The recently released report “Report on the Baku to Belem Roadmap to 1.3T” (henceforth referred to as the Roadmap), prepared as part of the COP29 and COP30 Presidencies, is framed as an action-oriented consolidation of existing initiatives and potential leverage points within the international climate finance system. The report realistically acknowledges the tension between its ambition to provide a coherent, systemic guide and the unresolved nature of the political agreements necessary to implement major components of its five action fronts.
While pragmatism is valuable, a good plan should not come at the expense of striving for a truly great one. One feels that the Roadmap relies too heavily on legacy institutions and mechanisms that have historically underperformed or proved politically contentious, which may limit its transformative potential. The point made about systemic fragmentation across climate finance institutions-multilateral climate funds, MDBs, bilateral providers, philanthropies, and regional development banks – is definitely an important one. However, the suggested coordination measures between institutions are largely procedural (e.g., regular meetings, harmonised IT systems). There are deeper structural issues, such as differing risk appetites, conflicting shareholder incentives and mandates, etc., that may hinder attempts made in this direction. A meta-governance structure or accountability architecture is needed to make the proposed coordination mechanisms work.
More attention also needs to be paid to funding access barriers that developing countries have outlined in their submissions to the UNFCCC, while reviewing multilateral climate funds, such as long accreditation timelines, co-financing requirements, and burdensome documentation. This is particularly true for countries in the LDC and SIDS groups, as funding for disaster management (including compensation) and post-disaster reconstruction must be available with immediate effect.
Countries are also unequal in their ability to raise funds from markets due to credit rating biases that penalise climate-vulnerable states, high transaction costs associated with the low ticket size of borrowings, and under-representation of local institutions in many funding decisions. While the preparation of vulnerability indices, etc., that the Roadmap discusses would go a long way toward informing policymakers and ensuring preparedness in the short to medium term, addressing disaster impacts and relief measures requires immediate action and funding support. The Roadmap also places great confidence in MDB capital adequacy reforms, private finance mobilisation, and blended finance solutions. Yet the empirical evidence from the last decade shows that MDBs have miles to go to expand lending at the scale envisioned, and blended finance has mobilised far less private capital than projected. Success stories remain dependent on region, targeted income groups, and sector, with low-income countries often seeing much weaker mobilisation.
Looking specifically at the report from the perspective of developing countries desperately seeking options to raise finance for adaptation strategies, the document offers limited options. It correctly surmises that “strengthening adaptation finances lies at the heart of all efforts”, and that existing finance flows are unequivocally dominated by mitigation and large-scale infrastructure projects. However, it must be acknowledged that for mitigation, measurement is easier and returns are more predictable. Building revenue models for adaptation that work remains a tall order. Due to its hyper-local nature, the need for adaptation action, particularly in smaller developing nations, is systematically underreported because of limitations in assessment methodology. Also, post the implementation of projects, monetising the gains, the primary basis for developing a revenue model, is difficult for many sectors.
Taking the specific case of a sector that remains at the heart of adaptation action in India- agriculture. Adaptation action in agriculture may be categorised into various buckets- promoting climate-resilient crops, enhancing food security and nutrition, sustainable and regenerative cultivation, innovation and research, etc. As can be seen, while all of them increase output, which is directly measurable, the marginal benefits of each may not be immediately apparent. In a world of concessional lending (as opposed to grants), developed countries need to find a means to monetise these gains, necessarily to justify borrowings. Otherwise, they run into the risk of unmanageable public finance deficits or under-investments in the macroeconomic sense. On this topic, ICRIER has recently contributed to the chapter on Adaptation Resourcing for the preparation of India’s National Adaptation Plan. Issues such as the necessity of linking public expenditures to outcomes achieved across all eight adaptation sectors have been highlighted there.
On the issue of different instruments that could raise potential revenue sources, the Roadmap lists carbon pricing, fees on aviation or maritime transport, special drawing rights (SDR) issuance, taxes on luxury commodities, financial transaction tax, wealth taxes, etc., as some of the options. However, the report does not offer a realistic political economy assessment of which countries are likely to support which mechanisms. Given that many of these revenue sources, especially those listed at the end, may be used for other non-climate developmental purposes, there may be tensions while ringfencing them for climate purposes. Careful attention needs to be paid not only to revenue possibilities, but also to tax incidence, existing geopolitical tensions and rifts, and domestic political resistance that may limit its implementation. There is therefore a need to understand these sources through a dynamic general equilibrium lens, and deep-dive assessments are warranted using scenario modelling, sensitivity analysis, and distributional impact analysis. One feels that there is also a missed opportunity to propose new innovative financial mechanisms and instruments.
(Views expressed are the author’s own and do not reflect those of ICRIER)
