Explained: How Asia Can Unlock $800 Billion of Climate Financing

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Asia's pivotal role in climate action stems from its significant contribution to global growth, accounting for about two-thirds last year and expected to do so again in 2024. However, the region's heavy reliance on coal for energy translates into over half of global greenhouse gas emissions

New Delhi (ABC Live): Countries in the Asia-Pacific region are confronting a climate financing shortfall exceeding $800 billion. Given the depletion of public finances due to the pandemic, it is imperative for policymakers to mobilize private capital effectively in the battle against global warming.

Addressing this challenge requires a coordinated and comprehensive effort from various stakeholders, including governments, central banks, financial supervisors, and multilateral institutions. Key strategies involve phasing out fossil-fuel subsidies, which have surged to a record $1.3 trillion. Additionally, expanding carbon pricing, addressing critical data gaps, and fostering innovative financing, along with public-private partnerships, are crucial.

Drawing on our latest research, which incorporates insights from recent chapters of the Global Financial Stability Report on scaling up climate finance and other IMF studies on climate issues, we present an overview.

The urgency of climate finance arises from the sluggish progress in meeting climate goals. Global temperatures are on track to exceed the critical 1.5 degrees Celsius threshold above pre-industrial levels. Efforts to halve 2019 greenhouse gas emissions by 2030 fall significantly short, aiming for only an 11 percent reduction. Without more robust action, the consequences of a warming planet pose threats to homes, health, and food security. Mobilizing additional climate finance is essential not only for emissions mitigation but also for building adaptive capacity through investments in climate-resilient infrastructure. This is especially crucial for Asia, given its status as home to major emitters and its vulnerability to climate change due to high population density and geography.

Asia's pivotal role in climate action stems from its significant contribution to global growth, accounting for about two-thirds last year and expected to do so again in 2024. However, the region's heavy reliance on coal for energy translates into over half of global greenhouse gas emissions. Recognizing the direct impact of climate hazards on lives and livelihoods, Asian economies have made deeper commitments, as evidenced by their revised Nationally Determined Contributions under the 2015 Paris Agreement. Asia can play a vital role in the climate fight by showcasing how to balance economic growth with environmental sustainability.

How significant is the funding gap? Asia’s emerging market and developing economies need investment of at least $1.1 trillion annually to meet mitigation and adaptation needs. But they’re only getting $333 billion, mostly from sustainable debt instruments like green bonds, and public sources contribute more than half. Such a shortfall leaves these economies with a funding gap of at least $815 billion. China leads in attracting climate finance, making major strides in renewable energy adoption, and its collaborations with the EU have yielded crucial frameworks for sustainable finance, such as the Common Ground Taxonomy and stricter China Green Bond Principles.

What are the biggest challenges? Pacific island countries and other small economies often have trouble accessing international capital markets or obtaining financing via global climate funds. In particular, they find it hard to meet stringent accreditation requirements of global climate funds as their capacity is already stretched thin and public investment management is challenging. For larger countries, green bonds may be as costly as conventional securities because investors appear to be less trusting of green characteristics in Asia’s sustainable debt instruments. These issues underscore the broader challenges for the region’s funding aspirations.

What do countries say? A survey of 19 countries in Asia revealed important gaps in data, disclosures, and taxonomies, and that these are exacerbated by inconsistent national climate policies that can promote fossil fuel subsidies. These deficiencies undermine investor confidence in forward-looking targets and transition. Greenwashing also is a risk, respondents say, because it can call into question the legitimacy of environmental claims made by bond issuers. In addition, increasing geoeconomic fragmentation, including friend-shoring and fraying global supply chains, could threaten cooperative and collective action to contain climate change.

Action to unlock much more climate finance requires coordination among agencies overseeing climate initiatives, plus collaboration between local and global entities:

How can Asia’s governments help? One way will be to comprehensively enhance the framework on data, taxonomies, and disclosures. They should phase out fossil fuel subsidies and expand carbon pricing, which would generate revenue for sustainable public investment. This would help boost investment in green technology, jobs, and growth, while supporting vulnerable households. Measures that strengthen macroeconomic and public investment management will help reduce risk premiums and funding costs, drive economic growth, and attract private capital.

Where do central banks and financial supervisors fit in? They should promote global standards for transparent and consistent disclosures, while strengthening climate risk analyses and incorporating climate-related financial risks into prudential frameworks to enhance financial stability. Lastly, collaborating with multilateral standard setters to develop internal capacity is crucial for improving the clarity and reliability of ESG score ratings, fostering greater trust and understanding in these evaluations.

What is the IMF’s role?The Fund is working with member countries to better detail climate-related economic risks and policies in surveillance and lending activities. The IMF also is strengthening data and statistics, including through capacity building and peer learning, to develop common standards for measuring and analyzing climate risk. Finally, our Resilience and Sustainability Trust can help vulnerable low- and middle-income countries catalyze financing from other sources by restoring sound macroeconomic management and building the institutional capacity of the public sector. Other multilateral organizations can provide more grant financing and concessional lending, and risk-mitigating mechanisms can help expand their lending capacity. Cooperation among multilateral institutions is essential to align efforts and resources to achieve a balanced allocation between mitigation and adaptation lending.

Source : IMF 

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