At the opening High-Level Session for Climate Action at the UN COP27 Climate Conference held in Sharm El-Sheikh in November, I posed the question of “what is insufficient, inefficient, and unfair?” Then I supplied the answer: the current system of international climate and development finance.
The evidence tells us that the available funding for sustainable development from the pledges made by the industrialised nations comes to 0.7 per cent of these countries’ GDP. Although this funding reached $179 billion in 2021, the highest amount of official development assistance on record, it is still less than half the amount that has been pledged.
Even if those pledges were met in full, the resulting amount would still not cover more than 15 per cent of the average funding gap for development, which was estimated at $2.5 trillion before the Covid-19 pandemic hit.
Taking just the transition to clean energy as an example, an estimated $1 trillion a year will be required to fund this until 2030, according to the Climate Action and Development Financing report that was launched at the COP27 by a working group formed by the presidencies of the Glasgow COP26 and the Sharm El-Sheikh COP27 conferences.
The minimum $100 billion pledge made by 23 industrialised nations at the earlier Copenhagen Conference comes to just a fraction of the actual amount required, yet even so only seven of those countries have met their pledges in full.
There is no consensus on the criteria for calculating the flow of funding to the developing nations, so estimates vary greatly. One official source will tell you that 80 per cent of the pledges have reached their intended beneficiaries, while the international charity Oxfam estimates that the amount is around 20 per cent. Whatever the case may be, the financing for climate action is faring no better than that for development.
Both sources of financing are falling far short of bridging the funding gap for climate projects and development needs. Therefore, extreme poverty and severe deficiencies in education, healthcare, and infrastructure persist, disparities between and within nations grow more acute, and the climate and environment continue to deteriorate in the absence of solutions that will bring the world on target to meeting the 2030 UN Sustainable Development Goals (SDGs), of which the SDG13 is on climate action.
The developing nations, civil society organisations, and research centres have all worked hard to persuade the industrialised nations to meet their obligations, but to little avail. One attempt to track their commitments involves separating development financing from climate financing, ostensibly to avert double or triple accounting.
However, in my opinion, this has led to an unwarranted division between development activities and climate action and the unhealthy creation of separate spaces, some focused on climate action and others on development. The result has been an artificial and false dichotomy between development work and climate action that has then led to a woeful reduction of action to lower carbon emissions.
Moreover, as important as that goal is, it overlooks the need to address other harmful emissions such as methane, underrates the importance of climate adaptation, and entirely ignores the question of loss and damage.
At least the latter was successfully addressed at Sharm El-Sheikh. The inclusion of loss and damage in the conference’s outcomes and the creation of a special fund to finance it in the international climate action To Do List is no less than a historic victory.
The conference also underscored the need to keep climate action within the framework of sustainable development and the realisation of the SDGs. Creating new and renewable energy sources, promoting green infrastructure development, improving water management and agricultural systems, protecting coastlines and fighting desertification are all areas for investment in sustainable development, in which context we must not overlook the need to invest in people first.
Clearly, financing development and climate action should be pursued in a comprehensive and integrated manner at the country level and in accordance with national priorities.
The reason why I described international financing as ineffective as well as insufficient is because of the huge amount of time the funding process takes from the day an agreement is signed between a developing nation and a funding agency to the day the money actually reaches the intended projects or fields of investment.
This can take many years. Some small island states have had to wait for up to four years before they receive some of their funding requests for urgent needs in infrastructure development and adaptation to the dangerous impacts of climate change on lives and livelihoods.
The sluggishness is largely the product of administrative flaws and red tape. The fault lies primarily with the financing institutions themselves, regardless of their arguments based on the presumption that the institutional capacities of the recipient countries are too weak. One of the functions of these institutions, and, indeed, one of the reasons for their existence, is precisely to strengthen the capacities of the developing economies.
My use of the word “unfair” to describe international climate and development finance is based on the exorbitant cost of financing that the developing nations, especially the middle-income ones, have to bear in order to obtain the necessary funding for climate action.
It is important to differentiate between financing mitigation and financing adaptation. The former requires investment in new and renewable energy sources that can be undertaken by the private sector through investments in solar, wind, and green hydrogen energy projects. What the international development institutions should do in this framework is to support the private sector by helping to minimise the risks of their investments and insuring them against political changes, especially as concerns property rights.
All the aforementioned projects are essential to keep the planet’s temperature from exceeding 1.5 degree Celsius above its average temperatures before the First Industrial Revolution.
As for adaptation, the private sector accounts for only three per cent of investment in this area. The public sector undertakes the lion’s share of funding through national budgetary allocations or loans in order to pay for projects aiming at protecting infrastructure and infrastructure services, adapting irrigation and agricultural systems, fighting desertification and coastal erosion, and adapting to the adverse effects of climate change caused by the industrialised nations.
It is not fair that the developing nations, especially the poorest ones, have to borrow in order to remedy the damage caused by the wealthiest nations.
I know that it is impossible to rectify the global financial system in a manner that can address the abovementioned deficiencies, given the warped economic system that supports and finances it. The global economic system in turn mirrors the warped international political system that has managed world affairs in accordance with the post-World War II arrangements devised by the victors in that war.
The Third World countries had no say whatsoever in those arrangements. Most of these countries were still colonised at that time and continued to be exploited by the belligerents in the war. Until such time that a new world order emerges founded on more equitable pillars that reflect the changes in the balance of power since World War II and the growing economic role of countries having high-growth emergent markets, we can only offer proposals for new funding processes that are consistent with proposals for reforming the global financial system.
I will therefore take this opportunity to reiterate a proposal for financing climate action in the framework of sustainable development. This is to offer facilitated loans on terms that would provide for a grace period of at least ten years, a repayment period of at least 20 years, and a financing cost of no more than one per cent, which would cover technical assistance.
The financing itself would be provided through existing financial institutions and specialised funds, as well as through the financial pledges to which the developed nations have previously committed themselves, which could reduce financing costs. At the same time, the capital available to the international development institutions should be increased to provide an additional $1 trillion for financing climate action, thereby helping to plug the funding gap mentioned above. This amount comes to only one per cent of global GDP.
The obvious question is: what will make the rich countries contribute to financing climate action in the developing world after so many years of not doing so? The motive, I believe, will stem from their realisation that it is in their own interests to do so.
Even if some of them are unable to appreciate the benefits of international solidarity, the deterioration of the climate does not discriminate between rich and poor countries. The threat of climate change to international security is visible to all, not least in the form of the displacement of populations caused by natural disasters and the growing phenomenon of people claiming climate asylum.
* This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
*A version of this article appears in print in the 1 December, 2022 edition of Al-Ahram Weekly.