02 Dec How can climate finance be scaled to meet the necessary support for developing countries?
Money has been at the core of climate discussions for many years. Over a decade ago, developed nations promised to raise $100 billion annually by 2020 to support developing countries in tackling the climate challenge. While the target hasn’t been reached, measures created in the Paris Agreement have established a new goal of 2025. The current climate finance plans are not where they need to be. To eliminate fossil fuels and protect people from accelerated climate-related impacts, developing countries require trillions of financial support.
Developed nations face mounting pressure to invest more, but this rise in finance requires a significant leap in commitment. Countries like the US want to depend more on the private sector to support this global transition. Other countries are urging a complete rethink of the global financial systems to enable funds to be directed easily toward climate action.
Carbon Brief recently explored the options available to increase climate finance and ensure the flow of money remains consistent with global climate goals.
Climate finance is typically considered an element of existing aid programmes. Only Norway and Sweeden provide climate finance that exceeds the broad aid target of 0.7% of gross national income. Developing countries also highlight the need for grant-based finance, rather than additional loans for countries already facing debt pressure. At present, only about a quarter is provided as grants, with Japan and France providing nearly all climate finance as loans.
How much climate finance do we need?
For years the World Bank has discussed the necessity of transforming billions to trillions agenda. As the issue of climate finance becomes more severe, there is mounting pressure to make this possible. For the moment, developed countries have failed to achieve the $100 billion target, with the OECD claiming over $83 billion in 2020.
Preceding the COP27 climate summit, representatives are focusing on a new collective quantified goal, which will come into play from 2025 and follow a target higher than $100 billion and take into account the needs and priorities of developing nations.
The recent climate summit focused on loss and damage finance for the first time. Paying for low-carbon energy and climate-resilient infrastructure will require significant sums of money. Some of this money will come from developing countries and the private sector, but there is also a push for developed nations to manage a significant part of the costs via climate finance.
The latest report from the Intergovernmental Panel on Climate Change (IPCC) concludes that climate investment in developing countries must rise by 4 to 8 times by 2030 to achieve the warning limits stated in the Paris Agreement. This rise would require an annual investment of around $2-3 trillion.
The International Energy Agency’s (IES) recent World Energy Outlook (WEO) report concludes that to meet the 1.5C scenario, clean energy investment must triple by 2030, reaching $42 trillion, with approximately $1.8 trillion of this in emerging and developing nations. The UN estimates that climate mitigation in developing countries will cost between $160 and $340 billion annually by 2030.
These figures may sound quite overwhelming, but the IEA gives an example which estimates that advanced economies have allocated over $500 billion to protect people from the impacts of the energy crisis. The EU committed over $750 billion towards recovering from the pandemic.
Increasing private investment
Climate finance involves businesses in developed countries investing in climate-related projects, like solar and wind farms. Wealthy countries and multilateral development banks can support private groups to invest in these projects by allocating grants and low-interest loans to secure investments and drive projects forward. Considering the significant money required, there is a general agreement that private finance has a considerable part in scaling up climate finance worldwide.
US climate representative John Kerry has repeatedly stated the importance of the private sector, explaining that no government can provide enough money to solve the climate crisis. Private finance should not, however, be considered a replacement for public funds.
Pretty Bhandari, a senior advisor at the World Resources Institute, explained to Carbon Brief that there are concerns among developing countries that there is an increased emphasis on the role of the private sector. Private climate finance often favours investment in wealthier countries that are considered more stable over other low-income nations that are typically the most in need of support. The latter often have higher risk premiums attached to borrowing and investing. The WEO report from the IEA explains that the higher capital costs in emerging countries reflect the real and potential risks. Concerns around investment can impact funding towards mitigation rather than adaptation. While clean energy projects can yield good profits, adaptation measures don’t necessarily provide clear financial gains. The Climate Policy Initiative claims that 98% of adaptation finance in 2019 and 2020 came from the public sector.
Managing the debt challenge
Many countries that require finance also face significant debts, which makes funding climate projects very challenging. According to the World Bank, nearly 60% of the world’s poorest nations are in debt or at high risk of debt. Other studies indicate that low-income countries spend five times more on debt than climate adaptation and small-island developing nations spend 18 times more managing debts than climate finance.
Demands to remove debts have increased since the floods in Pakistan this year. The UN Development Programme argued for relief on the billions of foreign debt in Pakistan so the country could focus its efforts on managing the impacts of the recent climate-related disaster.
The majority of climate finance is in the form of loans, and this only adds to the challenge of rising debt. A grant-focused finance approach could help alleviate these problems. A recent proposal is that the post-2025 climate finance goal should include a specific goal for grants.
Debt-for-climate measures have been discussed as a way to address the debt crisis and increase climate investment. This concept involves the removal of debt by the creditor, with the money used specifically to fund climate-focused projects. The idea isn’t new but has only developed on a limited basis. There has been renewed interest in recent months, with hopes that these measures could support and scale climate finance worldwide.
No Comments