Bhutan’s carbon neutrality comes at a price: Is climate finance enough?
Yangyel Lhaden
Amid the global push for clean energy and phasing out of fossil fuels, Bhutan has been investing in renewables like hydropower and solar, despite being burdened by significant debt and limited financial support. The recent decisions at the 29th Conference of Parties (COP29) have raised concerns that new climate finance commitments may exacerbate financial pressures for countries like Bhutan.
One of the most anticipated outcomes of COP29 was the establishment of a new climate finance target, replacing the unmet USD 100 billion annual pledge that expired this year. The new promise—USD 300 billion annually starting in 2035—is far below the USD 1.3 trillion that developing nations, including Bhutan, had sought to fund climate mitigation, adaptation, and loss and damage.
A contentious issue under the New Collective Quantified Goal (NCQG) is what consist of “climate finance”. The COP29 decision text proposes diverse funding sources, including bilateral and multilateral channels, public and private investments, and contributions from philanthropic organizations and multilateral development banks (MDBs).
It also suggests that climate finance could include grants, concessional loans, and other financial instruments, while urging developed countries to honour their commitments.
Sonam Tashi, Director of the Department of Climate Change, said that new climate finance should be additional, non-debt, and primarily from public finance. “The funds borrowed from bilateral and MDBs cannot be considered climate finance, as they must be repaid, further burdening the country’s already significant debt.
He said that “new climate finance” was simply repackaging existing funds as climate finance. “If MDB and bilateral funding are included as climate finance, developing countries, including Bhutan, would have already met the climate finance goal.”
Hydropower and solar projects are Bhutan’s largest renewable energy initiatives, funded by MDBs and bilateral fundings.
The Chukha and Tala Hydropower Plants were financed by the Government of India, with 60 percent in grants and 40 percent in loans. The Kurichhu project received 60 percent grants and 40 percent loans, while the Punatsangchhu-I hydropower project was funded with 40 percent grants and 60 percent loans. The Punatsangchhu-II project is financed by 70 percent loans and 30 percent grants, with an annual interest rate of 10 percent on loan repayments.The first major solar plant in Sephu, Wangdue is funded by the Asian Development Bank, with a grant of USD 10 million and a loan of USD 8.26 million, while the government has invested USD 0.99 million in the project.
Sonam Tashi said that Bhutan is already heavily indebted due to hydropower projects, with high interest rates and renewable project loans from MDBs in foreign currency, creating a significant financial burden since the country earns in ngultrum but repays in dollars. “Even when the loan repayment interest is only one percent, foreign currency exchange rate fluctuations defeat it.”
He said that the existing renewable projects are debt-driven, and repackaging existing official development assistance as part of climate finance is not acceptable. “If we agree to include funding from bilateral and MDB sources as climate finance, we have already achieved the climate finance goal without a single dollar contribution from developed countries.”
The ambiguity surrounding climate finance definitions and access mechanisms further complicates Bhutan’s efforts to secure funding. “Why can’t global funds fast-track project approvals? Waiting years to finalise a project delays real progress,” Sonam Tashi said.
Money from climate finance in COPs are mainly channeled through mechanisms like the Green Climate Fund (GCF) and the Adaptation Fund. The GCF, in partnership with accredited organisations, supports climate projects in developing countries. Additionally, funds may be provided bilaterally, with wealthier countries offering direct assistance for specific initiatives.
Sonam Tashi said that the Paris Agreement requires increasing ambition with each Nationally Determined Contribution (NDC), and with the third NDC due in February, Bhutan plans to continue its commitment to remaining carbon neutral.
“While Bhutan already invests heavily in renewable energy, securing funding remains a challenge and as mentioned in Bhutan’s NDC, climate projects can only move forward if sufficient funding is available.”
This is also why many developing countries advocate for climate finance to come largely from public finance, rather than private funding to secure funding which is otherwise difficult.
Sonam Tashi said that while private financing was a good mechanism, it would be difficult for Bhutan to attract investors for climate projects, given the country’s size and population, as investors typically sought profit and scalability.
Bhutan’s recent graduation from Least Developed Country status has also made negotiations more challenging. Now part of the broader G77 and China bloc, Bhutan faces increased competition to voice its vulnerabilities and secure favorable terms.
“This is our first COP as a developing country,” Sonam Tashi said. “Previously, we negotiated as part of the LDC group, which amplified our concerns. Now, we must align with like-minded nations to advocate for fair climate finance modalities.”