We are already seeing the consequences of global warming: the increased frequency of hurricanes, floods and droughts; adverse effect on agricultural production; loss of biodiversity; Receding glaciers, melting Arctic ice, dying coral reefs and rising sea levels. The window of opportunity to avert the catastrophic consequences of global warming of more than 1.5°C above pre-industrial levels is fast closing. Some projections indicate that average temperatures are likely to rise above 1.5 degrees Celsius, unless more is done to stop global warming in the next 3-5 years. Hindustan Times 26 April 2023). Fortunately, there have also been phenomenal advances in mitigation technologies. However, there are large variations in adoption across regions and geographies even for mitigation technologies that are now commercially viable, mainly due to lack of finance. Large-scale adoption of these technologies requires large amounts of capital, but access to such finance is limited or completely absent in many countries.
Among mitigation techniques, the most advanced is renewable energy: solar, wind, etc., in addition to hydropower, the original renewable. The cost of solar panels, wind turbines, storage batteries and other components has dropped dramatically, such that the cost of renewable energy is now comparable to that of fossil-fuel based electricity. As a result, renewable energy projects are now being taken up on a large scale. Despite this, renewable energy still accounts for only about 15% of global electricity generation. Next, green is hydrogen. Extracted by breaking water molecules into hydrogen and oxygen through electrolysis, hydrogen has wide applications for electrification in areas such as heavy industries, shipping, air transport, etc. Hydrogen extracted using renewable energy is green hydrogen. In addition to the power source, the cost of green hydrogen has been dependent on the cost of the electrolyzer, which has been very high. As these costs have come down, green hydrogen has become commercially viable and is now attracting large-scale corporate investment, including in India. However, the rollout of green hydrogen on a large scale is just beginning.
Third, we have Carbon Capture and Sequestration (CSS). Renewable energy and green hydrogen can reduce new carbon emissions but they cannot reduce the CO2 already in the atmosphere, which is responsible for the increased frequency of extreme weather events. To address this we need ‘carbon negative’ technologies to capture carbon and store them until they are broken down for commercial use. Existing CSS technologies are very expensive. Significant investment in research and development (R&D) is needed to drive down costs before CSS techniques become commercially viable.
A fourth group of technologies, still mostly experimental, replicate and improve ‘technologies’ available in nature to capture carbon from the atmosphere and use it productively. Plants use ‘photosynthesis’ to feed on CO2 obtained from the atmosphere, while releasing oxygen in return. Terrestrial and underwater forests are natural ‘carbon sinks’ that sequester the carbon load in the atmosphere. But emissions levels have far outstripped the capacity of natural ‘carbon sinks’ to absorb the additional carbon load. Vast R&D investments are needed to develop technologies to artificially replicate and enhance the capacity of natural carbon sinks many times over to reduce the ambient carbon load and ultimately reverse global warming.
The key takeaway from the foregoing is that successfully addressing the climate crisis requires large amounts of capital. Investments are needed mainly for research and development in CSS technology and synthetic replication of natural carbon sinks and also for undertaking renewable energy and green hydrogen projects on a large scale. Indeed, these projects are already being undertaken, but nowhere near the scale needed to stop and eventually reverse global warming. United Nations Environment Programme Emissions Gap Report 2022 It is estimated that the current annual investment in climate finance of about $571 billion needs to be increased to at least $1.7-2 trillion.
How can it be financed? Global public sector finance is an obvious option for financing a global public good. However, discussions following the report of the independent committee appointed by the G20 to review the capital adequacy framework of multilateral development banks (MDBs) indicate that MDBs could generate as much as $1 trillion in additional aid for all purposes, including climate finance. Can There is a lot of doubt regarding this amount also. The alternative is private capital, a stock estimated to grow by about $15 trillion annually. However, much of this capital is generated in advanced countries and will not flow easily to tropical developing countries, which have the greatest potential for renewable energy generation.
To induce private capital flows towards climate finance in developing countries, first, climate finance will require the creation of an appropriate ecosystem, including universally accepted concepts, definitions and standards, appropriate rating systems and technical appraisal methodologies (See Ajay Sagar, trade standard 27 March 2023). Second, it requires such private capital flows as well as its attendant moral hazard (V. Ananth Nageswaran, peppermint, April 11, 2023). MDBs can play an important role here by providing credit guarantees despite their limited resources (Ajay Chibber, Atlantic Council, 17 October 2022). In this way, through your own due diligence one can leverage 10-20x of one’s own investment to raise private capital while reducing the moral hazard of non-risky private investment.
Sudipto Mundle is the chairman of the Center for Development Studies. These are the personal views of the author.
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