SUMMARY of the Article “New Climate Finances,” by Ali Tauqeer Sheikh, Dawn [Published on December 14th, 2023]
The climate summit in the UAE initiated with significant developments, including the establishment of the Loss and Damage Fund (LDF), a pledge to replenish the Green Climate Fund (GCF), and the adoption of the UAE-led Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action. These align with Pakistan’s major concerns in climate negotiations. The pledges made during the conference, totaling over $57 billion in the first four days, cover areas such as energy transition, agriculture, food security, water, urban planning, disaster risk reduction, SDGs, regional collaboration, and philanthropy. However, many of these pledges are contingent on private sector leveraging and partnerships, posing potential challenges for Pakistan in attracting foreign direct investment (FDI). The UAE banking sector’s commitment to leverage $270 billion in green finance by 2030 through the Alterra fund aims to finance climate projects, particularly in countries like Pakistan. The exact operationalization and additionality of these commitments remain unclear, prompting concerns about the financial gap, the proportion of domestic and international private sector investment, and the risk of increasing debt for developing countries. The article emphasizes the need for internal reforms in Pakistan to create an enabling environment for these pledges and underscores four key developments in the international climate finance architecture that require closer examination: adaptations by multilateral development banks (MDBs) to climate change realities, joint efforts by multilateral climate funds to simplify processes, co-financing frameworks between MDBs and financial institutions, and the World Bank’s initiative on global methane reduction. It highlights the importance of Pakistan’s proactive engagement in these developments, especially in leveraging a variety of funds, mobilizing domestic private sector financing, and addressing barriers to green finance through the State Bank of Pakistan.
Easy/Short SUMMARY:
The UAE climate summit saw significant commitments, including the Loss and Damage Fund establishment and pledges for sustainable agriculture. Pakistan, concerned about attracting foreign investment, faces challenges as many commitments rely on private sector partnerships. Pledges of over $57 billion cover vital areas, but operational details are unclear, raising concerns about financing gaps and debt. The UAE banking sector’s $270 billion green finance commitment aims to benefit countries like Pakistan. Internal reforms are essential for Pakistan to capitalize on these pledges and navigate the complex international climate finance landscape, particularly with four key developments, including MDB adaptations and joint efforts by climate funds and MDBs. The State Bank of Pakistan plays a crucial role in removing barriers to green finance.
SOLUTIONS of The Problem:
1. Internal Institutional and Legal Reforms:
- Implement internal institutional and legal reforms in Pakistan to create an enabling environment for attracting foreign investment and utilizing pledged funds.
2. Private Sector Engagement Strategy:
- Develop a comprehensive strategy for engaging the private sector, especially in areas covered by pledges like energy transition, agriculture, and urban planning.
3. Transparency and Accountability Mechanisms:
- Advocate for transparency and accountability in operationalizing pledges, ensuring clarity on additionality, timing, and mechanisms for fund disbursement.
4. Risk Mitigation Instruments:
- Design de-risking instruments to address perceived or real risks, making the cost of capital more attractive for investments at the needed scale.
5. State Bank of Pakistan’s Leadership:
- The State Bank of Pakistan should take a proactive leadership role, removing barriers to green finance, such as developing a green taxonomy, using information disclosure strategies, promoting financial markets, designing effective policy measures, and facilitating cooperation in green finance.
6. Domestic Private Sector Mobilization:
- Mobilize domestic private sector financing by creating incentives, fostering a green business environment, and collaborating with local industries.
7. Climate Finance Strategy Development:
- Develop a coherent and comprehensive climate finance strategy for Pakistan, ensuring that funds serve as agents of transformative change rather than contributing to additional debt.
8. Engagement in MDB and Climate Fund Initiatives:
- Actively engage in initiatives by multilateral development banks (MDBs) and climate funds, participating in joint programming, private sector mobilization, and efforts to simplify processes.
9. World Bank’s Methane Reduction Initiative:
- Seek inclusion in the World Bank’s initiative on global methane reduction, leveraging Pakistan’s commitment to reducing methane emissions by 30% by 2030.
10. Global Collaboration for Green Finance:
- Collaborate globally to address the dysfunctional aspects of the international financial system, advocating for fair terms and conditions that benefit developing countries, including Pakistan.
IMPORTANT Facts and Figures Given in the Article:
- Pledges in First Four Days of the Conference:
- Total: $57 billion
- LDF: $725 million
- GCF: $3.5 billion
- Health: $2.7 billion
- Nature-based solutions: $2.6 billion
- Renewable energy: $2.5 billion
- Relief recovery and peace: $1.2 billion
- Reduce methane emissions: $1.2 billion
- Clean energy manufacturing: $568 million
- Urban climate action: $467 million
-
UAE Banking Sector’s Green Finance Pledge:
-
$270 billion by 2030 through Alterra fund.
-
Global Methane Reduction Commitment by Pakistan:
- Commitment made in Glasgow in 2021 to cut methane emissions by 30% by 2030.
MCQs from the Article:
-
What is the total amount of pledges made in the first four days of the climate summit?
A. $30 billion
B. $50 billion
C. $57 billion
D. $70 billion -
Which fund aims to finance climate projects in countries like Pakistan through leveraging private investment?
A. Green Climate Fund (GCF)
B. Clean Energy Manufacturing Fund
C. Alterra Fund
D. Urban Climate Action Fund -
What is the primary concern for developing countries regarding the pledged financing?
A. Lack of transparency
B. Proportion of grants to loans
C. Operational timing
D. Private sector mobilization -
Which initiative focuses on reducing methane emissions globally, and what is Pakistan’s commitment in this regard?
A. Climate Investment Funds
B. Global Environment Facility
C. World Bank’s Methane Reduction Initiative
D. Green Climate Fund -
What is the State Bank of Pakistan urged to do in the context of green finance?
A. Reduce interest rates
B. Increase foreign reserves
C. Remove barriers to green finance
D. Implement tax incentives -
What does the UAE banking sector’s Alterra fund aim to achieve by 2030?
A. $100 billion in green finance
B. Leverage $270 billion in green finance
C. Fund renewable energy projects
D. Establish a climate resilience fund -
Which organization will chair the board of the Alterra fund?
A. United Nations
B. Green Climate Fund (GCF)
C. COP28 President Sultan Al Jaber
D. Arab Coordination Group -
What commitment did Pakistan make at COP28 regarding methane emissions reduction?
A. 20% reduction by 2025
B. 30% reduction by 2030
C. Zero emissions by 2050
D. No specific commitment mentioned -
What is the total amount allocated by the Arab Coordination Group to support energy transition until 2030?
A. $5 billion
B. $10 billion
C. $20 billion
D. $50 billion -
Which key role is assigned to the State Bank of Pakistan in the article’s solutions?
A. Regulatory oversight
B. Removing barriers to green finance
C. Managing foreign exchange reserves
D. Implementing tax policies
VOCABULARY:
-
Operationalization (noun) (عملی بنانا): The process of putting a plan or system into effect.
-
Contingent (adjective) (مشروط): Dependent on something else; conditional.
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Additionality (noun) (اضافہ): The quality or state of being additional or extra.
-
Proactive (adjective) (فعال): Creating or controlling a situation rather than just responding to it.
-
Enabling Environment (noun) (ممکن بنانے والے ماحول): A supportive and conducive atmosphere that promotes a particular activity or development.
-
Leverage (verb) (استفادہ حاصل کرنا): Use (something) to maximum advantage.
-
De-risking (noun) (خطرے سے بچنا): The process of reducing or eliminating risks associated with an investment or business activity.
-
Taxonomy (noun) (تصنیفیات): The classification of something, especially living organisms.
-
Disclosure (noun) (اطلاعات فاش کرنا): The action of making new or secret information known.
-
Catalytic Financing (noun) (آغاز کاری مالی): Financing that stimulates change or accelerates a particular process.
-
Sustainable Development (noun) (مستقبل کے لئے مضبوط ترقی): Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
-
Philanthropic (adjective) (خیراتی): Seeking to promote the welfare of others, typically through donations of money, resources, or effort.
-
Resilient (adjective) (مضبوط): Able to withstand or recover quickly from difficult conditions.
-
Operationalized (verb) (عملی ہونا): Put into operation or use.
-
Petro City (noun) (پٹرولیم شہر): A city or region known for its significant petroleum-related activities.
-
Allocation (noun) (تخصیص): The action or process of allocating or distributing something.
-
Urban Climate Action (noun) (شہری جلوہ عمل): Initiatives or measures taken in urban areas to address and respond to climate change.
-
Collaboration (noun) (تعاون): The action of working with someone to produce or create something.
-
Domestic Private Sector (noun) (قومی نجی سیکٹر): The part of the economy consisting of privately owned businesses operating within a country.
-
Incentives (noun) (مراعات): Things that encourage or motivate someone to do something.
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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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