Blog November 21, 2022

Are We Finally Closing the Climate Finance Gap?

By Roshni Menon
Front page of Are We Finally Closing the Climate Finance Gap?
  • Inequality and Exclusion
  • Pathfinders

This year’s United Nations Climate Change Conference (COP27) in Sharm el-Sheik took place at a time of conflict, a continuing global health pandemic, soaring inflation that have exacerbated concerns over food and energy security, and an increasingly precarious debt sustainability situation in many emerging markets and developing economies (EMDEs). While the climate crisis presents an existential threat amongst these overlapping, interlocking and compounding crises, meaningful action on the climate could also offer a way forward across multiple areas of shock in a world more vulnerable than ever.

Yet, wealthy countries were hard pressed — despite eventual agreement — during the negotiations to show more solidarity with developing countries by providing compensation for ‘loss and damage’ — that is, losses from extreme weather events that disproportionately impact the world’s poorest and most vulnerable, who did the least to cause climate change. For many wealthier nations also dealing with runaway inflation, skyrocketing food and energy prices, geopolitical tensions and impending recession, providing aid was low on their agendas. Thus, as the number of crises grows around the world, many EMDEs are left chasing the same dwindling pot of funds, creating not just an impasse, but also a break in trust between countries, as some crises are seemingly viewed as being more important than others. As the devastating impacts of climate change mount — made clear in the latest (2022) IPCC Global Warming report — the world must contend with extraordinarily tough choices and an uncertain pathway to sustainability.

The challenge: Regaining trust and raising massive funds at COP27

Negotiations at the recently concluded COP27 were defined by the call for climate finance. Discussions over loss and damage financing loomed large, with countries at the frontlines of the crisis urging developed countries to pay for the consequences of their emissions, and to help them pursue a sustainable path towards development. They also asked for the fulfillment of an unmet promise made by developed countries to transfer USD 100 billion annually to low-income countries. By 2020, total climate finance provided and mobilized by developed countries for developing countries amounted to USD 83.3 billion — a four percent increase from the previous year, yet still falling short of the goal by USD 16.7 billion. This came as no surprise as wealthier nations had already signaled that the target — despite being set in 2009 — would not be met until 2023.

While USD 100 billion a year is still considered the watershed figure for climate investment, the reality is that trillions, not billions, are now required annually. A report, commissioned by the UK and Egypt and released during COP27, stated that EMDEs outside of China need a combined USD 1 trillion annually in external funding to meet the goals set out in their National Determined Contributions (NDCs) — the climate action plan set out in the Paris Agreement. No government can put this much on the table, thereby putting the onus on mobilizing private finance and investment.

Hope and momentum rise as a trillion-dollar plan is hatched: The Bridgetown Initiative and innovative finance to fight climate change

Against an increasingly bleak background, glimmers of hope have emerged. The Bridgetown Initiative, a proposal initially developed by the Prime Minister of Barbados, Mia Mottley, and her climate finance envoy, Avinash Persaud, has gained traction with the aim of reforming the Breton Woods institutions and unlocking the trillions needed to fight the impending climate catastrophe.

The plan calls for the International Monetary Fund (IMF) to issue the equivalent of USD 650 billion in its reserve currency — known as Special Drawing Rights (SDRs) — to finance developing countries’ climate needs. Mottley proposes that wealthy countries deposit USD 500 billion of their SDRs into the new trust, and leverage that as security to borrow a further USD 500 billion from the private sector at very low rates. In this way, the first trillion will be mobilized — to be funneled through multilateral development banks at low interest rates to developing countries — bridging the chasm between what is currently on offer and what is needed. Architects of the Bridgetown Initiative envision that such a scheme could eventually mobilize up to USD 5 trillion in private investment for climate efforts.

The Initiative also calls for a tax on oil companies that would be used to fund reconstruction in developing countries after destructive extreme climate events. It further calls for countries’ outstanding loan payments to be paused after disasters, citing how Western creditors capped Germany’s annual debt payments after World War II to allow the country’s economy to rebuild.

Steps forward in the fight for a just and sustainable future for all

While outright commitments on the part of developed countries remain abysmal, the Bridgetown Initiative presented in Sharm el-Sheikh presents a tantalizing possibility for a better future. The pathway to sustainability is still visible — though barely — and its elements have been roughly mapped: a mechanism to unlock trillions in private sector funds, concessional or below-market rate financing provided by financial institutions, funding around loss and damage for countries pummeled by climate disasters and a moratorium on repayment timelines. Most importantly is the call to overhaul the international financial architecture and to regulate and tax polluting oil and gas companies to pay for climate resilience. If these ideas take root and continue to build momentum, then a full proposal could be taken to the Spring Meeting of the IMF and the World Bank in Washington DC next year.

As COP27 drew to a close, it was clear that the message on financing was making its mark. A new US-EU-Indonesia initiative aimed at catalyzing USD 600 billion in infrastructure investment by 2027 through the Partnership for Global Infrastructure and Investment (PGII) was announced. Under the strategy, the US aims to scale up climate finance to support action in developing countries by encouraging multilateral development banks (MDBs) to unlock hundreds of billions of dollars in additional lending capacity and to make these funds more accessible to recipients. And at the very last minute, a deal was finally reached on setting up a new fund for loss and damage, financed by wealthy countries. While the details are still being worked out, there is a sense that the conversation has shifted. All eyes should be on what action follows.

Photo: Shutterstock / DisobeyArt

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