My Say: Time to fix broken climate finance promises

This article first appeared in Forum, The Edge Malaysia Weekly, on November 8, 2021 - November 14, 2021.
My Say: Time to fix broken climate finance promises
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The evidence suggests that current climate mitigation plans are seriously inadequate and will result in a catastrophic rise of 2.7°C in world temperature. An estimated US$1.6 trillion (RM6.6 trillion) to US$3.8 trillion is needed annually to avoid global warming exceeding 1.5°C.

Creative accounting

Rich countries have long broken their COP16 pledge at Copenhagen in 2009 to mobilise “US$100 billion per year by 2020 to address the needs of developing countries”. The pandemic has worsened the situation, reducing available finance. Poor countries — many already caught in debt traps — are struggling to cope.

While minuscule compared to the finance needed to adequately address climate change, it was considered a good start. The number includes both public and private finance, with sources unspecified as to whether they are public/private, grants/loans and so on.

Such ambiguity has enabled double-counting, poor transparency and creative accounting, noted the United Nations’ Independent Expert Group on Climate Finance. Thus, the rich countries’ Organisation for Economic Co-operation and Development (OECD) reported US$80 billion in climate finance for developing countries in 2019.

Fudging numbers

But OECD climate finance numbers include non-concessional commercial loans, “rolled-over” loans and private finance. Some donor governments count most development aid, even when not primarily for “climate action”.

Also, the dispute over which funds are to be considered “new and additional” has not been resolved since the adoption of the UN Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit in 1992.

Official development assistance redesignated as climate finance should be categorised as “reallocated”, rather than “additional” funding. Consequently, poor countries are losing aid for education, health and other public goods.

India has disputed the OECD claim of US$57 billion climate finance in 2013/14, suggesting a paltry US$2.2 billion instead! Other developing countries have also challenged such creative accounting and “greenwashing”.

Climate finance anarchy

Developing countries expected the promised US$100 billion yearly to be largely public grants disbursed via the then new UNFCCC Green Climate Fund. Oxfam estimates public climate financing at only US$19 billion to US$22.5 billion in 2017/18, with little effective coordination of public finance.

Developing countries believed their representatives would help decide disbursement, ensuring equity, efficacy and efficiency. But little is actually managed by developing countries themselves. Instead, climate finance is disbursed via many channels, including rich countries’ aid and export promotion agencies, private banks, equity funds and multilateral institutions’ loans and grants.

Several UN programmes also support climate action, including the UN Environment Programme, UN Development Programme and Global Environment Facility. But all are underfunded, requiring frequent replenishment. Uncertain financing and developing countries’ lack of meaningful involvement in disbursements make planning all the more difficult.

Financialisation has meant that climate funding increasingly involves private financial interests. Claims of private climate finance from rich to poor countries are much contested. Even the OECD estimate has not been rising steadily, instead fluctuating directionlessly from US$16.7 billion in 2014 to US$10.1 billion in 2016 and US$14.6 billion in 2018.

The actual role and impact of private finance are also much disputed. Unsurprisingly, private funding is unlikely to help countries most in need address policy priorities or compensate for damages beyond repair. Instead, “blended finance” often uses public finance to “de-risk” private investments.

Putting profits first

The poorest countries desperately need to rebuild resilience and adapt human environments and livelihoods. Adaptation funds are required to better cope with the new circumstances created by global warming. Needed “adaptation” — such as improving drainage, water catchment and infrastructure — is costly, but nonetheless desperately necessary.

But “donors” prefer publicisable “easy wins” from climate mitigation, especially as they have increasingly given loans rather than grants. Thus, although the Paris COP21 Agreement sought to balance mitigation with adaptation, most climate finance still seeks to cut greenhouse gas (GHG) emissions.

As climate adaptation is rarely lucrative, it is of less interest to private investors. Rather, private finance favours mitigation investments generating higher returns. Thus, only US$20 billion was for adaptation in 2019 — less than half the sum for mitigation. Unsurprisingly, the OECD report acknowledges only 3% of private climate finance has been for adaptation.

Chasing profits, most climate finance goes to middle-income countries, not the poorest or most vulnerable. Only US$5.9 billion — less than a fifth of total adaptation finance — has gone to the UN’s 46 least developed countries (LDCs) from 2014 to 2018! This is “less than 3% of [poorly] estimated LDCs’ annual adaptation finance needs between 2020 and 2030”.

Cruel ironies

The International Monetary Fund recognises the “unequal burden of rising temperatures”. It is indeed a “cruel irony” that those far less responsible for global warming bear the brunt of its costs. Meanwhile, providing climate finance via loans is pushing poor countries deeper into debt.

Increasingly frequent extreme weather disasters are often followed by much more borrowing due to poor countries’ limited fiscal space. But loans for low-income countries (LICs) cost much more than for high-income ones. Thus, LICs spend five times more on debt than on coping with climate change and cutting GHG emissions.

Four-fifths of the most damaging disasters since 2000 have been due to tropical storms. The worst disasters have raised government debt in 90% of cases within two years — with no prospect of debt relief.

As many LICs are already heavily indebted, climate disasters have been truly catastrophic — as in Belize, Grenada and Mozambique. Little has trickled down to the worst affected, and other vulnerable, needy and poor communities.

Funding gap

Based on countries’ own long-term goals for mitigation and adaptation, the UNFCCC’s Standing Committee on Finance estimated that developing countries need US$5.8 trillion to US$5.9 trillion in all until 2030. The UN estimates developing countries currently need US$70 billion yearly for adaptation, rising to US$140 billion to US$300 billion by 2030.

In July, the “V20” of finance ministers from 48 climate-vulnerable countries urged delivery of the 2009 US$100 billion vow to affirm a commitment to improve climate finance. This should include increased funds, more in grants, and with at least half for adaptation — but the UNFCCC chief has noted a lack of progress since.

Only strong enforcement of rigorous climate finance criteria can stop rich countries from abusing currently ambiguous reporting requirements. Currently fragmented climate financing urgently needs more coherence and strategic prioritisation of support to those most distressed and vulnerable.

This month’s UNFCCC COP26 in Glasgow, Scotland, can and must set things right before it is too late. Will the new Cold War drive the North to do the unexpected to win the rest of the world to its side instead of further militarising tensions?

Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions from 2008 to 2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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