International Climate Finance Agenda

The transition from assuming climate change as a myth to accepting it as a reality was both lengthy and painstaking. A school of thought that dominated the discourse suggested that climate change patterns are cyclical and the data on extreme weather is drawn from a limited sample. A more extensive observation of climate data would provide patterns that can act as counterfactuals to the narrative presented by climate enthusiasts. It seemed that apart from an academic view that certain experts held against climate change, the hesitation to accept it as a reality was an outcome of political economy concerns. Both mitigation and adaptation measures were known to contain economic growth and were also understood as absorbers of enormous amounts of fiscal resources.

While the evidence is torn between the positive and negative impacts of climate mitigation and adaptation measures on economic growth, the latter case has attracted more debate and become effectively mainstreamed in the process. However, nations in the industrial or pre-industrial phases see climate investments as a double whammy: a drag on their domestic resources and a cost associated with non-pursuance of growth opportunities. Therefore, it is important that alongside mainstreaming efforts, fiscal and budgetary capacities of countries to pursue climate goals are also developed. This can help create an optimal mix of local and international financial resources to conform with the international climate change reduction agenda.

The recognition of climate change as a reality was stressed upon during Copenhagen, Kyoto and Paris climate conferences which implied that country governments would be pushed to mainstream climate actions within their policy and planning frameworks. At the center of the mainstreaming exercise lay the need to mobilize and channel financial resources - drawn from local, international, public and private sources - towards mitigation and adaptation measures. These resources had to be spent primarily on building state capacities to fight climate change, and also provide a mix of regulatory features to incentivize certain behavioral and structural changes in both residential and commercial settings.

By November 2021, 151 countries, representing 81.3% of global emissions, have submitted an updated NDC  (Nationally Determined Contribution), of which 92 have increased their emission reduction pledges. During CoP (Climate Change Conference of Parties) 26, several important new commitments were made by countries in Asia, including Pakistan, which has set a target of a 50% reduction in its projected emissions between 2015 and 2030. While world leaders need to go further – as the world is still not on track to limit global warming to 1.5°C – more work needs to be done to ensure that the pledges that have been made are implemented. A major part of the work that needs to be done revolves around mobilizing finance that can be aligned with climate action.

Mobilizing finance is at the heart of a successful implementation of a climate action agenda, especially for developing countries like Pakistan, that have limited or no fiscal space to make available additional resources for climate action. Many of the commitments that have been made by developing countries are conditional on industrialized countries meeting and scaling-up previous pledges on international climate finance. While international climate finance in the form of grants and loans will be a significant source of funding for climate action, investments by international capital and domestic sources of climate finance will be equally crucial: 75% of 2019-20 tracked climate investments were raised domestically, putting greater reliance on national budgets as a major source of finance for adaptation actions.

However, as we have witnessed in the developing world, and in Pakistan, budgets and development plans have leaned increasingly towards unsustainable production practices. A recent example is of fuel subsidies in Pakistan that have continued to incentivize the use of hydrocarbons and the traditional fossil-based over renewable energy sources. These practices have effectively offset any big or small investments governments make sporadically/in choice sectors for both mitigation and adaptation purposes. The fiscal space used up by such subsidization leaves the government with limited options to accommodate the fiscal demands of climate action - which are often left to be fulfilled by bilateral and multilateral loans and grants. The government will have to seek innovative mechanisms and ways in which the existing development financing could start to lean more increasingly towards greener development projects and ensure that the climate element is accommodated at the planning stage of projects. This will require a reimagination of sorts to look at project designs and implementation mechanism with a different lens.

Tracking Climate Finance

There are many global and national estimates being regularly undertaken to track and classify climate finance (both domestic and international). However, there is a critical need to undertake more actionable studies on how national plans and commitments can be financed. In Pakistan, we need to document how best to leverage international climate finance and domestic public budgets, within the national policy context as well as highlight possible sectoral avenues to shape fiscal and expenditure policies that could gain from fresh investment flows, to deliver Pakistan’s NDC and other climate goals.

Financial planners need to identify and assess different approaches and instruments in use for accessing and deploying climate finance and monitoring its effectiveness. They will also have to recognize key institutional, policy, political, technical capacity, and economic barriers that hinder access to, and effective uptake of, different types of climate finance. Key measures will be needed to create a domestic environment conducive to attracting different forms of climate finance, including from the private sector. Recognizing that experience of developing countries like Pakistan with various forms of climate finance is limited, planners will also need to extrapolate lessons from existing barriers to development investment and business activity.

Options and Recommendations

There is a strong case for enhancing understanding of the avenues available for accessing international climate finance pools, and the extent to which a bridge between them and local decision-making can positively support Pakistan’s NDC and other climate goals.

Such analysis should begin by answering some important questions such as:

• What are Pakistan’s most appropriate (inter)national sources of climate finance (and related approaches/instruments for their deployment)?
• What steps are required to facilitate deployment of climate finance for both adaptation and mitigation strategies?
• Who are the key actors across federal and provincial governments required for identifying, and materializing, investment for climate action?

The policy options and recommendations below can be considered to address some of these questions:

1. Longer-term strategic thinking on managing trade-offs between different policy objectives: there are various policy entry-points to allow the government to think through how to build synergies, particularly during the transition period to a net-zero economy. For example, how to move away from a dependence on fossil fuels as a revenue source.
2. Increase contribution of public budgets to climate goals: this can be achieved by increasing expenditure on budget lines with high relevance to the NDC or adjusting the design of certain programmes and schemes to increase their relevance to climate goals. However, this needs to be done in a way which also protects the socio-economic and development objectives of the public budgets.

• Design public finance measures to promote a just transition: there are several good practices on how to protect the most vulnerable in the transition to a low-carbon and climate resilient economy, such as using revenue from a carbon price to offset any electricity price rise for low-income consumers, introducing extended unemployment benefits for those in fossil fuel legacy industries etc.

1. Adopt new public finance mechanisms targeted to climate goals: there are various established and innovative mechanisms that incentivize action and investment aligning with NDC goals. This could be at a macro level, such as an economy-wide carbon tax, to micro measures, such as bus concessions and cheaper electric bus fares.
2. While there is a growing field of analysis on the contribution of public budgets to direct funding of climate actions, there is relatively little research on the role of broader fiscal and expenditure policy. Similarly, there is significant research on the potential role of carbon pricing, but little on other tax and financing instruments. One will have to agree that it is important to consider not just direct financing, but also indirect pricing signals that national governments, of developing countries like Pakistan, can make to influence low-carbon and climate-resilient investments and actions.

Asad Ejaz Butt is a Consultant Economist