The challenges posed by climate change cannot be met without transforming the development model of our economies. To achieve this, we need to come up with solutions to finance that transform the process and support countries and local authorities on the development and implementation of new public policies.
What are the drivers for change? This new development model requires massive investments in installing renewable energy generation, reconverting the capacity of the most emissive energy production, and implementing more energy-efficient technologies in all sectors, including industry, transport, and construction.
The challenge is made more complex by the fact that the life span — and therefore structuring effects — of energy infrastructure contribute to limit the implementation of changes.
This “transformational” or “transitional” issue entails major changes in the public policies and budget allocations of national governments and local authorities. These changes can — and must — take place with economic, social and environmental costs that are acceptable for countries, economic stakeholders and populations.
In addition, the issue entails a rapid and substantial redirection of global financing towards investments and technologies with the greatest climate co-benefits, as well as a reduction in financing investments with the highest greenhouse gas emissions. Current estimates show that climate finance does not exceed $300 billion, whereas thousands of billions of dollars are invested every year in infrastructure and generation capacity with high or very high levels of GHG emissions.
Mobilization of all actors
Public international climate finance at large, or an instrument like the Green Climate Fund are bound to redefine the objectives and modalities of traditional official development assistance. However, in view of the challenges at stake, official development assistance institutions cannot alone address the need to redirect public and private investment massive flows towards low-carbon investments, while allowing economies to adapt.
The involvement of national and regional public financiers, which are legitimate in supporting the development trajectories of their countries and have technical and financial capacities — that can in no way be compared to those of international financiers — is of crucial importance.
The complementarity and synergies of financiers is one of the priorities of the climate finance architecture. The International Development Finance Club, set up in 2011 and which includes 22 major international, regional and national development banks, proves that change is possible and feasible. With some $87 billion of financing invested in projects that contribute to the fight against climate change, these banks are demonstrating their capacity and willingness to contribute to a solution.
Yet given the scale of investment needs, the role of international or national public finance will also increasingly become catalytic in nature and it must promote the redirection of private investment flows towards investments with climate co-benefits.
A change in global paradigms
In addition to the necessity of financing the ecological transitions of countries, two other dimensions need to be considered.
The first is valuing and reviving climate services rendered by certain natural resources — forests and soil, for example, which act as carbon sinks: These natural capacities have dramatically declined over the past decades and major investments for conservation and replenishment are required. Climate finance can help to promote these highly effective climate investments at relatively low financial cost.
The second is the capacity of countries, local authorities, economic actors and people to adapt to the consequences of inevitable climate change. The climate challenge lies as much in the capacity of populations and countries to bear more frequent and more violent extreme events as in their capacity to make provisions for and establish policies to anticipate the impacts of climate change and be more resilient to them. The cost and financing of these measures are complex to assess, while the consequences that need to be faced have not yet been established.
Changing the behavior of financial institutions
To address the climate challenge, public financiers — and more specifically development banks — must pursue their efforts to mainstream climate issues in their strategies. This effort is necessary both to increase financing flows and to give financial incentives to redirect investment flows.
During the Climate Finance Forum in Paris on March 31, the multilateral development institutions and IDFC agreed to promote better practices in terms of mainstreaming the “climate dimension” and building a more standardized and operational framework for climate finance.
But they must also seek ever greater transformational impacts by supporting national or territorial public development policies that integrate the issue of the fight against climate change and the objective of achieving impacts in terms of mobilizing and redirecting investments and financing flows. This includes supporting the innovations required to give incentives to financial markets, providing solutions to local finance in order to help stimulate energy upgrades in SMEs, and assisting the formulation of local authorities and governments climate action plans to make them more ambitious and more economically and socially acceptable.
Finally, greater support to the poorest countries and the most vulnerable to climate change is required in order to finance appropriate development, robust to the consequences of climate change. This can be implemented in three phases:
1. Prepare and support countries (governments, local authorities, economic actors) for the definition of new and appropriate policies for development and land-use planning;
2. Finance these new development policies and support the upgrading of infrastructure and sectors to make them resilient;
3. Set up and finance natural disaster prevention and risk management mechanisms.
The fight against climate disruptions requires major changes in terms of behavior, development policies and actors. They will mostly be anticipated and integrated — and mostly endured.
Public financiers have developed significantly in recent years and will have a major influence on the other actors in this field. The next stage will be to further strengthen the effectiveness of their actions.
This guest opinion is published in association with ID4D, an international blog for exchanges and constructive debates on development. Hosted and facilitated by the AFD, the French agency for development, ID4D is aimed at all development stakeholders.
Join the Devex community and access more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.