develop a strategy to make climate funds agents of transformative change?

The critics are not clear how many of these commitments are new and additional, and how and when these will be operationalised. According to the Guardian, the amounts pledged to LDF will cover less than 0.2 per cent of the amount needed. In most cases, the exact funding targets and mechanisms are unclear. A big concern for developing countries is how much of the financing will be in the form of grants and how much in loans that will increase their debt. The debate now centres around the growing financial gap: how much of it will be covered by the domestic and how much by the international private sector investment?

Pakistan has applauded the swift operationalisation of the LDF, urged developed nations to fulfil their commitment of providing $100bn in climate finance, and more specifically, it has taken the lead on financing for eradicating neglected tropical diseases that will worsen as temperatures increase. The UAE and the Bill and Melinda Gates Foundation have pledged $100m each for climate-related health risks.

This complex landscape is indicative of the international climate finance architecture that has become an impossible maze to understand and traverse. From Pakistan’s perspective, four developments deserve closer examination.

First, the multilateral development banks (MDBs) have announced the adaptation of existing frameworks to the new realities of climate change by pausing (not cancelling) debt service in case a country faces an environmental disaster.

Second, multilateral climate funds (Adaptation Fund, Climate Investment Funds, the Global Environment Facility, and the GCF) at COP have adopted a joint declaration to simplify their processes and enhance direct access to finances through joint programming, mobilising private sector finance, and increasing funding for climate adaptation.

Third, the MDBs have signed at the climate summit a co-financing framework agreement with 16 financial institutions to partner with private financial institutions and cooperate with other partners. In other words, the institutions outside the traditional MDBs’ sphere will be expected to follow principles agreed at the UAE summit.

Fourth, the World Bank launched an initiative onglobal methane reduction from rice production, livestock, and waste management at the national or sub-regional levels. Pakistan joined the Global Methane Pledge in Glasgow in 2021 and committed to cut methane emissions by 30pc by 2030. The World Bank has announced that it will mobilise catalytic financing for scaling up successful projects in 15 countries in the next 18 months, but Pakistan is not on their list even though we are one of the world’s top 10 methane emitters. The World Bank’s representative at the Pakistan pavilion urged the government of Punjab to proactively engage and become the first country in the queue.

The level of our engagement in the coming years will determine the implications for Pakistan of the first three points. The 2022 joint report by MDBs reveals their new lending architecture. The report shows that a total of $60.9bn were lent to low- and middle-income economies during the period and this included, in the same order of magnitude, investment loans, policy-based financing, credit lines, grants, guarantees, results-based financing, equity, and other new instruments. It reveals the emerging trends in the complexity of their blended financing. This breakdown is instructive particularly for the economic affairs, finance and the Planning Commission — key financial decision-makers.

The international financial system is dysfunctional for large parts of the developing world. For Pakistan, it is the perceived or real risks that make the cost of capital too high to invest at the scale and speed needed. How can Pakistan design de-risking instruments to ensure availability and access to climate finance? Can Pakistan develop a coherent strategy to make climate funds agents of transformative change for the country rather than accumulating additional debt burden?

Since Pakistan is presently not an attractive destination for FDI and faces debt vulnerability, it is essential for us to leverage a diversity of funds, particularly by mobilising domestic private sector financing. The State Bank of Pakistan needs to take the lead in the coming years and remove five barriers to green finance: i) develop a green taxonomy, ii) use information disclosure strategies, iii) promote financial markets, iv) design effective policy measures, and v) facilitate cooperation in green finance. If Pakistan is to avail climate finance, the State Bank will have to step up its role, rather than waiting for the outcome of the COP.

The writer is an Islamabad-based climate change and sustainable development expert attending COP28.

Published in Dawn, December 14th, 2023

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