by Sunil Poshakwale, Professor of International Finance, Cranfield School of Management
It is now a widely accepted reality that climate change is disrupting and causing significant loss of financial and human resources around the world. Over time, the cumulative impact of technology and economic development has inflicted significant damage to the natural environment. Although, evidence of adverse impact of human activity on the environment is not new, the magnitude of its effects has increased exponentially. Pollution of air, water, and land caused by human activity has reached global proportions threatening the environment’s sustainability. As a response to this, both governments and private corporations have taken up the challenge of finding cleaner and greener technology solutions to reduce global warming. However, to be able to achieve the 2 degrees Celsius threshold for global warming, it is estimated that by 2030, US$2.4 trillion will be required every year for fundamental reforms of the global financial architecture to scale up the financial resources needed to tackle the challenges posed by the climate change.
Climate finance refers to investment drawn from public, private, and alternative sources that are targeted to significantly reduce Green House Gases (GHG) emission and the impact caused by climate change. Green bonds (a category of Climate bonds) have emerged as a major source to finance this initiative and it is estimated that globally, annual issuance of green bonds now exceed $500bn. However, this is not enough to bridge the huge gap between the required financial resources and funding provided by the issuance of green bonds. Many other sources need to be explored by initiating operationalisation of the Loss and Damage Fund proposed at the COP27, recapitalisation of multilateral banks, incentivising the private sector to actively participate to create conducive environment for investments in climate initiatives, and rapid development of an active carbon markets which can facilitate channelling of private capital for investments in green technologies. In brief, given the scale of the challenge, long-term climate financing requires urgent mobilisation of a wide variety of sources including public, private, bilateral, and multilateral investments.
In this context, the Carbon Emission Trading (CET) market proposed at the Kyoto Protocol could play a significant role. CET caps the total level of GHG emissions and allows those industries with lower-than-expected level of emissions to sell their extra allowances to the larger emitters thus creating a market price for emissions. Currently European Emissions Trading System (EU ETS) is the world’s largest and operates in all EU countries plus Iceland, Liechtenstein, and Norway. The system limits emissions from around 10,000 installations in the energy sector and manufacturing industry, as well as aircraft operators and covers around 40% of the EU's greenhouse gas emissions. Carbon pricing could prove to be a game changer and an important market mechanism to raise capital and channel financial flows in making progress towards sustainability and development goals.
