Decoding Climate Finance with Varad Pande
Tue Jun 06 2023
Decoding Impact Podcast Summary
Season 2: Solving Systemic Problems at School
- Decoding Impact is a podcast by Sathwa Knowledge Institute hosted by Rati Shpala Krishnan.
- Season 2 will engage leading thinkers and practitioners to understand what it takes to solve systemic problems at school.
Climate Change and the Need for Action
- Climate change requires a fundamental re-tooling of our entire way of life, with funding needs in the trillions.
- Adaptation resilience and loss in damage are the stepchild in the climate finance debate.
- India needs to act on climate change for its own sake and not because somebody else is.
- Finance has a crucial role to support mitigation and adaptation actions that are necessary to address climate change, especially for vulnerable nations who have fewer resources to fight climate.
- There is a need for sustained support and actual commitment of resources towards the cost of addressing climate change.
The Complexity of Climate Change
- Climate change is an existential threat to humanity with no obvious answers.
- The problem cuts across every sector and human activity, requiring a fundamental re-tooling of our entire system.
- The interconnectedness of climate change problems is coming to the fore, with domino effects leading to droughts and floods.
- Mitigating climate change is a global public good, but there is an incentive for everyone to free ride, leading to sub-optimal action.
- Climate change has become a mainstream conversation in every sector of the world, recognizing the problem as the first step in solving it.
- Negotiators are now playing more offense instead of defense in engaging with climate change.
Shifting Mindsets and Approaches
- People are now playing more offense and coming up with solutions to climate change.
- There is an increased appetite for collective contribution to solutions.
- The conversation around climate change has shifted from threat framing to opportunity framing.
- The ticking time bomb of climate change continues, with a limited window in which to act.
- Traditional ways of solving the problem will not work, and creative, innovative solutions are needed.
- Tribal communities have always taken care of their natural resources, while modern economies have a longer feedback loop that makes it harder to connect consumer choices with environmental impact.
- Money needs to be spent on making real progress towards solving the problem of climate change, rather than just raising awareness or creating problems for people.
The Challenge of Climate Finance
- The world needs 3 to 5 trillion dollars a year to address the climate problem and become net zero by 2050, but currently only about 600 to 700 billion dollars are being spent on climate-related stuff.
- There is a misallocation of capital in which 80% of climate capital is going to just two sectors (electricity and mobility) that contribute about 42 to 45% of emissions, while other high-emitting sectors such as agriculture and industry are deeply underfunded.
- Two-thirds of early-stage investing capital is going to just mobility, leaving many climate tech incubators and accelerators without venture capital funds beyond a certain stage.
- Developed countries receive 80% of climate capital despite the social return on investment being much higher in the Global South where they are not yet locked into the high carbon pathway used by developed countries over the last century.
- Adaptation and resilience receive little attention and focus in the climate finance debate despite being crucial for preparing for bad things that have already been locked into.
Institutional Structures and Financing Solutions
- Bharat Pandey, a social impact in public policy professional, currently partner at BCG, joins the podcast to discuss institutional structures needed to accelerate access.
- The conversation will focus on capital finance and build down to India and where to invest.
- India owes 15 trillion USD due to indiscriminate use of carbon space.
- Climate justice is a legitimate demand of developing countries for two reasons: the problem of stock emissions since industrial revolution began in 1850, and per capita emissions.
- Developing countries are being thrust into a double jeopardy situation due to greenhouse gases from the industrial revolution.
- The principle of common but differentiated responsibilities was enshrined in the UN Framework Convention of Climate Change, but it has been difficult to operationalize it in its true spirit.
Finding Solutions and Mobilizing Funds
- The world is facing a bad outcome and needs to find a solution rather than just restating positions.
- Developed countries are also facing their own internal political questions.
- There may be ways to frame the problem towards a solution by going deeper into certain sectors or transferring resources between developed and developing countries.
- Taxpayers and politicians are not willing to take on large amounts of burden, so conversation has moved towards becoming more competitive and creating jobs.
- Private sector will need to step up as government funding is not enough.
- Developed countries promised $100 billion a year in climate finance to developing countries but have not reached that amount yet.
- Conversation has now moved towards trying to push that amount higher, but it's still political.
- Loss and damage fund is almost like the third pillar of climate finance after mitigation (reducing emissions) and adaptation (adapting to climate change).
The Three Pillars of Climate Finance
- The three pillars of climate finance are mitigation, adaptation, and loss and damage.
- Mitigation involves reducing emissions by transitioning to renewable energy.
- Adaptation involves preparing for the effects of climate change that are already happening.
- Loss and damage is the concept of compensating for losses caused by climate change that were not the fault of those affected.
- A framework agreement on a loss and damage facility was agreed upon at a climate summit in 2022, but detailed design decisions still need to be made.
- The problem of climate finance requires a novel approach to sourcing funds, as current capital is insufficient.
Blended Capital and Innovative Financing
- A workman-like approach is needed to secure funding for energy transitions.
- Funding sources include governments, private sector, international and domestic flows, and philanthropy.
- India has allocated 25,000 crores in the budget for energy transitions and has a National Green Hydrogen Fund with a budget of 20,000 crores.
- The global south faces massive budgetary constraints and needs an increase in international flows due to resource mobilization constraints and climate justice arguments.
- Private sector investment is constrained due to perceived high risk premiums in the global south caused by regulation, political risk, currency fluctuation, etc.
- A new paradigm of public-private partnership is needed to provide catalytic public funds that can attract private funds at 8 to 10 times the amount invested by the public sector.
- Public or concessional capital could provide guarantees to cover losses from events such as payment defaults or currency fluctuations that private investors are not comfortable taking on.
Building an Ecosystem for Climate Finance
- Blended capital approach is catching on and currently at around 1.5 billion dollars a year, but needs to reach 3 to 5 trillion.
- Private money leverage is needed to reach the trillions and solve problems with low and high returns.
- Transaction costs of blended finance are high due to mediators, structuring, and intermediary costs.
- Clarity on the role of different types of capital in financial structures is needed.
- Moving from project mode to product mode by creating templates for projects can save time negotiating with guarantors like the World Bank.
- Mindset change is needed for multilateral development banks to switch from lending banks to leverage banks.
Changing Mindsets and Building New Institutions
- The mindset needs to change in order to address climate problems effectively.
- Multilateral development banks are not reforming quickly enough, and a new global climate finance agency is needed that focuses exclusively on leverage instruments.
- Existing institutions cannot respond quickly enough to the pace of change, so building new institutions makes sense.
- Traditional ecosystems optimize for existing behaviors, so it's important to build a new ecosystem rather than changing the existing one.
- Infrastructure is crucial, and creating collective infrastructure can aid in addressing climate problems. This includes digital public infrastructure for measuring emissions consistently and low-cost, as well as soft infrastructure such as forums for countries to exchange ideas and a base green taxonomy.
Collective Action and International Cooperation
- The idea of creating a common green taxonomy is being discussed globally.
- A collective action approach can be used to create an infrastructure for the climate change space.
- India has had success with environmental markets in the past, and regulatory playbooks are needed at both national and global levels.
- Plurilateral approaches, where like-minded countries come together, can be more effective than UN-based approaches.
- Private capital can come in if there is an emergent ecosystem that is agile and climate-focused, systems that provide data and honest conversations, infrastructure of institutions and exchanges with low friction, and soft infrastructure for forums and knowledge exchange.
Financing Adaptation and Resilience
- Soft infrastructure allows for forums and knowledge exchange
- Patient and public capital reduce risk of operations
- Diverse sectoral products ensure balanced capital flows
- Regulated and transparent transaction system is necessary
- Prototype creation is preferred over analysis paralysis
- Carbon markets are complex but necessary, with two options: carbon tax or carbon market
- Compliance carbon market has quotas and trading, while voluntary carbon market is important for agriculture in net zero pledges
Unlocking Climate Finance through Carbon Markets
- Companies will need to buy credits from carbon markets to meet their net zero obligations.
- The voluntary carbon market presents an opportunity for unlocking climate finance for livelihood projects, such as transitioning farmers to regenerative agriculture.
- Good carbon markets require credibility in the measurement system, coherence of the market, consensus among stakeholders, and capacity to regulate emissions.
- The Gujarat ETS experiment showed a 23% reduction in emissions with no additional cost to industry due to a new measurement system called the continuous emissions monitoring system.
Regulation and Governance of Emissions Markets
- A national carbon market regulator is needed to regulate emissions markets.
- The regulator should have the right expertise and be connected to the global discourse.
- India's Pat scheme and Gujarat ETS provide valuable lessons for regulating emissions markets.
- Carbon markets can incentivize farmers to do the right thing, such as making soil regenerative, by transferring incentives down to them.
- Shifting from a mitigation mindset to an adaptation and resilience mindset is important.
- Mitigation is global while adaptation is local, which makes it harder to create revenue streams for private sector involvement in adaptation projects.
- Adaptation will have to be led more through government financing and international overseas development assistance.
- Adopting a co-benefits lens is necessary, such as moving towards seeds that are more resilient for various reasons like water consumption.
- Mangroves are both mitigation and adaptation solutions that sequester large amounts of carbon quickly and act as bulwarks against floods.
India's Role in Climate Change Action
- Bombay has beautiful mangroves that provide a source of biodiversity for birds and fish.
- The budget this year has allocated funds for mangrove investments, recognizing their importance.
- India has the opportunity to address issues such as job creation and equitable growth through climate change action.
- India needs to act on climate change for its own sake due to unique vulnerabilities such as sea level rise, melting glaciers, disrupting monsoon patterns, and energy access issues.
- Climate change action can also create new areas of competitive advantage in green technologies.
- India has the potential to create 70 million green collar jobs by 2050.
- India is taking a positive approach in international negotiations on climate change and has made ambitious commitments at Glasgow.
- There is a need for new innovations and financing to spur manufacturing growth in the climate tech industry.
- Climate tech finance can be divided into three arcs: ready-to-scale technologies, promising technologies that need support, and big bold bets that require patient capital.
- Breakthrough Energy Ventures is an example of patient capital investing in technologies that can solve at least 1% of emissions problem.
Mobilizing Resources and Addressing Inequalities
- Encourage leaders of organizations in industry, government, and philanthropy to take risks and prioritize long-term goals for climate change.
- Philanthropy should fund bold initiatives such as earth short moonshots and building collective infrastructure for the climate problem.
- Inequalities in capital allocation exist between developed and developing countries, sectors causing emissions versus those receiving funding, developed solutions versus those dying in the value of death, and funding for mitigation versus adaptation.
Building an Ecosystem for Climate Finance
- Misallocation of capital on issues that matter is a significant problem.
- The size of the pie available to solve problems is not large enough, and building an ecosystem with patient capital, products for faster execution, and private capital is necessary.
- Orchestration of diverse forms of capital (public, ODA, market, philanthropy) is critical to finding the right problem they can solve within their means.
- Building systems like carbon markets by learning from experiences that have already worked is essential.
- Investing in nature-based solutions like mangroves can be a good way to build ecosystems of solutions rather than one big monolith solution.
- The G20 platform presents an opportunity for this work as it has the best of 194 countries and states on the same table with relatively the same weight.
- Changing governance in multilateral development banks could be a major unlock for addressing climate change.
- It's a spring of hope rather than a winter of despair if we bring human ingenuity to address this problem over the next decade.
- The podcast ends with a statement about bringing human ingenuity to address a problem over the next decade.
- The host thanks the guest, Vareth, for the conversation.
- The audience is thanked for listening to the episode.
- The Sappan Knowledge Institute is promoted and listeners are encouraged to follow them on social media and explore their website.