Alternative financing needed to shield vulnerable nations from climate debt

As COP29 kicks off in Baku, Azerbaijan, the world's attention turns to the pressing issue of climate finance. Vulnerable countries, particularly those at high risk of falling into a climate debt trap, are urging for alternative funding mechanisms like grants. 

In an interview with The Business Standard, M Zakir Hossain Khan, an international climate finance analyst and founder and chief executive of Change Initiative, discusses funding, debt trap, climate politics, and existing gaps. 

Why is this COP important for developing, climate-vulnerable, and developed countries? 

Zakir Hossain: The Conference of Parties (COP) started journey in 1994 under the United Nations Framework Convention on Climate Change (UNFCCC). This annual gathering serves as a crucial platform for state parties and global stakeholders to address the escalating climate crisis and its disproportionate impact on vulnerable nations.

Countries like Bangladesh, which contribute minimally to global emissions [a mere 0.56%], bear the brunt of climate change's devastating effects. For developing and climate-vulnerable nations, COP is a lifeline, providing a space to advocate for climate finance, technology transfer, and capacity building to reduce emissions as well as building resilience. 

Vulnerable countries like Bangladesh bear disproportionate impacts while contributing minimally to global emissions (e.g., only 0.56% for Bangladesh). For developing and climate-Vulnerable countries COP deals with climate finance to help these nations adapt to climate change and renewable energy-based transitions, addressing the irreversible losses and damages, technology transfer and capacity building to reduce emissions as well as building resilience. 

At COP, developing countries consistently urge developed nations to accelerate their emission reduction targets and fulfill their financial commitments under the principle of Common But Differentiated Responsibilities (CBDR). The developed countries need to support developing nations in their climate actions.

Bangladesh, as a vulnerable LDC, can play a leading role in mobilising global solidarity for a greener future. 

What should be the priority of the LDC group? 

Zakir Hossain: The LDC group should prioritise defining climate finance in a concrete, fair, and justifiable way, guided by the "polluter pays" principle. This includes renewing the Copenhagen Accord commitment to mobilise "new" and "additional" funds beyond Official Development Assistance (ODA), scaling up from $100 billion to at least $1 trillion per year starting in 2025. Financing should be time-bound, grant-based, and aligned with the specific needs of each country, including a commitment to double adaptation finance by 2025 and to operationalize and replenish the Loss and Damage Fund (LDF). Importantly, climate finance should prioritize grants over loans.

A 2024 study by Change Initiative revealed that the per capita annual climate debt burden for 20 vulnerable LDCs is approximately $1, with Bangladesh alone carrying an almost $13 billion climate debt burden that was non-existent in 2009.

Additionally, Bangladesh and the LDCs should advocate for full implementation of the "Common Framework for Debt Treatments Beyond the Debt Service Suspension Initiative" to address the financial obligations of vulnerable countries arising from loan-based climate financing through bilateral or multilateral channels. The LDC group should pursue alternative funding options, such as grants and an increased focus on adaptation funding.

To strengthen climate resilience and finance, the LDC group should consider implementing carbon pricing mechanisms like a carbon tax and financial transaction tax, while developing a comprehensive climate finance strategy. Improving negotiation capacity in international climate finance and reforming public financial management to attract philanthropic and private funding are also cruicial steps.

What is the common priority of South Asian countries?  

Zakir Hossain: Coastal cities and regions in South Asia, including Bangladesh and the Maldives, are highly vulnerable to coastal erosion and flooding caused by rising sea levels, which can result in population displacement and loss of livelihoods. Additionally, the increasing frequency and intensity of floods, particularly in riverine countries like India, Bangladesh, and Pakistan, pose a significant threat. South Asia, already a hot region, is also experiencing more frequent and intense heatwaves due to climate change, leading to health issues such as heatstroke, dehydration, and related complications.

Coastal areas, especially along Bangladesh and India's eastern coast, are also prone to cyclones, while water scarcity and drought are increasingly affecting agriculture, water supplies, and economic growth. Approximately 2 billion people across South Asia could face declining agricultural productivity, resulting in food shortages, price increases, and greater food insecurity. Health impacts are also escalating, as water-borne diseases like cholera and diarrhea are exacerbated, while heat-related stresses heighten risks of heatstroke and dehydration. Additionally, climate change is shifting the distribution of disease-carrying insects, increasing outbreaks of diseases like malaria and dengue.

To address these shared challenges, South Asian nations should focus on increasing access to adaptation finance, disaster risk reduction, and food security measures. They must advocate collectively for equitable climate finance allocations and mechanisms tailored to their specific vulnerabilities, such as flooding, sea-level rise, and impacts on agriculture.

Why is it important for Bangladesh? 

Zakir Hossain: Ranked 7th on the Long-Term Climate Risk Index despite contributing only 0.56% of global greenhouse gas emissions, Bangladesh urgently needs a transformation in climate funding. In light of these challenges, Bangladesh's National Adaptation Plan (NAP) outlines six strategic goals to address climate vulnerabilities:

1.    Ensuring protection from climate variability and natural disasters
2.    Developing climate-resilient agriculture to secure food, nutrition, and livelihoods
3.    Building climate-smart cities for sustainable urban environments and well-being
4.    Promoting nature-based solutions to conserve forestry, biodiversity, and community welfare
5.    Integrating climate adaptation into governance and planning, and
6.    Enhancing capacity building and innovation for transformative climate adaptation.

These goals support the nation's priorities under the Nationally Determined Contributions (NDCs).

Historically, Bangladesh has played a significant role in climate advocacy, especially for Least Developed Countries (LDCs), including in the establishment of the Loss and Damage Fund (LDF). However, Bangladesh still faces considerable challenges in addressing climate injustices on the global stage. COP29 provides a vital opportunity for Bangladesh to advocate for international support, address these injustices, and secure necessary funding to build climate resilience and advance development initiatives.

What should be Bangladesh's priority? 

Zakir Hossain: Bangladesh has identified twelve key priorities for the 2024 UN Climate Conference (COP29). These priorities include setting time-bound mitigation targets for major emitters and advocating for an additional $480 billion in annual climate finance by 2030, including increasing Official Development Assistance (ODA) to 1% of the Gross National Income (GNI) of OECD member countries. This must align with Article 9.3 of the UNFCCC and the Paris Agreement. Addressing climate debt through frameworks like debt-for-climate swaps and sustainability-linked bonds is also essential.

A critical priority is securing grant-based financing and climate-resilient debt clauses. Bangladesh aims to double adaptation finance through the Green Climate Fund by 2025, prioritize grant-based funding, and strengthen the role of multilateral development banks. Bangladesh and other LDCs seek regulation of the Common Framework for Debt Treatments (CFDT) to support countries with climate debt, and they advocate for a just energy transition. This includes urging developed nations to redirect fossil fuel subsidies toward mitigation finance, which would fund renewable energy projects and create green jobs.

Bangladesh also calls for reduced CFDT limitations to better support countries trapped in climate debt. Multilateral Development Banks (MDBs), such as the Asian Development Bank, should incorporate local currency financing and common country platforms, with Bangladesh prioritizing MDB operations and frameworks. Debt cancellation, where possible, could be promoted for climate action, with Bangladesh leading efforts in mechanisms like "debt-for-climate swaps" to convert debt into investments in mitigation and adaptation.

Further priorities include advocating for just transition frameworks for LDCs, enhancing disaster risk reduction initiatives, securing funding for loss and damage, and investing in climate-smart agriculture and urban resilience. Finally, Bangladesh emphasises the need for international cooperation on technology transfer and the replenishment of global climate funds to build a resilient future and address climate injustices.

What political decisions need more amplification? 

Zakir Hossain: To drive meaningful progress in global climate negotiations, certain political decisions need stronger emphasis. The LDCs should spotlight the deepening vulnerabilities of billions affected by climate impacts. Leaders must be guided by the needs and demands of impacted communities rather than the interests aligned with corporate agendas. Political leaders in developing countries should avoid becoming entangled in climate politics and work within a shared framework for collective action to address vulnerabilities and effectively pressure developed nations.

Setting time-bound mitigation targets for major emitters is crucial to tackling their disproportionate contributions to global greenhouse gas emissions. With 53 companies responsible for 80% of industrial emissions, holding these entities accountable through stringent deadlines can significantly reduce emissions and help meet Paris Agreement goals.

Advocating for a just transition in global energy markets is equally important to ensure that moving away from fossil fuels does not worsen inequalities. Strengthening international cooperation on technology transfer is essential to narrow the gap between developed and developing nations. Access to advanced, climate-friendly technologies can enable countries like Bangladesh to move toward sustainable development, enhance resilience, and reduce reliance on high-emission practices. Global mechanisms must guarantee that these technologies are affordable, accessible, and tailored to the unique needs of developing countries.

Where is the gap between negotiations and ambitions? 

Zakir Hossain: The gap between negotiations and ambitions at global climate forums like COP arises from a disconnect between commitments and concrete actions. Developed countries have consistently fallen short of their $100 billion annual climate finance commitment, a pledge made over 15 years ago, leaving developing nations struggling to adapt to and mitigate climate impacts. Much of the disbursed funds are in the form of loans, often with non-concessional terms, rather than grants, increasing the debt burden on vulnerable nations.

Moreover, progress on establishing equitable mechanisms to balance climate finance between mitigation and adaptation has been limited. The underrepresentation of adaptation and loss and damage in financial allocations leaves vulnerable countries, especially LDCs, exposed to climate risks without sufficient support. The absence of a universally accepted definition of climate finance further complicates negotiations, weakens accountability, and fuels mistrust between developed and developing nations. 

How far is the Loss and Damage Fund? What are the obstacles? 

Zakir Hossain: The Loss and Damage Fund (LDF), a landmark decision made at COP27, remains stalled between agreement and implementation. Key obstacles include disagreements over its governance structure, with ongoing debates on who will oversee the fund and how decisions will be made. Financing sources are also contentious; developing countries are calling for new and additional funding, while developed nations are hesitant to commit to mandatory contributions.

Distribution criteria present another critical barrier, with disputes over which countries qualify for assistance and what types of losses and damages are eligible for funding. The fund's reliance on loans rather than grants undermines its purpose of providing reparations for climate-induced losses. Additionally, inflated financial reporting by developed nations, which often includes repurposed funds, erodes trust and complicates negotiations. The lack of transparency and clarity further delays the fund's operationalisation, leaving vulnerable countries without the resources urgently needed to recover from climate impacts.

Ultimately, disagreements over governance, financing, distribution criteria, and reliance on loans instead of grants are preventing the fund's implementation and hindering effective support for those most affected by climate disasters.

What is the debt trap lying ahead?

Zakir Hossain: Vulnerable countries like Bangladesh risk falling into a climate debt trap due to heavy reliance on loan-based climate financing. This reliance intensifies fiscal pressures, diverting resources away from critical development initiatives and increasing debt-to-GDP ratios. In Least Developed Countries (LDCs), each person bears an annual climate debt of $0.85.

These climate loans are pushing developing countries further into debt. Currently, 3.3 billion people live in countries that spend more on interest payments than on education or healthcare. Without reforming the climate finance framework, LDCs will face increasing vulnerability to climate-induced debt, compromising their ability to build resilience and invest in essential services.

What is the gap between mitigation and adaptation funds, and how to solve it?

Zakir Hossain: Globally, only 25-30% of climate finance is allocated to adaptation, with the majority directed toward mitigation. This imbalance could be addressed by doubling adaptation finance by 2025, establishing a needs-based funding mechanism, and advocating for increased contributions from developed nations. Adaptation finance is especially critical for vulnerable countries.

To address this, policymakers should redirect fossil fuel subsidies toward mitigation finance to support renewable energy projects and create green jobs. Additionally, making adaptation finance 100% grant-based from 2025 would relieve vulnerable nations of debt burdens. Increasing adaptation funding through the Green Climate Fund could be supported by innovative channels such as Sustainability Bonds and Climate Resilient Debt Clauses. 

Additionally, redistributing IMF Special Drawing Rights (SDRs) through the Resilience and Sustainability Trust would further bolster adaptation resources for climate-vulnerable nations.