Hundreds of mangrove seedlings grow in a small bay on an island south of Fiji’s main island of Viti Levu. The Pacific island nations are vulnerable to climate change and need resources to adapt. Credit: Tom Vierus/Climate VisualsOpinion by Labanya Prakash Jena (sharm el-sheikh)Friday 18th November 2022Inter Press Service
SHARM EL-SHEIKH, 18 November (IPS) – The Pacific Island Nations (PICs) – 14 small island developing nations in the Pacific Ocean – constitute one of the regions most exposed and vulnerable to climate change and natural disasters. The region did not cause this climate crisis; The crisis was due to the strong CO2 emissions of the industrialized countries. But paradoxically, the countries in the region also have the fewest resources to adapt to climate change.
The IMF estimates that PICs will need additional investments averaging 9% of GDP over the next decade to develop climate-resilient infrastructure. The climate-resilient infrastructure of some countries requires more than 10% of their GDP. However, such a large capital mobilization is impossible for the region with low per capita income, volatile economy, lack of fiscal space and low savings rate. In addition, these countries have committed to ambitious targets to decarbonize their economies.
In this scenario, the international mobilization of climate finance is crucial to make the region resilient and prosperous. The longer the delay in building much-needed climate-resilient infrastructure, the higher the cost and risk of exposing these countries to extreme events for longer.
Labanya Prakash Jena, Commonwealth Regional Climate Finance Adviser, Indo-Pacific Region, argues that mobilizing climate finance internationally is crucial to make Pacific Island nations resilient and prosperous. Photo credit: Commonwealth
overcoming the bottlenecks
There are two main bottlenecks for international climate flows: institutional structures and a lack of capacity at different levels. The institutional structure of the PIC region is plagued by limited administrative and financial capabilities, poor program management and accountability, and an opaque verification system for mobilizing international public climate finance.
Furthermore, these countries lack the capacity to design and structure projects and develop a robust and concrete climate adaptation project pipeline. In addition, the region does not strategically allocate available capital, including budget spending, international climate finance, development assistance, and private finance. The main focus of international institutions must be to address these challenges quickly.
Options for international climate finance: grants, debt, equity
According to the World Bank, the total GDP of the PIC region is only about US$10 billion with an average per capita income of about US$4,000 and a gross investment rate of 20%. This corresponds to a maximum domestic capital mobilization of USD 2 billion per year. Meanwhile, the IMF estimates that the region needs additional capital of $1 billion a year to invest in climate-resilient infrastructure.
International development capital is the only way to finance climate adaptation projects in the region. Because any form of borrowed capital, even in the form of licensed borrowed capital on a permanent basis, is not economical. The PIC region is unable to repay debt and the region’s economic size is unlikely to increase rapidly to repay debt in the future.
Although the region’s main international sources of climate finance – the Green Climate Fund (GCF), the World Bank and the Asian Development Bank (ADB) – provide grants, these are only for project preparation and capacity building. These financiers mostly offer debt financing, albeit at a better interest rate than private financiers.
However, the region’s low ability to service its debt is holding it tight and procuring foreign capital. It is even more problematic when the debt is in foreign currency (e.g. USD) – the borrowers face huge amounts of foreign currency due to the expected and unexpected devaluation of the local currency, and the borrowers are exposed to currency risk.
Equity is not the best form of financing for climate adaptation projects. Unlike climate change mitigation projects, they do not generate clear cash flows as the beneficiaries are difficult to identify in order to monetize climate adaptation projects. Equity is therefore not an efficient source of capital for climate adaptation projects.
Strategic capital allocation is crucial
Unlike developed and developing countries, the PIC region does not have a strong domestic financial and banking sector and rarely attracted foreign capital for large investments. It is therefore futile to expect large-scale private financial flows to fill the financing gaps for their climate action.
Furthermore, the public good character of climate adaptation projects does not attract private financiers. Therefore, public funds, including government budget spending, international climate finance and other development assistance, must be spent wisely.
The crux is strategically allocating available capital and balancing project needs with public finance responsibilities. One of the most efficient ways is to carve out climate finance as a separate portfolio and decide where and how the capital will be used in different climate adaptation projects.
In addition, the climate change departments of these countries can work closely with the Ministry of Finance to mainstream climate adaptation into national development plans and sectoral policies, and to bring climate change perspectives into economic decision-making. Countries may also need to identify the projects that offer the dual benefits of climate migration and adaptation, drawing much attention from global climate financiers.
For example, nature-based carbon sequestration through marine conservation, forestry, and wilderness (wetlands, grasslands) sequesters carbon, provides natural protective shields, and protects human life and property during extreme weather events. Global impact investors will find these projects attractive as they help the region become climate resilient and create a global public good that benefits everyone, including the donor country.
Keep it up
International institutions must help Pacific Island nations strengthen governance and financial structures for greater transparency and accountability, which can help PICs access global public capital. In addition, governments in the region must strategically allocate climate finance, prioritize climate action in decision-making, integrate adaptation projects into national climate action plans, and identify appropriate projects that provide dual mitigation and adaptation benefits.
The international institutions can also help countries identify and design projects to develop pipeline projects for funding. There is an urgent need to develop institutional and local capacities to meet the demands of climate change-related economic activities in the region. But if addressed, the region will be able to finally make progress in addressing the profound adaptation challenges it faces due to climate change.
Labanya Prakash Jena is the Commonwealth’s Regional Climate Finance Advisor for the Indo-Pacific region.
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© Inter Press Service (2022) — All rights reservedOriginal source: Inter Press Service
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