Originally posted in The Daily Star on 25 October 2021
It is now well-recognised that the impacts of climate change will have significant economic costs in climate vulnerable countries. Scientists and economists have estimated that the cost of inaction to take measures against climate change impacts will be enormous compared to the cost of mitigation and adaptation. Numerous studies show that the economic cost of climate change is very high. According to the famous “Stern Review” (2006), the cost of inaction is five percent of global gross domestic product (GDP) each year, and the upper-case estimate is 20 percent of GDP or even more. Poor countries will face costs amounting to more than 10 percent of GDP with 5-6°C warming by the end of the century. On the other hand, American economist William Nordhaus estimated in 2006 that due to a 3°C increase in temperature and precipitation, there will be a cost equivalent to three percent of global GDP.
Taking these into cognisance, global leaders have made political commitments to work together to reduce global warming by reducing greenhouse gas (GHG) emissions and taking adaptation measures. Two important means of achieving this goal are technology and finance. These two are interlinked since without finance, innovation and access to technology cannot be achieved.
Some of the harms caused by climate change are either irreversible or only partly reversible. This means that once the damage is done, we cannot get back the original environment and natural resources. For example, extinction of species, loss of ice sheets and loss of unique cultures cannot be reversed. Some of the impacts—such as on agricultural production, infrastructure, water resources, energy, health, and migration—are partly reversible if adaptation policies are undertaken.
However, the cost of adaptation to address the impact of climate change can be huge. These costs will multiply a few hundred times due to delayed measures. Mitigation measures are required to cut or minimise the GHG emissions that cause global warming. Most of the climate vulnerable countries are not significant GHG emitters. Hence, most countries actually have to develop adaptation policies and need resources for that.
How the required resources to bear these huge costs will be mobilised remains a difficult question. There are two broad mechanisms of financing climate change. These are direct contributions from developed country governments, and market mechanisms. The first mechanism is preferred by developing and least developed countries, while the second mechanism is preferred by developed countries. Given that poor countries are victims of the GHG emissions by developed countries, there has been a demand from the former for compensation from the latter. However, there has always been resistance from rich countries to the call for directly compensating poor countries as the victims. As an alternative, at COP15 in Copenhagen in 2009, developed countries committed to channel USD 100 billion a year by 2020 to the affected poor countries. The Global Climate Fund (GCF) was set up to disburse the money. It was expected that the needs of climate vulnerable countries would be met through this fund.
However, the climate fund is fraught with several limitations. GCF could not deliver on its objectives due to the flawed climate finance architecture. In the upcoming 26th Conference of Parties (COP26) of the United Nations Framework Convention on Climate Change (UNFCCC), it is expected that strong and workable decisions will be made by the parties on finance-related issues. Specifically, a few important ones are as follows.
First, the amount mobilised so far is lower than the commitment of USD 100 billion per year. The recent estimates by the Organisation for Economic Co-operation and Development (OECD), updated with 2019 data, indicate that USD 78.9 billion of climate fund has been mobilised. The sources of this money have been mainly bilateral public grants or loans, multilateral public climate finance, multilateral development banks (MDBs), and multilateral climate funds. The amount of private finance is very small—only 14 percent of total climate funds, which are in the form of guarantees, shares in collective investment vehicles (CIVs), credit lines, syndicated loans, direct investment in companies, etc.
But the issue here is not only the inadequate mobilisation effort, but also the components of this climate fund and the way it is estimated. Oxfam (2020) claims that the OECD estimate of climate fund is inflated and the real climate fund is much less, since many unrelated components have been included in this fund. The organisation estimated that public climate finance in 2017-18 was only in the range of USD 19-22.5 billion, as opposed to the amount of USD 59.5 billion that was reported by the OECD. Among a number of eye-opening findings, the report also indicates that the climate-related development finance was 25.5 percent of bilateral overseas development assistance (ODA) in 2017-18.
Second, there are also questions about whether climate funds benefit the recipient countries or the donor countries. In many cases, funds are not for country-driven projects, and not even relevant for climate action. Countries include such initiatives as climate projects which have no link to climate mitigation or adaptation. For example, aid projects or road construction projects are counted as climate fund by some countries.
Third, the climate fund is biased towards mitigation projects. Mitigation funds comprise 64 percent of the total climate fund and are mostly used for energy and transport sectors. However, the least developed countries (LDCs) and the Small Island Developing States (SIDS) are the worst victims of climate change and need funds for adaptation more than for mitigation. As per the United Nations Environment Programme (UNEP), the present requirement of developing countries for adaptation is USD 70 billion per year, and in 2030 they will need USD 140-300 billion as adaptation costs. Moreover, the ongoing Covid-19 pandemic has put more pressure on climate vulnerable countries. Hence, ensuring the bigger share of climate fund towards adaptation is crucial to build forward a climate-resilient economy.
Therefore, COP26 has to deliver on the climate fund to resolve these anomalies and inadequacies of the current climate finance mechanism. It is expected that developed countries, MDBs, multilateral climate funds and other institutions would commit to increase grant-based public climate finance to the climate vulnerable countries. They should also pledge to increase adaptation finance to these countries—at least 50 percent of the total public climate fund.
Reporting on climate finance should be streamlined so that the climate projects can easily be identifiable along with their final outcomes. The share of the climate-relevant part of any project should be decoupled from the whole project, and only the funds for the climate-relevant part should be considered as climate finance. Non-concessional funds should not be considered as climate finance. More clarity on accounting standards of climate funds is needed. Additional climate funds should be available for actions which are locally-led and take into account the need of the local people, including women, in a country. Local people should be engaged in formulating their own national strategies towards reducing climate risks.
The concern on the adequacy, additionality, accessibility, predictability, and sustainability of climate fund was always there since the establishment of the GCF. More than a decade after the launch of the fund, these concerns have become even more prominent, instead of being resolved. The need for a better architecture of climate finance is more loudly pronounced now than ever before, since the promises on climate finance are broken. How COP26 will ensure predictable and sustainable financial resources for mitigation, adaptation, and technology cooperation is to be seen in a few weeks.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD).