Addressing climate change mitigation goals to achieve net zero targets has meant focussing on climate finance to plug the huge gap between demand and supply. The situation calls for a strategic thrust and concerted, multi-pronged action.

The recently concluded COP27 at Sharm al-Sheik, Egypt, kicked up discussion on climate finance and looked at loss and damage incurred by developing nations. The COP27 move to focus on creating a loss and damage fund is a positive step, along with a committee to work on modalities.

Climate finance assumes importance as spelt out in a recent report by KPMG India titled, ‘Closing the climate finance gap—A rapid yet sustainable scale-up of financing is critical to realise the Global Net Zero ambition.’ It says that estimates of investment are needed to undertake required climate mitigation and adaptation initiatives ranging between 3 to 6 per cent of global GDP through 2050. Prevalent level of financing supply is below 1 per cent of global GDP, dominated by global migration, and remains narrowly concentrated by sector and geography. It also notes that the climate clock is ticking and the pathways to keep global temperature rise to below 1.5 degree C have disappeared.

$8 trillion estimate

While there are different estimates, climate finance demand is estimated at around $7.6 to 8 trillion annually through 2050.

This may mean that among other measures accelerating cross border flows, addressing policy changes to align with finance needs and creating a carbon pricing framework, there is also the need to focus on boosting climate finance from multilateral agencies.

“As a leading marker for climate agenda, the climate finance gap needs urgent attention and collective action. It will require greater resolve among governments to squarely tackle the intractable issues including reforms in financial markets, rationalisation of fossil fuel subsidies, building institutional capacities and nurturing vibrant carbon markets. Deeper collaboration at scale among governments, multi-laterals, corporates and financial institutions will also be critical,” notes Anish De, Global Head for Energy, KPMG.

Global effort needed

The International Energy Agency in its recent report highlights the importance of shortfall in clean energy investment that are largest in emerging and developing economies. Today’s rising borrowing costs could add to the finance challenges. A renewed international effort is needed to step up climate finance and tackle the transition requirements.

One of the challenges developing countries face is the need to divert its development finance to climate change adaptation as there is no global finance mechanism. Therefore, India has been a strong advocate for global finance at international forums. It is expected to play a catalytic role in boosting focus on finance during its tenure as head of the G20 grouping.

Complications abound

The ongoing concerns in the global economy such as near-term headwinds due to inflation, interest rate hikes, public debt overhang and ensuing growth slowdown post Covid pandemic, and the Ukraine Russia conflict are all complicating the finance math further.

Sense of urgency

“COP 27 saw the release of four new reports on climate finance by UNFCCC’s Standing Committee on Finance, reflecting the importance of moving ahead on finance. It was backed by a number of issues including sustainability and transition finance. After COP27 there seems to be a sense of urgency and loss and damage has found recognition in formal global agenda. Therefore, this calls for an international effort to bridge the worrying divide in climate investments between developed economies and others and close the gap on climate finance,” says Anish De.

India has its task cut out as it works towards clean energy transition. To achieve targets, climate finance, both near term and long term, holds the key.