planet’s purse strings. Mitigate risks to unlock climate finance

For some years, global climate action has been looking like an ambulance stuck in traffic — a lot of loud and urgent screaming but very little forward movement.

The problem, in one word, is finance. There isn’t enough money to fuel the needed action. At the Conference of Parties - 24 (CoP-24) in Katowice, Poland, in December 2018, activists sported badges that yelled ‘WTF’ — ‘Where’s the finance?’. The question remains unanswered.

Forget the ‘giveaways’ that developed countries, which created the climate mess in the first place, ought to shovel to developing ones... even normal credit flows are choked.

Though, from time to time, one might hear a loudspeaker blaring a funding announcement. There was one last week — at the UK-India Economic and Financial Dialogue (EFD) — UK’s development finance institution CDC (already active in India) will invest $1 billion in green projects in India from 2022-26.

Well, the ambulance just moved an inch.

New Delhi-based think tank Council for Energy, Environment and Water (CEEW) estimates that between 2010 and 2019, the world invested $2.6 trillion in renewables, but only five developing countries — China, India, Brazil, Mexico and South Africa — managed to get upwards of $20 billion, showing the skew in climate financial flows.

CEEW notes that it is the emerging markets that have more renewable energy resources — an estimated 140 times their demand.

The roadblocks

Money in the hands of developing countries can accelerate climate action, but that is not happening.

Why so? There are two broad reasons — risk perception and scale. Investors know there are risks over which the project developer has no control, such as currency fluctuations, regulatory hurdles and off-taker payment. The instance of Andhra Pradesh reopening signed power purchase agreements has harmed risk perceptions.

In Tamil Nadu, the principal buyer of green electricity, the state-owned utility, has often refused to off-take power, citing technical covenants in the agreements.

As for scale, projects in developing countries are often too small for institutional investors. Aggregation of projects could attract more finance.

“Unfortunately, serious efforts at de-risking have been missing or marginal,” says Dr Arunabha Ghosh, CEO, CEEW.

Missing in action

After the 2015 Paris Agreement, four entities — CEEW, Confederation of Indian Industry, the Currency Exchange Fund and the Terrawatt Initiative — were mandated by 17 countries (including India) belonging to the International Solar Alliance to study the setting up of a risk mitigation initiative.

In November 2017, the group of four released the Common Risk Mitigation Mechanism (CRMM) at the Bonn (CoP-23) climate conference. It envisaged a $1-billion guarantee fund which, it estimated, could crowd-in $15 billion of investment to set up 20,000 MW of solar in 20 countries.

“The idea is to develop a sustainable financial ecosystem, centred around an international guarantee mechanism, which could pool various types of risks and pool projects across many countries to lower the costs of hedging against those risks,” they had explained in a press release.

Basically, the CRMM tells the investor, “Don’t worry, if your project trips over certain risks, the fund will compensate you.”

The release said the CRMM’s pilot phase would begin in 2018. Guess what? It is yet to take off.

Ghosh tells Business Line that he is “still working to give it a shot”, which shows the difficulties in putting together a billion-dollar risk mitigation mechanism. The CRMM is to be funded through international public money.

Mahua Acharya, a climate finance expert who is currently the CEO of Convergence Energy Services Ltd (a subsidiary of the public sector Energy Efficiency Services Ltd), observes that while climate finance flows are clearly not enough, “the biggest inadequacy is the lack of risk mitigation instruments”.

Climate finance, Acharya believes, “needs to grow up” to include “more differentiated instruments such as guarantees, first loss cover, credit wraps and viability gap funding”.

Ghosh says that perceived risk is often higher than actual risk — which means risk mitigation mechanisms can work well.

“There can be no deal on climate and clean energy finance without a real solution to de-risking investments in emerging economies,” he says.

This is essential to bring down the cost of capital, which accounts for 75 per cent of the cost of clean energy.

Looking ahead to COP-26

He has expectations of COP-26, due in Glasgow in November. The UK, with its pole position in financial services, has a central role in coordinating efforts to bring about risk mitigation mechanisms, he says.

Developing countries need $3.5 trillion to implement climate action pledges up to 2030; against this, there is an undelivered promise of annual mobilisation of $100 billion.

The chasm is wide and deep; without risk mitigation instruments, there can be no climate action, and the greenhouse gases continue to barbecue the planet.

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