COP28 and the Need for Climate Action for Pakistan

Article by Zafar Masud and Sayem Ali. Published in Business Recorder on December 11, 2023

While the world leaders meet on the sidelines of the COP 28 summit to agree on a climate action plan, developing countries like Pakistan continue to bear the brunt of the extreme climate events including floods, melting glaciers and changes to the crop cycles.

Zafar Masud article on COP28 and the need for climate action for Pakistan

UN Secretary-General Antonio Guterres has warned that the world is falling behind on climate action and we are heading towards a 3°C global temperature rise this century with catastrophic consequences. Climate Change has become the defining issue of our time.

From shifting weather patterns that threaten food production, to rising sea levels that increase the risk of catastrophic flooding, the impacts of climate change are global in scope and unprecedented in scale.

UNEP Adaptation Gap Report 2023 states that actions taken to date are woefully inadequate to meet the goals of the Paris Agreement and global average temperatures are already exceeding 1.1°C above pre-industrial levels. The current plans of the members reflected in their National Determined Contributions (NDCs) are putting us on a path towards 2.4°C–2.6°C by the end of the century.

A report by the University of Delaware estimates that climate change led to a loss of 6.3% of GDP in global economic output in 2022. This reflects both direct consequences of climate change such as disruptions to agriculture and manufacturing, as well as spillover impact on global trade and investments.

The loss and damage of climate change has been disproportionately borne by the least developed countries, with an estimated GDP loss of 8.3%. Low and middle-income countries, like Pakistan, remain on the receiving end, have experienced a combined loss in GDP totaling US$21 trillion in the last 30 years.

The key concern for developing countries is to increase investments in Climate adaptation and mitigation projects while ensuring public debt sustainability. Accelerating climate finance from developed to developing countries is a central tenet of the Paris Agreement but flows remain insufficient.

Developed countries committed to mobilizing US$100 billion a year in climate finance from 2020 to 2025. However, the funding mobilized to date has been inadequate for both the mitigation and adaptation needs of the developing countries.

IMF 2023 report titled ‘Is the Paris Agreement Working? A Stocktake of Global Climate Mitigation’ says that there is a large gap between current and needed climate mitigation finance and investment.

To achieve net-zero by 2050, climate mitigation investment (public and private) would need to rise from US$0.9 trillion in 2020 to US$5 trillion annually by 2030. About 60% of these investment needs are in the energy sector. Of the total, US$2 trillion is needed in developing countries (US$1.2 trillion excluding China), a fivefold increase from US$370 billion in 2020.

The UNEP Adaptation Gap Report 2023 estimates the adaptation costs and needs for developing countries are significantly higher than previous estimates, with a plausible central range of US$215 billion to US$387 billion per year this decade.

The report estimates that the modeled costs of adaptation in developing countries at US$215 billion per year this decade and are projected to rise significantly by 2050. The cost estimates rise to US$387 billion per year based on the extrapolation of the Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) of developing countries.

However, international public climate finance flows to developing countries decreased to US$21.3 billion in 2021, down 15% from US$ 25.2 billion between 2018 and 2020.

The adaptation finance gap is likely 10–18 times as great as current international adaptation finance flows – at least 50% higher than previous range estimates. International public adaptation finance over the past five years has also suffered from a low disbursement ratio, at 66%, as compared to the overall development finance disbursement ratio of 98%. This indicates that there are barriers specific to adaptation, such as low grant-to-loan ratios, etc.

The high levels of public debt service and insufficient fiscal and monetary space have constrained the climate crisis responses of most low and middle-income economies.

IMF GFS Report October 2023 warns that risks to global growth remain skewed to the downside as inflation remains elevated and interest rates are set to stay higher for longer. This poses significant challenges for developing countries already facing debt distress and struggling to raise financing for climate mitigation and adaptation investments.

Bridging the climate finance gap requires more international, domestic, and private finance, ideally a reform of the global financial architecture and better international cooperation. Significant reforms are needed in the global financial architecture, as proposed under the Bridgetown Initiative, including fast-tracking US$100 billion in SDRs to programmes that support climate resilience and subsidize lending to low-income countries.

The initiative also calls for the IMF to immediately suspend surcharges imposed on heavily indebted borrowing countries, beyond the low-income stipulation, and restore the two emergency financial support instruments, the Rapid Credit Facility (RCF) and Rapid Financing Instruments, link it was done at the time of Covid-19.

Bridgetown Initiative also calls on G20 countries to redesign the Common Framework for restructuring the debt of poor countries in default, notably by speeding up debt relief talks and allowing middle-income countries to access it. The initiative also calls to drive private sector investment in low-carbon economy projects through MDBs putting up US$100 billion through risk guarantee facilities.

The IMF also recommends action on carbon pricing. Carbon taxes and emissions trading systems (ETSs) are in operation in 47 countries, covering 25 percent of global GHGs. Measures equivalent to a global carbon price of at least $ 85 would be needed to achieve 2°C (higher for 1.5°C). Currently, the carbon pricing global average is only US$5 per ton.

Pakistan has updated the NDC in 2021 based on the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC). The NDC represents a national consensus to accelerate the transition towards a climate-resilient economy.

NDC 2021 aims to cut emissions by 50% by 2030, with 15% from the country’s own resources and 35% subject to the provision of international grant finance. To reach the target, Pakistan aims to shift to 60% renewable energy, and 30% electric vehicles by 2030 and completely ban imported coal.

After a period of adhering to the fiscal responsibility legislation, Pakistan’s debt distress has mounted and it is ranked as one of the most vulnerable countries to climate events, even though its contribution to GHG emissions is only 0.9%, one of the lowest per capita.

WB estimates that Pakistan could face up to 1% of GDP losses every year due to risks emanating from climate change. Besides meeting climate requirements Pakistan needs to invest almost 10-12% of GDP annually to meet SDG and climate financing requirements.

Pakistan has developed an elaborate architecture to address our challenges. Our regulators are driving holistic action through new Environmental and Social Risk Management (ESRM) introduced by the central bank and ESG guidelines offered by SECP. These regulations set the implementation framework to encourage companies into sustainable and green investments.

Pakistan is also in the process of developing guidelines for launching the Voluntary Carbon Market (VCM) exchange. This will be a critical component in attracting investment from international companies, allowing them to purchase carbon credits to compensate for their GHG emissions.

We must identify (and more so structure through a viability gap fund mechanism) bankable sustainable opportunities, prioritize climate investments through blended finance, and develop the disaster risk financing eco-system.

High political and credit risk discourages private sector investment even in bankable climate opportunities. The key instruments available to ‘de-risk’ Pakistan include concessional financing from multilateral and bilateral agencies providing credit guarantees to the commercial banks for climate investments.

We must develop a vibrant domestic green finance market, incentivizing companies to make climate mitigation and adaption investments through the domestic financial markets. The Bank of Punjab (BOP) is leading this initiative and has been awarded the mandate for issuance of Pakistan’s first local currency Green Sukuk being issued by Agha Steel Industries Limited (ASIL).

BOP is also actively working with an international advisory firm to designing a Debt for Nature (Sustainability) Swap programme, which is the most promising opportunity to raise much needed foreign currency financing for the country. BOP will continue to play its due role in meeting Pakistan’s climate compliance needs.

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