Tackling Climate Change through Financial Mechanism

Nevertheless, finance invariably runs through the spine of all these measures and a financial mechanism is indispensable for any type of practical commitment in tackling climate change.
Tackling Climate Change through Financial Mechanism
Representational Photo

The United Nations Framework Convention on Climate Change (UNFCCC) has over a period (from 1992) come up with some credible measures for tackling climate change. These include mitigation, adaptation, technology and Finance.

Although most of these measures stand wittingly negated or disrupted by those who have been utmost polluters, particularly USA who even didn't ratify the Kyoto Protocol treaty to be in the compliance regime (2008-12) to help in mitigation of GHGs, yet all these measures are conceptually sound and result-yielding depending, of course, on the extent of willingness and commitment each country is ready to demonstrate practically.

Nevertheless, finance invariably runs through the spine of all these measures and a financial mechanism is indispensable for any type of practical commitment in tackling climate change. 

Besides, it is pertinent to mention here that while the developed world advantaged from the industrialization and became economic powers out of it, the costs of industrialization in terms of dangerous emissions are to be unjustly borne equally by the developed and the developing countries.

While developed countries have the economic muscle and more importantly it is their foremost duty to bear the costs of emissions as they have been the beneficiaries of industrialization for about three centuries, the developing countries have been slapped with the costs with no fault of theirs. Small Island Developing Countries in the Pacific or elsewhere are at high risk of being submerged because of rising sea levels. Similarly the poor African states are experiencing extreme weather spells and so do we here in Kashmir. 


Recognizing the plight of developing countries in this regard, the UNFCCC came up with the proposal of instituting a financial mechanism to help these vulnerable geographies to tide over the impacts of climate change. Thus, in 2010 during Conference of Parties (COP) 16 meeting at Cancun, the Green Climate Fund was created to combat climate change through twin approaches of mitigation and adaptation.  In a way GCF is an operating entity of financial mechanism of the UNFCCC. There are 194 sovereign states as stakeholders of the GCF under UNFCCC framework.

The mandate of the Fund is to promote low-emission and climate resilient sustainable development in developing countries. The fund has same managing mechanism as that of International Monetary Fund (IMF) or that of World Bank or ADB. It has 24 Executive Directors representing developing as well as developed countries. 

The fund is aimed to partner with developing countries to fulfill its objectives of channeling its resources through a range of sub-national, national, regional and international institutions.

However, unlike IMF or World Bank or European Investment Bank which are headquartered in the West, GCF is placed in Asia headquartered in Songdo, South Korea, thus away from proximity influence of the western countries. World Bank, of course,  is the interim trustee. The GCF Board is supposed to "balance" alloca¬tion between mitigation and adaptation.

The fund will be allocated for 'adaptation' for the most vulnerable countries viz., Least Developing Countries (LDCs), Small Island Developing States (SIDS) and African States. However, given the intense climate change impacts happening in other geographies of the world,  the Board of the Fund has in principal agreed that the allocation of funds will happen on 'geographical balance' principle as well. 

The Finances for GCF

Further, with too much of premium placed on developed countries with regard to expecting  generous contributions for the fund and in fact they promised to contribute an exuberant contribution of US $ 100 billion each year by developed countries by 2020, the Fund soon fell short of expectations from the countries who earlier made tall promises.

Prof. Jeffery Sachs, Quetelet Professor of Sustainable Development and Management at Columbia University is of the opinion that to generate $ 100 billion, a carbon tax has to be levied on all polluting countries with, of course, higher rate of tax on major emitters.

 Nevertheless, GCF  has got pledges worth US $ 10.20 billion from 35 Countries but only US $ 5.8 billion have been received by the first week of August 2015 so far and it is expected that the remaining pledged amount will be subscribed soon and given the  seriousness with which the  climate change issue is  gaining ground   amongst  masses   all over the world, there is expectation of   additional commitments of hefty amounts beyond pledged amounts  to come over by before the forthcoming Paris Climate Conference scheduled December 2015, this year – the Conference which is supposed to intertwine the countries into a meaningful Compliance agreement from 2020 onwards.  

As the Fund is equally permissible to be allocated in adaptation schemes of climate change even away from most vulnerable SIDS and African States, therefore, the climate change vulnerabilities of Kashmir can be addressed well under the GCF. The frequent rains that have been inundating this geography and disturbing the ecosystem has to be tackled through adaptation scheme of UNFCCC.

The impaction of carbon emissions due to industrial activity of so many states of India and neighboring China has made drastic climate changes that are resulting in extreme weather conditions like flash floods, incessant rains, cloudbursts, intense heat spells that have almost become a routine.

The GCF's  Loan Advancing  Architecture

In order to combat the climate change issues in Kashmir, we have to adapt to the conditions as they fallen on us. The GCF policy of financing 'adaptation' programmes shall fit our requirements. It is pertinent to mention here that $ 2.5 billion have already been sanctioned in favour of some developing countries through the accredited entities and the state government must nominate one preferably department of environment or forests for the accreditation purpose.

The National Designated Authority (NDA) or NCDMA in case of India is the Nodal agency. The programme proposals of the accredited entity must pass through NCDMA to GCF for approval.  GCF has already accredited 125 NDAs (National Designated Authorities) or accredited entities and is inviting applications for further accreditations.  Therefore, it is quite desirable to propose an accredited entity from Kashmir.  

The GCF architecture envisages that funds shall trickle down from GCF to accredited entities and shall be utilized through programmes and projects. The financial instruments that will be used in the process shall comprise of grants, loans, guarantees and equity.  While grant financing is interest free, the tranches of Loans shall have two parts. The first part of the loan will have no Interest but shall have a service charge of 0.75 percent, while as the second part of loan will have benchmark rate of interest of the lending currency e.g., for Euros European Central Bank rate or US Treasury Bond Rate for Dollars. The second tranche of the loan shall carry also carries 0.75 as service charge. The repayments will not have to be there for grants, the loans shall have to be repaid over a period of spanning between 15 to 40 years.  

This is the cheapest financing one can imagine even cheaper than that offered by World Bank's IDA arm. Further, with scope for private sector investments where GCF could provide a guarantee or equity support, there is more potential for spurring  Green Technology investments in the state.   

Dr. S  M  Shafi teaches at the Department of Business & Financial Studies, University of Kashmir.


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