Challenges and Imperatives of Climate Finance

Written by: Lydia Nyachieo

COP26, the 26th annual global climate summit hosted by the UN, concluded on November 12th after two weeks of intensive negotiations. Even though many civil society actors – including country delegates, climate activists, scientists and indigenous groups – had high hopes for this conference due to the increasing threat and devastation of climate change, the final agreement left people with mixed feelings about its gains and failures. One such considered failure was the lack of concrete language concerning climate finance.

Climate finance refers to any funds allocated to support mitigation and adaptation efforts against climate change – whether through bilateral funds, the private sector, multilateral development banks or climate funds. This might include money to help a country replace more of its fossil fuel energy with renewable energy or to build sea walls to help coastal villages withstand rising sea levels and adverse sea weather. In the past few decades, it has been widely acknowledged that developed nations should provide developing nations with such climate finance. Not only do developing countries sometimes lack the means and capacity to effectively fight climate change, but rich nations have been responsible for the majority of greenhouse gas emissions while experiencing a fraction of the impacts. For example, Africa and Oceania have respectively contributed three percent and 1.2 percent to the global cumulative CO2 emissions (compared to 25 percent and 22 percent from the US and EU), yet these regions have been disproportionately impacted by droughts, flooding, rising sea levels and other erratic weather events caused by climate change. 

Both the 2015 Paris Agreement and the 1997 Kyoto Protocol call for richer nations to provide financial assistance to more vulnerable nations, and in the 2009 COP15 at Copenhagen, rich nations pledged to give $100 billion a year to poorer nations toward climate adaptation and mitigation efforts by 2020. Despite this stated commitment, has this climate finance pledge really been effective? 

What Has Been Done So Far

Even though several rich nations have generously paid tens of billions of dollars toward climate finance in the past decade – including Japan, Germany, and France – the $100 billion per year pledge hasn’t been met. At the time of the pledge, these countries didn’t formally agree on what each should pay, nor how they should pay, nor how to target the funds effectively. As a result, while some wealthy countries like Norway, Sweden, and Germany have paid more than their fair share in climate finance (according to the size of their economy and cumulative share of greenhouse gas emissions), many countries like the U.S., Australia, and Canada have paid a fraction of what they should have. Thus far only about $80 billion out of the $100 billion has been paid per year. Understandably, the COVID-19 pandemic has hurt economies all over the world and impacted countries’ abilities to fulfill this commitment. However, contributions toward this pledge had been falling short long before the pandemic, with an estimated $78 billion given in 2018. Additionally, the money that has been paid out hasn’t been used as effectively as it could have been. For one, around 70 percent of the funds paid out thus far have been loans instead of grants, according to Paul Steele, the chief economist at the International Institute for Environment and Development, in a BBC podcast. This essentially makes developing countries pay for their own mitigation and adaptation efforts, which – on top of having to handle the economic hardships caused by the COVID pandemic – exacerbates the existing foreign debt that many of them have. 

Another factor is that, despite developing countries’ wishes for more climate finance to go towards adaptation efforts, the bulk of the money given has gone toward mitigation efforts. Mitigation targets the root of climate change by preventing greenhouse gases from going and staying in the atmosphere, such as by replacing fossil fuels with renewable energy sources or preserving carbon-dioxide sinks like rainforests. On the other hand, adaptation aims to help people adjust to the effects of climate change by helping them to live with and minimize the harm already done. Examples of this include helping farmers switch to drought-resistance crops in areas that have experienced more droughts, or building sea walls in coastal areas threatened by the rising sea levels caused by global warming. Although the proportion of climate finance going toward adaptation has improved in the last five years, adaptation efforts still only account for about 25 percent of the funds thus far. Reasons for this include the fact that mitigation efforts are seen as more profitable, with more visible and measurable results.

Apart from overlooking developing countries’ adaptation priorities, another problematic factor is that, according to Steele, only about 20 percent of the $80 billion given so far has gone to the most vulnerable, least developed countries, whereas the bulk of the money has gone towards middle-income countries. According to Chukwumerije Okereke, an economist at Alex-Ekwueme Federal University Ndufu-Alike in Nigeria, many African countries haven’t been able to receive sufficient climate finance funds due to the “complexity and the technicality” involved in accessing it. For example, some countries have reported that the accreditation process they must undergo to get funding from the Green Climate Fund – the world’s largest multilateral climate fund – is “excruciatingly painful,” given the bureaucracy, long delays, and long list of standards and data they must deliver.

Finally, Steele also mentions that many rich countries count existing development aid as climate finance if the development projects remotely relate to climate. For example, according to Tracy Carty, a senior policy adviser on climate change at Oxfam, Japan “treats the full value of some aid projects as ‘climate relevant’ even when they don’t exclusively target climate action.” Thus, instead of giving new and additional money for climate finance, as was implied at the time of the 2009 pledge, many countries are counting the money they are already giving in existing development aid as part of their pledge.

Therefore, even though billions of dollars have been paid out towards climate finance by rich countries, this money hasn’t been as sufficient, targeted, affordable or accessible as it ideally should have been.

The (Moral) Dilemma

Even though climate change has been a threat for decades, the relatively recent and growing push to phase out fossil fuels has put many developing countries in an extremely strained position of choosing whether or not to use the fossil fuel-based resources they have to develop their country, especially with the lack of adequate financial support from other countries. One such country is Guyana. A long-time carbon sink due to its rainforest preservation, Guyana has been pressured to start extracting its recently discovered oil to finance adaptation efforts against devastating floods and rising sea levels. However, countries such as Guyana have little financial means and capacity to fund urgently-needed mitigation and adaptation efforts – especially with the onset of COVID-19 – and oftentimes the most appealing yet equally risky option is to capitalize on their fossil fuel resources. At the same time, developed countries – many of whom have enriched themselves using fossil fuels – are telling them not to.  

Understandably, several countries in such situations have pushed back. For example, India and China insisted on the ‘phasing down’ rather than the ‘phasing out’ of coal at COP26. Likewise, several African countries – many of whom have an abundance of fossil fuels – opposed a swift transition to renewable energy sources, citing their need to use these fuels to develop their countries. Given the historical context, it would be fair to say that several developed countries don’t have the moral authority to tell developing countries not to use their fossil fuels. Yet there are still strong reasons why they shouldn’t use these fuels. Not only do these countries have a duty to the rest of the world (including other climate-vulnerable areas) not to exacerbate climate change by burning these fossil fuels, but also to their own citizens, who oftentimes experience the immediate health, environmental and social consequences of living near sites of fossil fuel extraction. Additionally, given that fossil fuels are finite resources, it would be dangerous to continue to orient their infrastructures and economies toward industries that are inevitably going to phase out anyway. Given this dilemma faced by several developing countries, adequate due climate finance from developed countries is all the more important.


The Outlook

Before COP26, the Canadian and German environment ministries were tasked with assessing the $100 billion climate finance pledge and its outlook. The resulting Climate Finance Delivery Plan emphasizes a “continued commitment to meet the annual US$100 billion goal” by 2025 and lists collective actions for developed countries, including increasing adaptation finance, making climate finance more accessible, increasing transparency around reporting and having more grant-based finance. This document is a crucial step in recognizing the need to improve climate finance. However, the fact remains that several rich countries refused to make solid commitments on climate finance at COP26  – such as refusing to discuss loss and damage compensation to developing countries – and the final agreement includes no specific, official language as to how countries are expected to contribute to climate finance. That said, at least three important considerations remain.

For one, despite the encouraging commitments at COP26 to decrease greenhouse gas emissions, to keep global warming below 1.5°, and to pledge money towards climate finance over the next few decades, the reality of climate change for many communities – in both high-income and low-income regions – is urgent. Island dwellers are watching their homes sink, farmers in parts of sub-Saharan Africa are finding it increasingly difficult to make a livelihood amidst increasing floods and droughts and there are numerous rippling effects of climate change on migration and conflict in the Sahel. Even though climate efforts can hardly be carried out overnight, it’s imperative that we keep in mind the urgency and life-threatening gravity of the impacts of climate change.  

Second, based on some of the discourse at COP26, it seems that a fundamental change in mindset is needed around the tie between fossil fuels and development. According to a BBC article, India’s climate minister Bhupender Yadav questioned the feasibility of developing countries phasing out fossil fuels when they “have still to deal with their development agendas and poverty eradication”. This reveals the underlying assumption that development is inextricably linked to the burning of fossil fuels, which – given the industrial history of many rich nations – isn’t surprising. Yet, it seems that an essential step in the global transition to renewable technologies is the willing consensus that these sustainable technologies should be the basis for growth and that we should focus on decoupling growth from negative environmental impacts. This is, by all means, easier said than done, due to how many countries’ infrastructures are already oriented toward fossil fuels, the extreme subsidization of the fossil fuel industry ($5.9 trillion in 2020), and the ongoing exploration of the large-scale feasibility of renewable energy sources. However, if there is to be more widespread willingness for countries to rapidly phase out fossil fuels, renewable and sustainable technology has to be made more affordable, accessible, and attractive – it has to become the norm.

Finally, fulfilling the pledge of $100 billion per year isn’t a matter of charity. Given the history of which world regions have directly and indirectly contributed most to greenhouse gas emissions, climate finance to poorer and more vulnerable regions is a matter of global environmental justice. Furthermore, rich nations’ failure to achieve this promise is a matter of trust. For countries to continue to work together toward more sustainable ways of being, there must be trust between parties that each will do what they say they’re going to do. As COP26 president Alok Sharma said, “This [$100 billion pledge] is a totemic figure, a matter of trust, and trust is a hard-won and fragile commodity in climate negotiations.” We can’t risk falling into an ‘each one for themself’ mentality, since the fight to keep this world livable has to be a collective, inclusive, and purposeful effort.