“The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” - Albert Einstein.
Pakistan ranks as the eighth most affected country by climate change, according to the Global Climate Risk Index 2021. Notably, this ranking predates the catastrophic 2022 monsoon floods, which inflicted an estimated $30 billion in damages and left the country requiring over $16 billion for rehabilitation alone.
By 2023, Pakistan had secured $2.456 billion under three major multilateral climate finance programs—namely the Global Environment Facility (GEF), the Green Climate Fund (GCF), and the Asian Development Bank’s Climate Change Financing. The stark disparity between Pakistan’s financial needs and the climate funds provided highlights the insufficient accountability of the Global North for its disproportionate contribution to global carbon emissions.
As this piece is being published, global leaders are in Azerbaijan for COP29, where a central agenda will be securing stronger commitments from developed nations to help developing countries tackle climate change. At COP15 in Copenhagen, developed nations had pledged $100 billion annually in climate finance to support these efforts starting in 2020. Yet, according to the Independent High-Level Expert Group on Climate Finance (IHLEG), this figure falls far short of the $1 trillion per year needed by 2030—a demand echoed by both India and the Arab Group.
This year’s COP will also debate whether countries like China and Middle Eastern nations should join the list of developed countries, a term defined based on OECD membership in 1992, to shoulder the burden of climate finance. Equally important, however, is reevaluating the structure of climate finance itself.
Most climate finance today takes the form of loans, including some concessional options. OECD data shows that between 2016 and 2020, loans accounted for 72% of international climate finance, while grants represented just 25%, with the remainder being equity investments.
For many developing countries, rising debt from such loans means redirecting scarce resources to debt payments rather than essential services. Currently, around 3.3 billion people—or 40% of the global population—live in countries that spend more on debt interest than on health or education, preventing them from achieving the Sustainable Development Goals.
In the case of Pakistan, the debt-to-GDP ratio is over 70% with over 56% of its government revenue consumed by interest payments. This financial strain has resulted in a combination of higher taxes, increased utility prices and a steep currency devaluation, further deepening the country’s economic crisis. Developing nations are now advocating for more grants and innovative solutions like debt-fornature swaps.
Despite some successful examples, such as transactions in Belize, Ecuador and Gabon these swaps have so far been small-scale and lack scalability. Further, the amount of investments required for Climate Finance cannot be done through grants or debt swaps alone without compromising the integrity of the global financial system.
Two potential solutions stand out.
First, Development Finance Institutions (DFIs) could employ blended finance to attract private capital, including foreign investment. Unlike a traditional loan, which yields only its face value, each dollar in blended finance can create 3-5 times the impact by making projects more appealing for private investors. The first-loss guarantee, a common blended finance tool, typically attracts local investors, who face lower sovereign risk. However, DFIs could assume some sovereign risks, as they already do with government loans, enabling foreign investors to participate more freely in these projects.
Another promising approach involves rethinking the Clean Development Mechanism (CDM) and Voluntary Carbon Markets (VCM). Currently, these markets allow sovereign and private entities to buy and sell carbon credits, which often lack quality and offer limited benefits to either party.
By incentivising firms and countries to invest directly in clean energy projects in developing nations instead of purchasing credits we could create more substantial impacts. Such investments would not only reduce the carbon footprint of the investors but also provide a reasonable return, contributing to long-term value rather than only short-term compliance.
Beyond prevalent renewable energy solutions, clean energy technologies like carbon capture, utilization, and storage (CCUS) show considerable market potential in developing countries where coal and gas are dominant for power generation.
While CCUS won’t eliminate emissions entirely, it offers a high reduction in carbon emissions per dollar spent, making it a cost-effective solution for these economies. Upcoming technology like membrane filtering and cryogenic freezing has the potential to make CCUS both cost-effective and more efficient.
In regions where transitioning fully to renewables is capital-intensive and requires substantial infrastructure changes, retrofitting existing power plants with carbon capture systems presents a more feasible path to emission reductions. Developing countries may also face fewer regulatory obstacles, such as land rights disputes and community opposition (NIMBYism), which often hinder large-scale projects in the U.S.
As COP29 draws near, it’s clear that the conversation must move beyond pledges to create practical, scalable financing solutions. A genuine commitment to sustainable development means rethinking the current debt-heavy approach and unlocking the full potential of blended finance and direct investment. Only with these strategies can we hope to achieve meaningful progress in the global fight against climate change.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is a former banker and consultant currently pursuing graduate studies at the University of Chicago
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