Why is Pakistan struggling to secure climate finance? 

There is a loud pitch by government quarters and development partners regarding Pakistan’s potential for harnessing climate finance — support provided by developed countries and international institutions to help mitigate and adapt to the impacts of climate change. After the devastating 2022 floods, the Ministry of Climate Change (MoCC) made a case regarding how climate finance could support initiatives which help cope with loss and damage, reduce greenhouse gas emissions, transform the energy system, and restore and protect natural capital. The ministry expects various forms of finance to materialize including grants, loans, equity investments, guarantees, and technical assistance by foreign partners. The potential of public private partnerships is also often highlighted. 

With extensive help from researchers at Sustainable Development Policy Institute (SDPI) we answer three important questions with the help of a recent survey. First, are the institutional arrangements to raise climate finance adequate? The answer is negative. Our respondents, which include technical experts inform how climate is still not prioritized in economic policy at the federal and provincial levels. Lack of policy coherence implies that initiatives at the Ministry of Energy are not necessarily in line with the MoCC. The line ministries have only weakly understood or subscribed to the Post Disaster Needs Assessment carried out by the Planning Commission. Experts also inform us that data at the local level, much needed for formulation of climate finance schemes is either missing or is not updated on a regular basis. 

Given the fiscal crunch, the public sector is finding it increasingly difficult to fund climate action. The private sector has high stakes in climate space but remains unable to provide or attract funding due to inadequate incentives and lack of trust on (often evolving) policy and regulatory environment. The domestic capital markets are inclined toward green bonds, however recommendations of the Green Financing Task Force should be implemented on expedient basis to promote wide ranging green finance instruments.

The country still lacks a robust taxonomy for carbon crediting that meets international criteria.

- Dr. Vaqar Ahmed

We also ask the respondents, what could be the key barriers due to which Pakistan is unable to earn foreign exchange through carbon credits, despite investing in reforestation, green covers, solar, and wind power? It was revealed that the country still lacks a robust taxonomy for carbon crediting that meets the international criteria. Taxonomy for carbon credits is essential to ensure that the credits represent genuine emissions reductions or removals. Usually this is carefully studied by investors, private sector firms, and governments looking to meet their climate targets.

There is a need to put in place Emissions Trading Scheme (PK ETS) and Certified Emission Reduction (CER) units. The difficulties in preparing competitive proposals for Green Climate Fund (GCF) and similar windows need to be addressed. The availability of sufficient expertise that can develop business cases and understand requirements to develop, execute, and monitor these projects will be important to win the confidence of lenders and investors. Having a system of carbon taxation can also create a market for carbon credits by putting a price on emissions. Post 18th amendment roles and responsibilities in the climate space also require clarity. While carbon stocks are owned by the provinces, the ownership is contingent on other factors. 

We asked stakeholders regarding measures which could be mobilized even under the current milieu of fiscal and political uncertainty. We were informed that the central bank has a key role to play in improving overall ecosystem for climate finance. For example, even if a project offers a higher rate of return, funding environmentally harmful projects should be discouraged by formal finance institutions. This should then vacate some resources which could be diverted toward climate action. Domestic issuance of green bonds by both public and private sector could be encouraged. Investment in green technologies needs longer term policy certainty.

Provincial governments can leverage public-private partnerships to mobilize private investment in climate-friendly projects. This will involve a framework provided by the government for risk-sharing and time-bound incentives (with a sunset clause). The credibility of data and reporting systems that provide information on the climate impacts and actions will go a long way in building trust with international partners and increase the likelihood of receiving climate finance.

As most provinces are implementing their own climate policies, registering projects under carbon credit programs should remain a priority. These projects are already in the pipeline and include renewable energy, sustainable agriculture, energy efficiency, afforestation and reforestation, and waste management initiatives. The registration of projects requires capabilities which provincial climate change and environment departments must bring to the table. Potential projects must prove eligibility criteria, including additionality, measurable emissions reductions, and sustainable development advantages.

- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed