Why Innovative Financing Mechanisms are Key for Success of COP29

It is becoming increasingly clear that the efforts of countries to mitigate or adapt to climate change need revision. The lack of political will, high technology costs, limited international cooperation and inadequate mobilisation of private financing, hamper the progress of climate action. Since public funds are limited and need to be directed primarily towards essential public services, it is crucial to use them strategically to attract private capital for climate actions. Here, innovative financing mechanisms, such as the ones outlined below, can play a game-changing role. 

Energy Saving Insurance

Energy efficiency is a potent step to reduce consumption, which would drastically lower emissions. However, large gaps in funding deter companies, particularly Small and Medium-sized Enterprises (SMEs), from investing in energy-efficient plants and equipment, despite the financial benefits in the long term. A major reason for the reluctance of lenders to bankroll such projects is their lack of familiarity with the latest energy-efficient technologies. The need, therefore, is to build the capacity of lenders to assess the financial benefits of capital-intensive, energy-efficient technologies and gain confidence in the ability of SMEs to pay back the debt. 

Energy savings insurance helps overcome investment barriers by providing compensation if the actual energy savings do not meet projected levels. It ensures financial benefits from energy savings. Companies selling energy-efficient machines and equipment pay a premium to insurance companies to guarantee the performance of these products. Since insurance companies may be wary of relying on equipment manufacturers for premiums payments, governments can step in to provide a payment guarantee in case of default. Such backing will encourage insurers to offer coverage and SMEs and lenders to invest.

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Affordable Green Homes

Residential housing will remain, a major energy consumer. Several developing countries, like India, are initiating affordable housing schemes that provide concrete dwelling to people with limited resources or to those who cannot raise housing loans from banks. These houses can help cut GHG emissions and energy consumption substantially if their design incorporates rooftop solar and energy-efficient appliances. However, high upfront capital requirements, uncertainty about the financial benefits of green housing, and lack of affordable debt inhibit green housing in the affordable segment, a challenge that governments can meet by using incentives tactically to make affordable housing bankable for private financers.  

Affordable housing is often considered sub-prime making it unattractive to private financiers, who either charge high interest rates for such loans or do not entertain them at all. A combination of grants and catalytic investment by public financers can turn this tide in favour of green housing. Grants (e.g., Pradhan Mantri Awas Yojana in India) for affordable green homes can reduce the project costs and motivate people to build energy-efficient houses. Additionally, public financers can offer high-risk, lower-interest loans that can help reduce lending costs and attract borrowers. Public capital, sourced from multilateral development banks (e.g., World Bank) and other international climate finance institutions (e.g., Green Development Fund), can also be structured as subordinate private capital, providing a safety cushion that encourages private financiers to lend to this sub-prime category.  

Restoration of Mangroves

Mangrove conservation and restoration along the coastal belts can protect assets like buildings and manufacturing plants from flooding, yielding both climate adaptation and mitigation dividends. However, local governments in developing countries often like the capital needed for such projects. To address this, local governments can sew up contracts with insurance companies and secure regular payments based on verified mangrove conservation or restoration efforts. These payments could be linked to site-specific calculations of the flood reduction benefits provided by the mangroves. As effective mangrove restoration reduces flood risk, insurance claims are likely to be lower which can increase profitability for insurance companies. Local government can enhance support for these initiative by selling blue carbon credits derived from wetlands and mangrove restoration, generating additional revenue and reinforcing the value of ecosystem-based climate resilience. This will be an additional revenue source for local governments to cover conservation and restoration costs.

Historically, international development and climate finance have been conservative, which does not help mobilise the required volume of private capital. In any financial innovation, public financers need to be catalytic and take adequate risks to attract private financing risks. Public finance can mitigate real and perceived risks, which attract risk-averse private investors. Sometimes, these risks are transitory, and public finance may not be required once they dissipate. 

(Labanya P Jena is a Sustainable Finance Specialist at Institute for Energy Economics and Financial Analysis. Views expressed are personal)