The global climate finance system has become an epic case study in muddle and splintering as a result of indecision in multilateral governance. Not only is climate finance woefully inadequate in scale and depth but it fails to involve the private sector sufficiently and diverts public expenditure away from development. As a result, huge climate finance gaps have opened for developing countries, and there are few tangible signs that current global financial commitments can close them.
To understand how this situation has come about, we need to backtrack a little. Historically, finance has been a lynchpin of the global climate deal. However, the principle of common but differentiated responsibilities and respective capabilities enshrined in the UN Framework Convention on Climate Change gives developing countries no guarantee of receiving adequate funding to finance their climate mitigation actions.
International policy regimes related to the principles of the Rio Declaration and the climate change convention have changed significantly in the two decades since those critically important international treaty documents were signed. The promises made about how the newly created climate funds could be sustainably replenished were vague. And in the absence of real pledges for more finance, each new climate-related financial organisation has added to the already complex mosaic of institutional infrastructure and reinforced the barriers and competition for the limited capital flows that do exist.
A strategic redesign of the entire architecture of climate finance is needed to make it more efficient
Once it was realised that the current funding schemes were failing, the Green Climate Fund was set up in 2010 with the clear purpose of addressing climate change mitigation and adaptation actions in developing countries.
Fire and flood
A succession of extreme weather events all around the world has made clear the potential fury of climate change. The impact of these events is felt acutely by some of the poorer and most vulnerable countries.
In 2022, for example, Pakistan suffered its worst weather-induced floods to date. They caused over US$30bn of economic loss and displaced millions of people, yet the country has remained a modest recipient of international climate change funding. In the immediate aftermath, US$245m was mobilised by the Pakistan government and private and international donors, along with US$816m in emergency relief pledges from international partners. The subsequent International Conference on Climate Resistant Pakistan culminated in institutions and countries pledging US$10.57bn for reconstruction.
However, the availability of concessional climate funds to developing countries remains limited. The total climate finance commitment of US$632bn following the Paris Agreement includes only US$65bn in concessional finance provided by multinational corporations to East Asian economies, and just US$20bn in grants to the most impoverished countries. Pakistan has faced stringent criteria for accessing concessional finance, despite numerous opportunities for debt swaps, such as transitioning to clean energy, implementing a massive reforestation programme and upgrading agricultural technology to reduce the burning of crop residues.
Non-concessional loans add to the debt strains on developing countries
Finance with strings
The climate finance instruments of relabelled loans and non-concessional financial instruments have added to the longer-term macro-economic and debt strains on developing countries. According to the OECD, concessional and non-concessional loans accounted for 72% of developing countries’ public climate finance between 2016 and 2020. Grants provided only 26% of the financing for climate change mitigation and adaption activities.
Climate finance needs urgently addressing at the COP 29 conference taking place in Baku this November. What is not needed is another fund or instrument without sustainable financing mechanisms or yet another call for private sector involvement, but rather the strategic redesign of the entire architecture of climate finance to make it more efficient and less time-consuming to access the capital that is already available. Equally essential – to unlock public money and expand carbon markets – is a doubling in the amount of concessional finance provided by the advanced economies through targeted mechanisms and special drawing rights for countries at risk.
Disclaimer: The views expressed by the writer do not necessarily reflect those of ACCA or any other person or organisation
