Rich states: stop shirking on climate finance

Finance is to play a key part in the fight against climate change. But with the crucial Paris Summit just weeks away, climate finance is a mess. With a few honourable exceptions, countries are doing far less than they should. The multilateral development banks are doing what they can — but without fresh capital, they can only divert funds from other needy causes.

Investment in green technology is accelerating but not nearly fast enough to curb climate change, and not much of it is going to the poorest countries. They have done the least to cause global warming but are already suffering worst from its effects, such as rising sea levels and extreme weather.

At the Copenhagen summit in 2009, when states failed to reach agreement to cut emissions, the developed countries promised that by 2020 they would be “mobilising” $100bn a year to developing countries, to help them mitigate (ie slow) and adapt to climate change. The amount was supposed to ramp up between 2009 and 2020.

Six years on, you might think the rich countries would have worked out a formula for how much each country was supposed to pay, and decided what counted and what didn’t.

Not a bit of it.

The first official survey of how much the rich countries are actually doing on climate finance for the developing world was presented by the OECD at the IMF/World Bank annual meetings in Lima on October 9.

It showed an average of $57bn a year had been committed, over 2013-14. The rhetoric from the rich countries in Lima was that this showed a “politically credible pathway” to reaching the $100bn in 2020.

But the developed countries deserve at best a C grade for their efforts.

First, the developing countries clearly felt they had been promised that the $100bn would not just be purloined from existing aid budgets. But much of what the developed countries are paying is indeed part of aid.

Even more seriously, the Copenhagen text left the door open for the $100bn to include private sector capital flows, without any specific limit.

The kneejerk reaction is to say “great — we need the private sector to get involved”.

Of course we do — but that is exactly why the public sector contribution needs to be as large as possible.

There is a multiplier effect. If a government or development bank puts up $10m for a project, extra private investment can be attracted alongside. Thus, the more of the $100bn ends up being public money, the greater, by a multiple, the overall benefit (and, incidentally, the opportunity for the private capital markets).

Bear in mind that the real amount needed to redirect the world’s economy towards low-carbon development has been estimated at $1tr-$5tr a year.

A third grave problem is that, while the $100bn commitment is legally binding on the group of developed countries, there is no agreed means for how to share it out.

This has led to a grossly unfair distribution of the burden and a heavy reliance on redirecting existing budgets.

In the $57bn of commitments counted by the OECD, $22.8bn, or 40%, came from governments, plus $1.6bn in export credits, mainly for renewable energy.

Multilateral development banks provided $17.9bn, or 31%, and the private sector $14.7bn in cofinancing. For the MDB part, the OECD counted only the share of the banks’ efforts that is supported by developed countries’ capital, as the MDBs also have capital from developing states.

But the latest figures for how much each country is doing refer to 2012 commitments, which totalled $17.1bn from states and $15.4bn from MDBs, according to the World Resources Institute.

The figures make depressing reading. Only Norway and France come anywhere close to pulling their weight (see table).

Countries seem to be hoping they will somehow, haphazardly, make it to $100bn, by scraping together what they can find in various kitties, including private money and a lot from the MDBs.

The MDBs are doing what they can. The World Bank Group, for example, has said it would raise its contribution from $10.3bn a year now to $16bn in 2020. But that money is just being diverted from other purposes — since the World Bank has not been given a capital increase, and would have planned to use its capital fully anyway. It has asked for a capital increase to “support the UN’s development goals”, but there is no certainty it will get it.

No one knows how much of a fight the developing countries plan to put up about finance in Paris. But they would be well within their rights to dig their heels in.

As a minimum, developing countries should insist that, by the end of 2016, developed states come up with a clear plan for what the $100bn will consist of, and how it will be divided among the various providers.

They would be well advised to insist that all of it is public money. More realistically, they may have to settle for a firm percentage, perhaps 70% or 80%.

They should extract a firm promise that new commitments do not come from existing aid flows.

As for the MDBs, the developing states ought to request that the supranational banks’ component in the $100bn be backed by fresh capital increases. If they are wise, the developed countries will see the logic of that — their money will go a lot further channelled through the efficient capital structures of the MDBs.

Finally, the developing states should insist on a hard percentage being earmarked for adaptation to climate change, rather than mitigation.

Resistance by the developing countries might make the meetings in Paris ugly and stressful. But climate finance is too important to be allowed to languish for much longer.

This is a shorter version of this opinion piece. Full version available here.