BAKU: To move away from fossil fuels, the G20 countries must push for new taxes from carbon emitters and overcome the foreign exchange (FX) barrier to achieve the ambitious climate finance goals.
This was suggested by Avinash Persaud, special advisor on climate change to the President of the Inter-American Development Bank (IDB) and a key figure in the Loss and Damage Fund negotiations. Persaud is also one of world’s prominent economists and the architect of FX Liquidity Facility, a first-of-its-kind mooted in Brazil earlier this year.
In an interview with The New Indian Express in Baku ahead of the G20 summit scheduled to take place in Rio from Monday, Persaud welcomed the G20 ministerial statement, with active participation from India, endorsing innovative mechanisms to improve the flow of climate finance from developed to developing nations.
Persaud said it’s high time for the G20 to unlock foreign investments in renewable energy projects in countries like India.
“While local financing has played a substantial role—96% of India’s renewable energy initiatives are funded domestically—this is insufficient for the massive scale of investment required. We need foreign money, but the primary barrier is foreign exchange risk,” he said.
Foreign investors face significant challenges due to the cost of hedging foreign exchange risks, particularly the rupee’s fluctuations. Hedging costs can exceed 7-8 percentage points annually, significantly diminishing investment returns. “An investment promising a 10% return effectively yields only 3% after accounting for foreign exchange costs, making it unattractive for investors,” Persaud explained.
To address this, the IDB has introduced an FX Liquidity Facility, piloted in Brazil and endorsed by the G20. The facility aims to mitigate foreign exchange risks by enabling projects to adjust their prices with local inflation over time.
“Exchange rate risk is essentially inflation risk in the long term. By aligning project revenues with inflation and providing US dollars when local currencies fall, we eliminate a substantial part of the risk,” Persaud told this newspaper.
Launched in March with USD 5 billion in support from the IDB, the Brazilian pilot has attracted significant interest from local and foreign investors. The G20 is encouraging other nations, including India, to adopt similar models to attract foreign investments into renewable energy.
“India’s local investors are already active, but it’s not enough. The answer is to bring in cheaper capital from places where is capital is abundant, which will also bring down the cost of capital,” said Persaud. He suggested replicating the Brazilian model in India to address this issue.
On loss and damage fund, which is already established, Persaud said fund needs dedicated revenue streams, proposing mechanisms such as levies on emissions from shipping.
“A levy of USD 80 per tonne of carbon emissions from ships could generate over USD 50 billion annually. This would cover half of the USD 100 billion needed yearly for loss and damage in developing countries,” he stated. Currently, only USD 700 million is available for the fund.
To ensure efficient use of resources, Persaud suggested a tiered funding approach: Grants for loss and damage, given their non-revenue-generating nature. Multilateral Development Banks funding for adaptation projects like climate-resilient infrastructure and private sector funding for mitigation efforts such as renewable energy projects.
A global task force on solidarity levies, involving nations like France, Germany, Colombia, Kenya, and Barbados, is exploring new taxation mechanisms during the on going COP29 negotiations, he revealed and said these could include levies on oil, gas, and coal transporters to compensate for atmospheric pollution.
On the highly debated New Collective Quantifiable Goal (NCQG), which saw no noticeable progress in the first half of COP29 negotiations, Persaud said, “There's now potentially two numbers. One number that is based on needs. So internationally, developing countries need about USD 1.3 trillion. I think that needs to be referenced somewhere. Some are referring to this as the outer number, but that number will have to come from multiple sources. Unless we make a real commitment for a core part of that number. The bit that is government support, grants, public finance, multilateral development banks finance then it's not going to make that 1.3 trillion a credible goal. So we need to triple the old collective quantifiable goal of USD 100 billion to at least USD 300 billion.”