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How much climate finance should rich nations provide?

Developed countries have committed to providing billions in climate finance to offset their contribution to the environmental crisis. But much of this funding is being redirected from existing development assistance and may be insufficient to tackle global warming.

Climate change is a problem created by industrial nations. But its effects – from extreme weather and drought to rising temperatures – will be most felt in lower-income countries.

The United Nations (UN) process to tackle climate change recognises finance as one of its three pillars and includes the only agreed international treaty on providing finance to developing countries. The legally binding Paris Agreement of 2015 reinforced this commitment. So, are rich countries doing enough; and what would ‘enough’ be?

Developed countries are expecting to meet a collective goal of mobilising $100 billion per year in climate finance in 2023, three years after they made this commitment.

While that amount is substantial, the design of the target means that much of the money has been rebadged or diverted from other development objectives such as economic development and poverty reduction. Policy officials at the UN and within individual countries are beginning work, mandated by the Paris Agreement, to agree a post-2025 climate finance goal from a floor of $100 billion per year.

While economic analysis of the externalities of climate change – effects not experienced by the company or country causing them – could justify a much larger figure, if the design of the target doesn’t improve, that money may not make a difference to those dealing with the worst effects.

Despite the importance of combating climate change, high quality economic research on it is still lacking. In 2019, a study assessed nine of the top economic journals and identified just 57 papers on climate change out of a total of around 77,000 (Oswald and Stern, 2019).

The authors suggest that this may reflect a bias towards ‘conventional’ topics among editors and authors. It may also reflect the absence of reliable data – but the result is relatively thin research on arguably the most important issue of our time.

What are the costs of climate change and adaptation?

It is well understood that emissions of greenhouse gases such as carbon dioxide are trapping the sun’s heat, raising temperatures and affecting weather patterns. Each tonne of carbon dioxide, wherever it is emitted, is damaging to the environment and has associated costs.

Various reports have estimated these costs, although doing so relies on taking a view on how badly the planet and the economy will be damaged if and when emissions peak.

If climate change ultimately destroys much of the planet, the cost of each tonne of carbon will be extremely high, relative to one where the goals of the Paris Agreement – which commits to limiting temperature increases well below 2°C – are achieved. One authoritative summary, led by the US government puts the cost at $40 per tonne in 2020.

We have used that figure to look at historical emissions and their cost. Even if we discount the externality cost historically, and don’t count emissions at all before 1979 – when awareness grew and the first world climate conference was held – the costs are very significant.

They are estimated at $34 trillion globally, or $15 trillion for OECD countries – around 28% of their national income (Robinson et al, 2021). Paying off just the OECD’s historical liability would cost $190 billion per year to 2100.

The costs of climate change could also be estimated by aggregating government or business costs of mitigating emissions and adapting to the effects of climate change. The true costs would be those relative to a scenario or ‘counterfactual’ without climate change.

But this is a difficult calculation. Even for, say, flood defences, it requires attributing some share of the cost to changed climate; and there is no automatic reason for governments or businesses to do so.

But under the Paris Agreement, every country must produce a nationally determined contribution (NDC), which estimates emissions pathways and includes financing costs in many cases. As these develop over time, they may give a fuller picture of national costs.

These estimates of costs are different from the climate finance target. The latter is a negotiated outcome as part of an agreement to reduce emissions, not an attempt to set finance to match the costs of climate. But clearly any ‘liability’ for climate damage is relevant to that negotiation.

The COP process has a separate track on ‘loss and damage’ (article 8 of the Paris Agreement), which is where discussions of compensation take place. But these have made little progress as industrialised countries have been unwilling to agree to liability – although Scotland made the first financial contribution of £2 million under this article at COP26 in Glasgow in late 2021.

The $100 billion climate finance and other development finance targets

In practice, the $100 billion per year target, originally agreed in 2009 at the 15th COP and reaffirmed by the Paris Agreement, is currently the only active mechanism for redistribution.

The other well-known international agreement on development finance is the 60-year-old UN agreement to provide 0.7% of gross national income (GNI) in official development assistance.

This long-standing target is accepted in principle by many high-income countries (but not by the United States or Switzerland), although in practice few have met it consistently. Across the 29 rich countries that comprise the OECD’s Development Assistance Committee, development assistance has typically amounted to 0.32% of GNI or $161.2 billion in 2020.

These efforts overlap with the COP climate finance target – nearly a quarter of official development assistance is now badged as climate finance (and counts towards the $100 billion target).

Climate finance was originally intended to be additional to existing development finance efforts. The first UN meeting of the conference on climate change (UNFCCC) in 1992 called for ‘new and additional’ resources. This language has appeared consistently in COP agreements, including the 2009 Copenhagen Accord, which set the $100 billion per year goal, and the Paris Agreement that reaffirmed it.

In practice, rich countries have shifted resources from aid programmes or rebadged activities to make progress on the climate goal. By 2019, the OECD suggests that climate finance grew to $78.9 billion but that was within an increase of all development finance of just $43.6 billion.

This suggests that only around half of climate finance was additional in absolute terms. Relative to national income, the picture is even worse: high-income countries’ contributions have remained unchanged as a share.

This failure to commit additional funds is particularly obvious in the case of the UK. The country is the current COP president and aims to double its climate finance to total £2 billion annually until 2026.

Despite this commitment, the UK has reduced its wider aid budget by £4.5 billion per year. During 2021, nearly all of the UK’s aid partners saw their support fall by a third or more, while the UK claimed to be increasing its support for climate.

The climate finance target was not defined clearly – it lacked a measure, baseline or any attempt to assess additionality. It also counts loans as equivalent to grants.

This has led to major disagreements in the past. Ahead of the Paris negotiations, India’s government famously suggested that credibly new and additional climate finance actually disbursed (rather than just ‘committed’) was more like $2.2 billion in 2014, far below the OECD’s claim of $62 billion for the same year.

Not only has this meant fewer resources to tackle climate change, but the lack of definition and progress has also undermined trust in the Paris Agreement. Without trust, countries do not have the incentives to make major adjustments to their policies or emissions.

Where next on climate finance?

At COP26 in Glasgow, developed countries set out a ‘delivery plan’ that would ensure the $100 billion target will be met three years late, from 2023 onwards. Although this is no guarantee of additional resources, for which there are acute needs in low-income countries to deal with the health and economic fallout from Covid-19, a food price crisis exacerbated by Russia’s invasion of Ukraine and record levels of humanitarian demand mainly due to the conflicts in Syria, Ukraine and Yemen.

The Paris Agreement commits to a new climate finance target from a floor of $100 billion per year from 2025 ‘taking into account the needs and priorities of developing countries’. Officials are starting work on the design of that target now.

This work will be crucial both in financing development, but also ensuring trust between nations as they look to transform their economies in the coming decades. Industrialised nations will need to recognise their responsibility for the damage caused by emissions and be prepared to provide financial support to those most vulnerable to deal with their effects on the climate.

Where can I find out more?

Who are experts on this question?

  • Joe Thwaites, World Resources Institute
  • Clare Shakya, International Institute for Environment and Development
  • J. Timmons Roberts, Ittleson Professor of Environmental Studies and Sociology at Brown University
  • Nicholas Stern, London School of Economics
Author: Ian Mitchell
Photo by Kongdigital from iStock
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