Funding green growth

Private sector will need to increase investment

With the COP28 summit scheduled to be held in Dubai next month, it is worth reassessing the progress of climate finance in the Global South, including India. Notably, India submitted its Long-Term Low Emission Development Strategy at the COP27 summit, which demands large investments. It will require a comprehensive climate-finance strategy for mobilising the capital required to support mitigation and adaptation. To be sure, the government cannot be the only stakeholder providing funds for the green transition. The advanced countries have clearly failed in honouring their pledge to mobilise $100 billion per year to help poor countries. At the G20 summit this year, though, developed countries reaffirmed their commitment to mobilising the targeted amount. But even that may not be enough. An analytical chapter in the latest Global Financial Stability Report of the International Monetary Fund notes that climate-mitigation investment will need to increase to $2 trillion annually by 2030 in emerging market and developing economies (EMDEs), which will be around 12 per cent of the investment in these countries, up significantly from the current 3 per cent.

In this context, two key pillars must underpin the climate-finance strategy: Private-sector mobilisation and an increased participation of international financial institutions. According to the study, EMDEs must finance 80-90 per cent of their climate-mitigation investment through the private sector. But they face significant challenges in attracting private capital. A major constraint in attracting private investment is the lack of favourable credit ratings for many EMDEs. Delays in project implementation, frequent regulatory changes, and a dearth of pooled investments at scale are affecting the participation of global institutional investors. The lack of depth in the domestic capital market further complicates the process. Carbon pricing, deepening capital markets, incentivising the coal phase-out, blended finance structures, and strengthening the climate-information architecture are some of the policy suggestions in this context. The study also notes that while green subsidies can substitute for carbon pricing in cutting emissions, the former requires incurring significantly large costs relative to the latter. A subsidy is a comparatively weak policy lever in controlling emissions due to possible misallocation of resources and its inability to directly incentivise firms to lower energy consumption.

The second pillar will also be critical in prioritising affordable climate-finance solutions for developing countries, including India. The G20 Delhi Summit’s call for reforming multilateral development banks (MDBs) to improve their ability to provide climate finance can be a significant step in this direction. MDBs will be crucial because they can help bring down the cost of project finance more than regular debt instruments can. They can also help establish the creditworthiness of green projects and attract investment. For India, it will also be important to de-risk projects by aligning policy and regulation to minimise disruptions. Given that EMDEs’ climate-financing needs are substantial and no single institution can provide financing at the required scale, it is essential that governments, international financial institutions, and the private sector work together, leveraging their respective expertise to mobilise additional climate finance. The private sector in India is somewhat better placed and is also willing to step in. Several large companies are beginning to invest in areas such as electric vehicles and green hydrogen. The trend will need to be encouraged to gain scale.