The Financial Express

Climate finance: Rich countries' broken promise trapping poor countries in debt

Climate finance: Rich countries' broken promise trapping poor countries in debt

As the COP26 United Nations (UN) Climate Change Conference takes place in Glasgow (UK), serious reflections are needed on rich countries' broken promise "to a goal of mobilising jointly US$100 billion per year by 2020 to address the needs of developing countries" made 12 years ago at the COP16 in Copenhagen.

While minuscule compared with the investment required to avoid dangerous levels of climate change, non-transparency and double-counting make it harder to monitor the rich countries' broken promise. Meanwhile, poor countries are increasingly falling into debt traps trying to cope.

Ironically, poor countries, though less responsible for climate change, are bearing disproportionate impacts and paying more for adaptation, recovery and redevelopment loans. The COVID-19 pandemic has also exacerbated their debt pressures.

The UN warns that world faces disastrous 2.70C temperature rise on current climate plans. The International Monetary Fund (IMF) highlights "unequal burden of rising temperatures" on poor countries.

CREATIVE ACCOUNTING, FUDGING NUMBERS: Rich countries' COP16 climate finance pledge of US$100 billion include finance from public and private sources. However, it does not specify the proportions of financing from different sources, nor indicates how different financial instruments, such as grants and loans, should be counted.

Thus, the UN Independent Expert Group on Climate Finance notes that ambiguity and non-transparency in reporting allow double counting and inclusion of non-grant, non-concessional loans in climate finance.

The Organisation for Economic Co-operation and Development (OECD), made up mostly of rich countries, reported US$80 billion in climate finance to developing countries in 2019, up from US$78 billion in 2018. The was based on reports from the wealthy nations themselves.

However, the OECD's numbers are vastly inflated. For example, Oxfam estimated public climate financing at only US$19-$22.5 billion in 2017-18, around one-third of the OECD's estimate. Reporting by rich countries includes non-concessional loans while only grants and lending at below-market rates should be counted. Some rich countries also count development aid, e.g., for road construction, as going towards climate projects even when they do not exclusively target climate action.

India disputed the OECD's estimate of US$57 billion climate finance during 2013-14, while the real figure was paltry US$2.2 billion, thus describing it as "deeply flawed, unacceptable". Other developing countries have collectively questioned creative accounting and green-washing of existing fund flows to paint a rosier rather a real picture.

Moreover, the long-standing issue of whether funds are 'new and additional', as has been promised at the 1992 Rio Earth Summit, has not been resolved. The diversion of development assistance counting as climate finance, for example, would be funding reallocated rather than additional or new. Thus, developing countries are losing out on funds for education, health and other public goods.

CHAOS GALORE: Developing countries expected that the funds promised in Copenhagen would be dominated by public grants directed through the new UNFCCC Green Climate Fund. Thus, their own representatives would be empowered to help decide the direction of these flows. There was also an expectation that climate fund would be better coordinated and targeted.

Instead, climate funds are funnelled through over 100 channels, such as developed countries' aid and export promotion agencies, private banks, equity funds and corporations, and lending and granting arms of multilateral institutions like the World Bank and regional banks. Very few of these are controlled in meaningful ways by developing countries.

There are also several UN agencies supporting climate action, including the UN Environment and Development Programmes and the Global Environment Facility; but these are chronically underfunded and require pledges to be 'replenished' regularly by contributor governments facing other demands on their federal budgets. This makes funding insecure and future planning difficult.

PRIVATE FINANCE: Negotiations since Copenhagen have also been characterised by a growing focus on private sector engagement in climate financing though blended finance. This raises questions about what types of private finance can be said to have been mobilised by developed countries, as was promised.

The OECD estimates that private climate finance has been stagnating, at US$16.7 billion in 2014, US$10.1 billion in 2016 and US$14.6 billion in 2018.  Statements on private climate finance mobilised by developed countries in poor countries are even more contested. There is no centralised body with the capability to ensure that private finance reaches countries most in need, or responds effectively to priorities such as climate adaptation and damages beyond repair.  The OECD report reveals that only 3 per cent of mobilised private finance is helping poor countries adapt to climate impacts. As widely anticipated, private investments go where money is to be made or emission reductions can be counted.

PROFIT BEFORE PLANET AND PEOPLE: The priority for the poorest developing countries is to receive adaptation finance to help them build resilience and adapt their infrastructure to the effects of extreme weather. But funding 'adaptation' projects - such as sea walls, early warning systems, or better infrastructure - is expensive and usually does not produce a tangible financial return. So, adaption projects have been shunned by donors in favour of easy wins elsewhere.

Even though the Paris Agreement aimed for a balance between 'mitigation' and adaptation, most of the climate finance has gone to projects to reduce greenhouse-gas emissions. For instance, in 2019, only US$20 billion went to adaptation projects, less than half of the funds for mitigation projects, according to the OECD report.

Donors favour mitigation projects because success is clear and measurable - e.g., quantified by the avoided or captured carbon emissions - thus expedient for domestic politics, whereas it is less easy to define successful adaptation. Donors also become more visible globally for mitigation, e.g., helping to reduce green house gas emissions.

The bias towards mitigation is also due to money being increasingly provided as loans rather than grants, and through blending with private finance. Helping people adapt to climate change does not generate money. So, private finance, in particular, does not have much interest in adaption and almost always goes to mitigation projects, such as solar farms and electric cars, that can generate returns on investment.

Most of the climate finance is also going to middle-income countries, not the poorest, most-vulnerable countries. Also, these vulnerable poor countries are not receiving sufficient capacity-building exercises and training. For instance, the International Institute for Environment and Development reported that only US$5.9 billion went to the UN's 46 'least developed countries' (LDCs) between 2014 and 2018, less than 20 per cent of the amount developed countries said they had given for adaptation projects.

It notes, "If this trend continues, this would equate to less than 3 per cent of (poorly) estimated LDCs annual adaptation finance needs between 2020-2030". And again, very little trickles to down to the actual needy - poor, vulnerable and worst affected communities.

As the UN Independent Expert Group notes, the COVID-19 pandemic has further reduced climate finance delivery; thus this trend will continue or may worsen.

DEBT TRAP: 'CRUEL IRONY': Climate finance provided in the form of loans rather than grants can push poor countries deeper into debt. It is a "cruel irony" that those less responsible for climate change are being made to pay a larger share of the price.

When extreme weather disaster strikes, it is often followed by sharp spikes in borrowing due to their limited fiscal space. However, loans for vulnerable low-income countries (LICs) are, on average, more expensive than for high-income countries. Therefore, high climate change vulnerability and high borrowing cost means "climate debt trap".

For examples, in 2000 and 2001, Belize was struck by two devastating storms; its government debt-GDP ratio doubled from 47 per cent in 1999 to 96 per cent by 2003. Grenada's debt-GDP ratio also rose from 80 per cent of GDP to 93 per cent when hurricane Ivan struck in 2004. Mozambique had to borrow US$118 million from IMF for recovering from cyclone Idai and cyclone Kenneth.

The most damaging disasters since 2000 - 80 per cent of them - have been tropical storms and the worst of these disasters pushed up government debt in 90 per cent of cases within two years (if debt relief was not granted in the aftermath). As many of these LICs are already indebted, climate disasters and the increased indebtedness that they bring with them, are creating serious challenges for development. LICs spend five times more on debt than coping with the impact of climate change and reducing carbon emissions.

FUNDING GAP: The UN Intergovernmental Panel on Climate Change's estimate that US$1.6-3.8 trillion is required annually to avoid warming exceeding 1.5°C. Based on nationally determined contributions (NDCs), i.e., countries' own long-term goals for mitigation and adaptation, the UNFCCC's Standing Committee on Finance, reports that developing countries need cumulatively US$5.8-5.9 trillion until 2030. The UN estimates that developing countries already need US$70 billion per year to cover adaptation costs, and will need US$140-300 billion in 2030.

The US$100 billion pledge has long been seen as a minimum, to increase over time. In July, the 'V20', a group of finance ministers from 48 climate-vulnerable countries called for a clear plan, setting out how the pledged amount will be met, including more grant-based finance, and at least 50 per cent of funding to go to adaptation.

The Chief of the UNFCCC also said, "We need clear signals that commitments made by developed countries to developing countries will become a reality,… We still don't have those US$100 billion with clarity on the table."

Developed countries continue to avoid fundamental accountability issues by taking advantage of ambiguous technicalities in reporting standards. Thus, there has to be major improvements in accountability to establish clearer and more rigorous rules of what nations can count as climate finance.

The fragmented climate finance system needs coordination and strategic targeting of support to areas and nations most in need, in line with their domestic priorities.


Anis Chowdhury is Co-editor, Journal of the Asia Pacific Economy and Adjunct Professor, School of Business, Western Sydney University.

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