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Economic Perspectives

Climate finance: A costly dodge

Print edition : May 06, 2022 T+T-

The afternoon traffic in Los Angeles, California, on April 4. The third installment of the Sixth Assessment Report of the IPCC casts a dire warning for the future of climate change with the world on track to expend its remaining ‘climate budget’ by the year 2030 at the current rate of carbon emissions.

The burden of climate finance must be shared fairly. But, in the context of the work being done by the IPCC, developed countries talk of measures such as “debt-for-climate swaps”, suggesting that the flow of new grant money is not the priority, even as developing countries link their climate plans and targets to certain levels of cross-border financial flows they must receive.

W ITH the reports of the three working groups of the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) now in the public domain, the current “official” position on the state of knowledge on the physical basis of climate science, the multiple impacts global warming will have and what needs to be done has been stated. Overshooting the target of limiting global warming to 1.5°Celsius seems almost inevitable, and much needs to be done starting now even if the 2°C level is not to be breached. But an area in which clarity and transparency is particularly lacking is the means through which whatever must be done will be financed. Over the years, since the First Assessment Report in 1990, ways to mitigate climate change by reducing greenhouse gas (GHGs) emissions and adapt to the now-unavoidable changes have been set out in much detail. What has been less clear is how the burden of these adjustments will be shared. A crucial aspect of any discussion on burden sharing must be an assessment of who is to finance how much of the required expenditure and where.

The IPCC addressed the issue of financing in a dedicated chapter for the first time in 2014 in the report of Working Group III of its fifth assessment. That discussion flagged the absence of a clear definition and estimation of climate finance flows, which Chapter 15 of the report of Working Group III in the recently released sixth assessment (hereafter WGIII6AR) notes is “a difficulty that continues”. This is significant since the finance chapter in the sixth assessment is the first since the 2015 Paris Agreement that called for aligning financial flows to climate goals. Seven years have been inadequate to build a framework for assessment of climate finance flows. That is a serious deficiency given the fact that the available partial and imperfect data suggest that to meet the assessed needs, climate finance would have to increase annually between four and eight times in developing countries, and between two and five times in developed countries. Addressing such a huge shortfall requires more acceptable, reliable and granular information.

Any useful evaluation of climate finance flows must estimate the actual volume of such flows and compare it with needs to achieve a specific target in terms of a ceiling on global warming in the future. While assessing needs is likely to be more controversial given the differences even on the trajectory to be pursued by each country and the timeline, tracking flows should, in principle, be easier. But even the latter exercise is riddled with difficulties. In order to be relevant, it must separate out climate-specific finance that delivers climate benefits within and outside a source country. But agreeing on which projects are climate relevant, the kind of flows to count and the standards these flows must adhere to has proved difficult. One problem is that a lot of the investments that contribute to the achievement of climate goals and targets are not profitable or adequately profitable, and, therefore, not attractive to the private sector. This requires the mobilisation of public finance as grants or on concessional terms, deployed directly or used to cajole private investors into diverting surpluses to low-carbon activities. So, within the flows identified, it is necessary to separate out the portion that constitutes public finance from private financial flows, and work to raise the share of the former, in keeping with the needs.

Sharing of emission reduction

There is also a need to spell out how much of these flows originate in the developed countries that are responsible for an overwhelmingly large share of cumulative carbon emissions, and how much of that flow is directed to developing countries called upon to share in the resolution of a crisis in the creation of which they played only a small part. The WGIII6AR places the cumulative share of North America, Europe, Japan, Australia and New Zealand in anthropogenic carbon emissions at 43 per cent. Add on eastern Asia, which includes China, and that share rises to 55 per cent. Calling on all countries to contribute to mitigation and adaptation purely on the basis of their own resources is obviously unfair.

Also read: The gaping holes in climate finance

The need for difference in the sharing of emission reduction and financing burdens was captured in the Paris Agreement in the diplomatically phrased recognition of “combined and differentiated responsibilities and respective capabilities”. To the extent that developing countries responsible for a small fraction of cumulative emissions must redesign their development strategies, fairness requires, among many other things, that developed countries contribute a reasonable share of those expenditures. As WGIII6AR notes, the International Energy Agency recently argued that as much as two-thirds of future collective climate investments would have to occur in developing countries, which make cross-border financial flows crucial.

Recognising the crucial role of finance in realising the climate agenda, Article 2.1(c) of the Paris Agreement called for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. However, the principle that a reasonable share of these flows must be public was not emphasised. The Paris Agreement implicitly flagged the role of governments by including the following rather general statement: “Developed country parties shall provide financial resources to assist developing country parties with respect to both mitigation and adaptation in continuation of their existing obligations under the convention.” But instead of emphasising the flow of public finance from developed to developing countries, it called on the developed countries “to take the lead in mobilising climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds”, whatever that may mean in practice.

In practice, this vagueness has hugely shrunk the commitment made by governments of developed countries in terms of targeted provision of climate finance, especially in terms of the volume of public financial resources deployed to support developing countries. As far back as 2009, at the 15th Conference of Parties (COP 15) held in Copenhagen, participating countries signed an accord, which included the following financial promise on the part of the developed countries: “In the context of meaningful mitigation actions and transparency on implementation, developed countries commit to a goal of mobilising jointly 100 billion dollars a year by 2020 to address the needs of developing countries. This funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.” This clearly sidestepped the issue that it is public finance that is crucial and must be an important component in climate finance.

Also read: World must halve emissions by 2030: IPCC

The WGIII6AR reports that data from the biennial assessments of climate finance flows of the UNFCC and the IPCC’s Special Report on Global Warming have placed the financing needs over the 2020-2030 period to contain global temperature rise to below 2°C by 2100 at $1.7 trillion a year. This excludes adaptation finance and financing to cover loss and damage and is at best a conservative estimate of even mitigation-financing needs. This makes the $100 billion committed at Copenhagen around 5 per cent or less of what is required for mitigation alone.

It is telling that even this low-ambition target has not been realised. Figures for 2020 are not available from different agencies that collate information on developed nations’ cross-border contributions. But the Organisation for Economic Cooperation and Development (OECD) estimates that the figure touched only $79.6 billion in 2019, which implies that the $100 billion target would not have been reached in 2020, even if the pandemic had not struck. What is more, even this sum is not all public and definitely is not all grants or concessional loans. Besides public grants or concessional and non-concessional loans transferred either directly or through multilateral institutions, a smaller amount is private finance that public money, given as loan guarantees and loans given alongside private funds, is said to have mobilised. Oxfam estimates that if only public finance is considered and only grants and the grant equivalent of lending is considered, the figure on transfers for climate falls to as low as $19-22.5 billion in 2017-18.

No assurance

There are no firm commitments as to when the 2020 target will be achieved—only a promise in the Climate Finance Delivery Plan touted before the Glasgow Summit to achieve this target as late as 2023. While there is talk that the $100 billion figure will be exceeded thereafter, there is no assurance that the shortfall relative to the $100 billion a year will be made up with additional contributions in the years to 2025. Moreover, the much-needed step up from the $100 billion figure is unlikely to materialise in 2025. The only agreement made at Glasgow was on a cumbersome process to discuss and arrive at a higher annual financing number, a “new collective quantified goal”, without any indication of where that number will lie relative to needs estimates and what kind of financing that number will incorporate.

Also read: Activist investors push firms to go green

O ne consequence of the failure to provide adequate financing through grants and concessional credit on the part of the developed countries is a shift of focus towards mobilising private finance. In fact, emphasis is being placed on using available public finance to mobilise private finance. In the view of the authors of WGIIIAR6, “a crucial priority is to expedite the operational definition of blended finance and promote the use of public guarantee instruments”. This is because: “Private flows to accelerate the low-carbon transition in developing countries would benefit enormously, by gaining clearer access to public international funds and support defined on a grant equivalent basis.” However, the evidence on blended finance and public-private partnerships indicates that the consequence of such initiatives is that risks and losses are borne by the public sector, whereas profits accrue to the private sector.

In sum, more than 12 years since the Copenhagen Accord and six years since the Paris Agreement, developed countries’ record of meeting their responsibility to advance a fair share of needed climate finance has been disappointing, if not dismal. This is despite their capability to provide such finance. Not surprisingly, the drive originating from the developed metropolitan countries, which have contributed disproportionately to GHG emissions, to get developing countries to embrace net-zero strategies and phase out fossil fuels lacks legitimacy and receives little support. Climate finance is no more a joint responsibility, the burden of which must be shared fairly. Developing countries increasingly link their climate plans and targets to certain levels of cross-border financial flows they must receive. And developed countries talk of measures such as “debt-for-climate swaps”, suggesting that the flow of new grant money, which is what is needed, is not the priority. The foundation for the plans and strategies being advanced to limit global warming is weak or missing.

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