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Climate finance: Who pays to close the inequality gap?

The UN's annual climate finance target of $100bn is not nearly enough to help poorer countries cope with the consequences of global warming.

By Sarah Dawood

This article was originally published in March 2022. The issue of climate finance is a key focus at Cop27 climate conference which began in Egypt on Sunday. Funding from rich countries is now vital for global climate action.

Monsoon season in Nepal is typically from June to August. But in October 2021, the country witnessed an unseasonal amount of rainfall that led to disastrous consequences. Floods stemming from the Karnali River killed more than 100 people; homes, roads and bridges were destroyed; livestock was lost; essential crops were ruined. “People were crying in the rice paddy lands,” Radha Wagle, joint secretary of Nepal’s Ministry of Forests and Environment, tells Spotlight. “We could do nothing.”

Sadly, extreme weather events like this are becoming commonplace. The Nepalese Ministry of Home Affairs reports that between June and late October 2021, water-induced disaster has caused nearly 700 deaths and 200 injuries, while 69 people are still missing. Livelihoods are also jeopardised; up to 80 per cent of the crop harvest has been lost in some areas, while crucial infrastructure such as renewable energy systems have been destroyed, undoing years of hard work in climate change mitigation. “Many bridges, infrastructure, hydropower and drinking water schemes have been washed away over time,” says Wagle.

Nepal is a developing country that contributes very little to climate change yet is hardest hit by its consequences. It is expected to see a 2.2°C rise in temperature as a best-case scenario. As a small economy, it cannot afford to manage this problem on its own and needs both financial and technical support from richer nations.

In 2009, at the 15th Conference of the Parties (Cop15) of the United Nations Framework Convention on Climate Change (UNFCCC) in Copenhagen, a commitment was made that developed nations would provide $100bn in climate finance per year to poorer nations starting in 2020. At Cop21 in Paris six years later, this was extended to providing $100bn every year from 2020 through to 2025. This promise was broken. In 2019, the OECD confirmed only $80bn had been spent, and the latest figures show that developed nations have still not reached this milestone. Following Cop26 last year, the Glasgow Climate Pact set a new goal of reaching $100bn per year by 2023 “at the latest”, as well as working with private organisations to unlock “trillions”. The Cop26 president, Alok Sharma, tells Spotlight that while it is “later than expected” he will be “working to ensure the commitments are implemented in full”.

Why was the $100bn target missed?

Sources close to the negotiations tell Spotlight there were multiple reasons the $100bn was not met. As the world’s largest economy, the US plays a significant part; Donald Trump’s administration, known for its cavalier approach to the issue, took many steps to deregulate and weaken environmental protection.

Conversely, tackling climate change is a central part of Joe Biden’s policymaking, and he has committed hundreds of billions towards clean energy, electric vehicles, and defences for extreme weather. “Now we have an administration in place that puts climate front and centre and very much wants to do the right thing,” says the climate economist Gernot Wagner. “We are passing policies now after a four-year drought.”

In 2020, international funding and attention was also inevitably diverted towards the pandemic, putting many climate projects on hold. The $100bn target had already been missed by this point but Covid-19 certainly stagnated plans further. Wagner says that climate change merits a similar “emergency” funding approach, given its severity. Alongside halting progress, funding dedicated to pandemic economic recovery actually worsened the climate crisis – while lockdowns did result in a drop in carbon emissions, research from consultancy Vivid Economics found that only a tenth of the $17trn bailout money went towards activities that positively impact the environment.

Iskander Erzini Vernoit, policy advisor on climate finance at the climate change think tank E3G, is optimistic that the $100bn target will be met by 2023, and says nations have “erred on the side of caution” to avoid over-promising and under-delivering. “The estimates used by developed countries are intentionally quite cautious because they were wary of making the same mistake again,” he says.

[See also: For small islands, climate change is life and death]

The make-up of climate finance

A downpour causes flooding in Accra, Ghana in 2020
A downpour causes flooding in Accra, Ghana in 2020. Image courtesy of Delali Adogla-Bessa / Shutterstock

While the UNFCCC’s promised $100bn per year is majority publicly-funded, it does also include private contributions, which has been a point of contention. In 2019, nearly four-fifths of the $80bn provided was from governments.

It is distributed in multiple forms, including loans, grants, guarantees (where a third party takes on a loan’s debt) and export credits (financial support to help buyers in developing countries purchase overseas goods). Funding can be bilateral (from one country directly to another) or multilateral (provided by many governments and institutions, then pooled and distributed by an international organisation such as the World Bank).

Prior to Cop26, it was announced in the Climate Finance Delivery Plan initiated by Sharma that $500bn would be delivered in total by 2025. Some have queried why this misses out the $100bn due from 2020, and say it could break the trust between developed and developing nations. “[The plan] falls short of committing to meet $600bn over six years,” says E3G’s Erzini Vernoit. “It’s not retrospective, and only looks across 2021 to 2025.”

However, there was a “shift” in Glasgow from talking about the “billions” to the “trillions”, he says. The $100bn figure is a starting point rather than the end goal, says Wagner – public funds would never be enough to tackle climate change, and the $100bn should be used productively to “mobilise” much greater private investment. “It’s a good focal point but a small number in the grand scheme of things,” he says. “It’s just a down payment.”

Concerns have also been raised about the “additionality” of the $100bn – the UK and US have slashed their international aid contributions to 0.5 per cent and 0.2 per cent of GDP, respectively, in recent years, and there are worries that climate finance replaces this. Wagle says there is a “lack of clarity” between the two funding avenues in Nepal, and it is unclear whether money is intended to address climate change or to right past wrongs.

“The UK’s decision to cut its aid is profoundly misguided,” says Erzini Vernoit. “We cannot expect developing countries to applaud us for increasing climate finance if it is displacing [aid], and we cannot achieve resilience, adaptation and low emissions if countries are not able to meet their essential development needs in the first place.”

[See also: Cop27 shows us that governments have short memories]

Grants vs loans

Women carrying water in Nepal
Extreme climate events restrict Nepalese communities’ access to drinking water. Image courtesy of Renewable World

For smaller countries with unstable economies, such as Caribbean islands, taking on loans can place them further into debt. Charities such as Oxfam have argued that too many loans are being delivered via climate finance instead of grants, which do not require repayment. In 2019, 71 per cent of public climate finance was provided as loans while just 27 per cent came in the form of grants.

Wagle, the Nepalese civil servant, says that smaller, poorer nations should be treated accordingly. “We should not be getting loans for climate action,” she says. “We need grants. It is unfair – we do not contribute much to climate change or greenhouse gas emissions.”

E3G’s Erzini Vernoit says that financial instruments that create debt need to be “approached with a great degree of care” and that concessional loans – essentially discounted loans at lower than market rates – should be offered. “Loans play an important part, but certain developing countries will have a better ability to take these on than others,” he says.

For private businesses, concessional loans can be extremely helpful to get projects off the ground and subsidise much larger investments. Dinesh Dulal, head of sustainable banking at Nepal’s NMB Bank, says that it is “very hard” to access concessional loans or loan guarantees (where a third party takes on debt) from institutions such as the World Bank. Instead, NMB borrows from the World Bank’s private sector arm, the International Financial Corporation, but is stifled by very high borrowing and foreign currency rates.

“Public funding is not sufficient to meet the bigger climate goals – $100bn sounds high, but if [Nepal] doesn’t get anything from that it’s no use to us,” says Dulal. “There needs to be a holistic approach that engages private institutions to leverage public funding. We are not looking for grants – we just need easy access to concessional resources.”

Nepal is rich in natural resources such as water and, with the right intervention, could successfully support itself through energy systems such as hydropower, and export to neighbouring countries that rely heavily on coal such as India – but currently the Indian government blocks exports. “We are wasting clean energy and they continue to use fossil fuels,” says Dulal. “The UNFCCC could put pressure on [India] to give us market access.”

There are other clever ways to generate private investment, says economist Wagner. One mechanism is the “auctioning” of limited public funds to the highest bidder. Private companies submit ideas of how they would use the money and the company with the “biggest bang for their buck” – highest emission reductions for the lowest cost – wins. “This ‘effective altruism’ can potentially leverage massive private funds with limited public money,” he says.

Government “demonstration projects” can also be used to encourage private investors to take on similar ventures. For instance, International Climate Finance (ICF) – a portfolio of projects from multiple UK government departments – invests in climate projects such as resilience-building and clean energy for developing countries. These are used to prove to investors that such projects can be scaled up or replicated and create positive returns.

[See also: The hidden threat of climate fraud]

A new focus on adaptation

Man standing in flood in Masamba, Indonesia
Flooding in Masamba, Indonesia in 2020. Image courtesy of Uchysanusi / Shutterstock

Most climate finance is currently spent on mitigation (reducing climate change, such as by moving countries off fossil fuels) rather than adaptation (adapting people to life in a changing climate, such as through building a sea wall to tackle sea level rises).

Mitigation projects tend to be prioritised because they reduce carbon emissions and therefore have a global impact, whereas adaptation is localised and benefits specific communities. The OECD estimates that mitigation takes up nearly two-thirds – 64 per cent – of climate finance spend.

Mechanisms such as “auctions” or “demonstration projects” make more sense for mitigation projects, such as building a solar or wind farm. Adaptation projects, such as safeguarding a community against increased drought or flooding, tend to be more complex and less commercially viable, says E3G’s Erzini Vernoit, so public funding will play a “massive role” in this. A commitment was made at Cop26 to double the amount of adaptation finance levels by 2025.

Countries such as Nepal urgently require adaptation, as they are severely impacted by extreme weather. Dulal believes that climate finance is dominated by bigger developing countries such as India and China, and that the UNFCCC should create “country-specific budgets” based on risk and vulnerability assessments – according to Oxfam, 14 per cent of climate finance goes to the least developed nations and only 2 per cent to small island developing states.

There is an obvious need to move giants such as China, India and Indonesia off coal if we are to limit global warming to 1.5°C. But there are ethical questions around whether public money should be spent on the world’s second-largest economy, rather than smaller countries facing significant “loss and damage” – when the impacts of climate change are so severe that they breach the limits of adaptation, such as a town having to relocate. “With China, there is a question of whether they lack finance or political will,” says Erzini Vernoit. “Small, developing countries will ask why other countries should be rewarded for being bigger polluters; they need help too, even if it doesn’t create the same dent in emissions.”

For bigger countries, country-led partnerships could be a successful way to shift off fossil fuels without expending too much public finance. At Cop26, an $8.5bn Just Energy Transition Partnership was agreed, which will see developed countries including the UK, US, France and Germany work with South Africa to cut its emissions significantly through a mix of public and private funding, with the initial money just a starting point to get the project running.

[See also: How can Cop27 be considered a success?]

Excessive red tape

An early warning system in Nepal to assess for extreme weather events
An “early warning” system in Nepal to assess for extreme weather events. Image courtesy of Renewable World

Even applying for public funding is a major hurdle for developing countries. Civil servant Wagle says that the laborious, slow process requires Nepal to find an “accredited agency” and has hindered the country’s nationally determined contributions (NDC) – its national climate plan. “I don’t know why it’s so complicated – we cannot directly access funds,” she says.

It can take years to get projects through, meaning plans are out of date by the time they come to fruition. Despite formulating its NDC in 2020 with targets to meet in 2025 and 2030, Wagle says that Nepal has not seen any support for its proposals. “Over a year has passed since we developed our NDC,” she says. “We have huge plans but we don’t have the budget.” She believes that developed countries are “escaping their responsibilities” by placing the onus of navigating the system on poorer nations. “They should be helping to make us more coordinated,” she says. “They need to motivate us by setting aside money – this is not our duty.”

Accessibility was an issue acknowledged at Cop26, and the UNFCCC has committed to setting up a Taskforce on Access to Climate Finance working with five pilot countries. Erzini Vernoit says there is more that needs to be done to “expedite” access, particularly via multilateral avenues such as the Green Climate Fund, which pool money from multiple governments. “Countries need to go through enormous bureaucratic, costly and labour-intensive processes, often when [their plans] are time-sensitive,” he says. “I think we still have a lot more to see delivered on that agenda.”

[See also: The emotional journey of Alok Sharma]

What needs to happen next?

Someone carrying water in Nepal
Image courtesy of Renewable World

The $100bn goal is not an ultimate target, says the economist Wagner – there should be a focus on innovating to generate more money through private means. “Is being able to ‘declare success’ actually what we want to do?” he says. “More money is always better.”

No government will be able to provide the trillions necessary, says Julian Havers, programme leader of public banks at E3G; private and public sources will need to work together to “co-share risks”. Creating such an environment would encourage more private investors to commit to projects in developing countries. For instance, the green bonds market – where investors lend to private institutions or governments to help them finance environmental projects, then receive interest on the investment – might be more attractive if the burden was shared.

A more organised and cohesive system would help ensure individual countries’ needs are met, says Erzini Vernoit – for example, collating every country’s national climate plan, or NDC, could help to calculate overall costs for similar projects and develop more accurate financing strategies. Establishing country or region-specific online platforms where countries log their needs and send clear requests to developed countries on providing contributions would also improve finance flow.

Divvying up money is a difficult task and Wagner believes that there are three core considerations: the ability to leverage private funds rather than relying on public funding long term; the scale of public benefit, so how many lives and livelihoods will be saved; and whether it compensates for past sins, helping those most impacted by climate change. “There are three criteria of cost-effectiveness, efficacy and equity,” he says. “Sometimes projects capture two or three, but often they compete with each other.”

Wagle also believes that developing countries need to ensure local people feel the benefits of governments’ plans. Nepal’s climate policy states that 80 per cent of the funding it receives from international mechanisms must help on a local level. “Grassroots people who depend on natural resources, including marginalised and indigenous communities, are hit harder than anyone,” she says. “Every country has to be responsible for a strategy that reaches them.”

There is no easy solution for helping developing countries tackle climate change. There is an obvious conflict between targeting big emitters for the global good and helping smaller nations adapt to a changing world. What is clear is that $100bn per year would never be enough, and collaboration between governments and private organisations is essential to generate the trillions needed. Translating those 13-figure sums into real-life affirmative action is the next hurdle. “Developed countries are the biggest polluters and the [poorest] countries are the victims of that development,” says NMB Bank’s Dulal. “Our contributions are negligible, but we are very vulnerable. We need support – so please provide us with easy access.”

[See also: On the climate crisis, to delay is to deny]

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