How Pakistan can leverage
international climate financing
In order to
achieve the 2030 emissions target, and make our cities liveable, Pakistan will
need to attract investment in climate change initiatives.
William P.
Mako | Amna Mahmood | Ijaz Nabi Published September 14, 2022
Imagine it
is 2030, and a chilly November morning. You step out of your house and are
welcomed by a clear sky and not a pervasive smog, a common occurrence not so
long ago that required you to mask up and forced schools to close down.
You start
the car and the engine revs up noiselessly and without fumes — you recently
replaced the older petrol version with an electric vehicle. Many people you
know have made a similar switch as it has become easier to purchase electric
vehicles and charging stations are now within easy access.
Shifting to
a solar home system reduced monthly electricity bills and generated savings
allowed you to invest in the electric vehicle. The image of a dense tree-lined
street, with the green contrasting magnificently against the blue sky, reflects
on your rear mirror as you reverse the car and head to work.
This can be
Lahore in 2030 if the government realises its vision of drastically reducing
greenhouse gas (GHG) emissions under the climate action plan, the Nationally
Determined Contributions (NDCs).
Mission
green
The aim is
to reduce GHG emissions by 50 per cent by 2030 from the projected levels
through shifting to 60pc renewable energy and 30pc electric vehicles, banning
imported coal, and sequestering (or capturing) carbon (a common GHG) through
natural resource restoration initiatives such as the Ten Billion Tree Tsunami
Programme (TBTTP) and the Protected Areas Initiative.
It is
common knowledge that Pakistan contributes minimally to global GHG emissions —
2020 emissions of CO2 accounted for less than 0.7 per cent of global emissions.Why
then, you may ask, did the government decide to set such ambitious plans to
reduce local GHG emissions?
It is
because being in the category of low emitters, sadly, does not make the country
immune to the consequences of global GHG emissions. Between 2000 and 2019, the
Global Climate Risk Index ranked Pakistan the 8th most vulnerable nations affected
by climate change. The recent floods will probably bump it further up the
vulnerability rank when the index is calculated next.
GHGs are
problematic because they trap heat, leading to increased global temperatures,
and like Covid-19, do not respect national boundaries. If global warming were
to exceed 2 degrees Celsius beyond pre-industrial levels, it is expected to
cause rising sea-levels, extreme and unpredictable weather, and damage to
ecosystems and human settlements at a scale that has not been observed before.
It is
precisely due to the global nature of the problem that 196 countries (including
Pakistan) became signatory to the legally binding Paris Agreement in 2015, an
international treaty on climate change that established the goal of limiting
global temperatures below 2 degrees Celsius, and preferably 1.5 degrees
Celsius. The same agreement also requires signatories to submit their NDCs
every five years to show their commitment towards achieving this goal.
The
question then is: how will Pakistan’s climate targets be financed?
Show me the
money
In the
NDCs’ view, 15pc of the reduction in 2030 GHG emissions will be financed from
domestic sources, and the remaining 35 per cent should be financed from
international sources.
In other
words, the ability to meet the 2030 commitments will hinge upon the
availability of international climate finance, ideally on a concessional (lower
market rate, generous terms) basis.
Broadly
speaking, climate finance refers to local, national or transnational financing
that is targeted towards supporting mitigation and adaptation actions that
address climate change.
The United
Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and
the Paris Agreement call upon parties with more financial resources to assist
those that are less endowed and more vulnerable, so that progress towards the
global objective of stabilising GHG concentrations in the atmosphere can be
made. There is also an added expectation that developed countries will take the
lead in mobilising climate finance.
To date,
Pakistan’s access to international climate flows has been very limited. Its
profile of relatively high climate vulnerability and relatively low income per
capita may allow it to attract concessional climate finance but, nonetheless,
will require meeting stringent qualifying criteria.
Globally,
the volume of concessionary finance has been modest. Of the total climate
finance of $632 billion available in 2019-20, $65 billion was concessionary
finance by multinationals to East Asian economies and only $20 billion was
grants to the poorest countries. The Ukraine war may further cloud prospects
for a substantial increase in the overall volume of funds at least for the
foreseeable future.
Furthermore,
the great majority of Pakistan’s planned mitigation spending is for renewable
energy. For instance, the NDCs anticipate $101 billion for energy transition
alone (the energy sector accounted for 41pc of Pakistan’s 2018 GHG emissions)
by 2030. As the costs of renewable alternatives fall within the range for
fossil fuel options, non-concessional financing for renewable investments has
become the norm.
Investors
expect renewable energy investments to cover their costs and provide an
adequate return on investment and hence, not qualify for concessionary climate
finance. Recent trends show the same. Of about $324 billion in recent worldwide
annual funding for renewable energy, a large proportion was market-rate debt
and private equity.
The
opportunities
Faced with
such challenges, what options are available to attract substantial quantities
of international climate finance? Well, Pakistan can explore two strategies.
One, it
should look at cases of innovative financing instruments and apply those
relevant to the local context. Two, and more broadly, it should look to improve
structural issues to make itself a more attractive destination for
international climate finance. A few examples are shared as follows.
In November
last year, Belize committed to protecting 30pc of its ocean (as well as a range
of other conservation initiatives) in exchange for a $362 million
debt-for-nature swap that reduced Belize’s debt by 12pc of the GDP. This was
the largest debt financing to date for ocean conservation and was negotiated
with The Nature Conservatory, an environmental organisation.
Pakistan
can also explore financing nature conservation projects, such as the TBTTP,
through a similar settlement. In April 2021, the government issued 30-year
bonds for $500 million. If the government can borrow to redeem the outstanding
April 2051 bonds, initial calculations show that debt servicing savings
generated could potentially fund 5.7 billion trees over the bonds’ remaining
maturity period.
Debt-for-nature
swaps can also be applied to subsidising green technology to make farming
practices more eco-friendly. For three weeks straddling October and November,
farmers in the Punjab province resort to stubble burning of the harvested rice
crop to prepare the fields for wheat sowing.
As a
consequence of this (and also of low-grade fuel, industrial emissions and dust
particles), many cities in Punjab experience a sharp deterioration in air
quality. One known technology for eliminating stubble burning is the “happy
seeder” which breaks down rice stubble (mulching it to the ground), and plants
wheat seeds simultaneously.
Options to
subsidise this technology to make it financially viable for the farmers by
approaching environmental organisations (such as the TNC above) to fund crop
stubble burning abatement can be explored.
Pakistan’s
coal fleet is fairly young when compared to coal-fired plants in the US,
Russia, and Europe, which have a higher average age of 30-40 years. The
government can use this to its advantage when negotiating coal plant
retirements.
Who would
de-commission a young coal-fired plant without some sort of concessional
financing? It should be possible to borrow enough from multilateral/ bilateral
development financial institutions to (i) buy out the investors for major coal-fired
plants and pay de-commissioning costs, and (ii) generate revenue from carbon
credits for future emissions prevented to pay off this borrowing.
Potential
climate financiers will appreciate a more fully developed presentation of
emission reduction plans. It will be important to show specifically what
changes would be needed in Pakistan to reduce 2030 emissions to 50pc below the
baseline projection.
For
example, major increases in renewable energy are contemplated, however, goals
for achieving these targets have not been laid out clearly. Specific projects,
and the emissions cut contribution for each, should be identified and grouped
by suitability for receiving concessional climate finance.
It will
also be important to generate credible investment costs projections, for
example, the estimate for buying out new coal power plants and Thar coal mines
is placed at $18 billion, which is significantly greater than the investments
in the five electricity generation public-private partnerships (PPPs) that
reached financial close since 2016 and totalled only $6.6b.
The
International Capital Market Association (ICMA) is a non-profit association and
is responsible for the development and monitoring of the Green Bond Principles
that provide guidelines on transparency, disclosure and reporting on funding to
projects that contribute to environmental sustainability.
Ease of
doing business
In
September 2021, the Securities Exchange Commission of Pakistan’s (SECP)
approved the national guidelines for green bonds. These guidelines recognise,
but go beyond the ICMA principles for green investment requiring more work for
the issuer and regulator. THE SECP should refine domestic guidelines for green
bonds to minimise the burden on investors.
A country’s
risk rating can affect the overall credit rating for a public private
partnership (PPP) project company, and hence the cost of its debt and the rate
at which it can profitably sell an infrastructure service (for example,
electricity) within the country.
Pakistan
currently ranks at around the 25th percentile from the bottom on rule of law
indicators, well below the averages for South Asia and other regions. To raise
Pakistan’s attractiveness to potential foreign investors, it will be important
to work to improve the country’s rule of law rating on contract enforcement,
property rights, and physical security indicators to enhance investor
confidence.
To
summarise, in order to achieve the 2030 emissions target, and make our cities
liveable, Pakistan will need to attract investment in climate change
initiatives.This will require Pakistan to de-commission coal plants, expand
renewable sources of energy, invest in green technology more broadly and deepen
the green finance market for bonds by improving perceptions about country risk.
More
importantly, it will be critical to build capacity and technical expertise
within the Ministry of Finance, which is leading the country’s climate finance
efforts, so it can identify and mobilise financing from the range of climate
finance instruments and means available internationally.
In recent
weeks, there has been much talk about the developed world compensating the
developing nations for catastrophic climate-related events — the current floods
are a case in point — fuelled by their high-emitting economic activities. The
time is here to work with international partners to support the country’s
climate change efforts. https://www.dawn.com/news/1708561/how-pakistan-can-leverage-international-climate-financing
