Funding crunch: An activist displays hands that read ‘pay up’ at the COP29 summit in Baku, Azerbaijan. Estimates to address the escalating climate crisis stand at US$1.3 trillion. — AP
“Climate change isn’t waiting for international pledges, and neither can the world’s most vulnerable nations, because every delayed dollar costs lives, livelihoods and a chance at survival.”
The conclusion of COP29 reiterates a troubling reality for emerging economies: the yawning gap between climate-finance needs and actual disbursements.
Estimates to address the escalating climate crisis stand at US$1.3 trillion, but developed nations have pledged to mobilise only US$300bil annually by 2035.
Although touted as a tripling of the previous US$100bil annual target set in 2009, this commitment has met with sharp criticism from developing nations, which deem it insufficient.
Analysts from the Centre for Global Development estimate that existing commitments, including contributions from multilateral development banks and private finance, could already account for approximately US$200bil annually by 2030.
Contributions from emerging economies such as China could potentially raise the total to US$265bil.
However, concerns about inflation eroding the real value of these funds persist. By 2035, the US$300bil commitment is projected to shrink to the equivalent of US$175bil, assuming a 5% annual inflation rate.
The absence of explicit provisions for new and additional funding raises concerns about how much of this finance may be redirected from existing aid, potentially undermining the Sustainable Development Goals.
This financial chasm, symptomatic of a global system ill-equipped to address pressing climate challenges, demands a new approach. Emerging economies, constrained by limited resources, cannot afford to rely solely on international pledges. They must explore innovative, pragmatic strategies to mobilize capital, ensuring returns that align with the current economic structure.
Climate resilience hinges on mitigation and adaptation projects. Mitigation focuses on reducing or preventing the causes of climate change, for instance, through renewable energy projects.
These include jobs such as those in construction, operations and maintenance of renewable energy facilities. Adaptation involves adjusting systems and practices to cope with the impacts of climate change.
Flood protection and growing drought-resistant crops are examples. But here’s the paradox. Mitigation projects may generate tangible economic benefits such as direct, indirect and induced employment opportunities.
But adaptation measures – equally essential, if not more – such as building climate-resilient infrastructure or improving water management, often lack direct revenue streams.
For emerging economies where public budgets are stretched thin, financing these efforts is particularly challenging. Here, large sections of people don’t have the disposable income to invest in financial instruments, such as green bonds or insurance schemes.
Thus, the key lies in reimagining climate finance frameworks to attract private capital while ensuring measurable returns.
This requires blending financial innovation with tangible incentives and institutional reforms. One promising approach is linking returns to local economic multipliers.
For instance, if the government invests in flood protection infrastructure, it generates jobs in construction, opportunities for suppliers providing material and allied local businesses. These workers and businesses, in turn, spend their wages or profits on goods and services within the local economy, stimulating further economic activity.
This will ensure that investments generate tangible community benefits while offering returns to investors.
Another solution is tying payouts for impact-linked bonds to metrics such as job creation, agricultural productivity or improved public health outcomes.
Such bonds, designed to finance projects with social or environmental objectives such as improving health and boosting agricultural productivity attract a diverse range of investors including governments, development banks, private investors and impact investment funds.
Unlike traditional bonds with fixed interest payments, these bonds offer payouts depending on the success of the project.
For instance, if a project meets specific goals such as reducing carbon emissions or improving literacy rates, the bond issuer may offer higher returns.
This performance-based structure attracts investors who are looking to achieve both financial returns and positive social or environmental outcomes. — The Jakarta Post/ANN
Amar Rao is an associate professor at the School of Management at BML Munjal University in Haryana, India. The views expressed here are the writer’s own.
