Recent developments in climate finance: Implications for Pakistan

Working paper Energy and Sustainable Growth

The Government of Pakistan (GoP) has ambitious plans for reducing 2030 greenhouse gas emissions to 50% of baseline projected levels. These plans anticipate USD 151 billion of investment just for energy sector mitigation projects by 2040. In the GoP’s view, any 50% reduction below baseline projected emissions should be financed 15% from domestic sources and 35% from international sources. International financing should be mostly on a concessional basis.

Despite Pakistan’s relatively high emissions and relatively low GDP per capita, accessing concessional international climate finance (CF) will require meeting stringent qualifying criteria. Globally, the volume of concessionary finance is modest. Of the total CF of USD 632 billion in 2019-20, USD 65 billion was concessionary finance by multinationals to East Asian economies and only USD 20 billion was grants to the poorest countries. The Ukraine war clouds prospects for substantial increase in overall volume of funds.

Of about USD 325 billion in recent worldwide annual funding for renewable energy (RE), the great majority was private equity and market-rate debt. With decreases in per-KWH costs to within the range for fossil fuel alternatives, RE is now expected to cover its costs and provide an adequate return on investment (ROI). By contrast, only 13% of recent CF came in the form of concessional debt or grant financing – focused on more challenging geographies (e.g., sub-Saharan Africa) and sectors (e.g., agriculture, forestry, or other land-use projects).

This suggests developing a strategy to target private external CF both for RE and for other climate change investments. Concessional CF may well be limited to non-remunerative climate mitigation projects (e.g., agricultural, or electricity transmission system upgrades to accommodate Variable Renewable Energy (VRE)), climate adaptation projects, or components (e.g., safety nets for laid-off coal sector or fuel sector workers) of otherwise remunerative mitigation projects that cannot
be expected to earn a profit.