Is climate finance diverting from development assistance?

A herder cultivates fodder that is more resilient to extreme weather changes in Mongolia — an example of a climate-smart agricultural activity promoted by development banks. Photo by: Asian Development Bank / CC BY-NC-ND

BURLINGTON, Vt. — The year 2020 was meant to be a key milestone on the road to meeting the goals of the Paris climate agreement. That is particularly true for climate finance and for the agreement between higher- and lower-income countries that if governments took steps to limit carbon emissions, they would be supported with technical and financial assistance.

Due to a lag in reporting, it will take another two years to know for sure whether high-income countries have met their commitment to provide $100 billion of climate finance to lower-income countries per year by 2020. Even if they officially reach the $100 billion mark, however, there will continue to be questions about whether that funding truly reflects the spirit of a global climate change agreement built on trust and solidarity.

In particular, some climate finance experts are concerned that governments’ efforts to boost international funding for climate change may not actually reflect new resources. A significant amount of this funding, they worry, has likely been redirected from development assistance budgets and relabeled as climate finance.

The COVID-19 pandemic has complicated international climate change cooperation, including by forcing the postponement of COP26 — the next United Nations Climate Change Conference — until 2021 and by placing enormous pressure on public budgets, which were already failing to mobilize resources at the scale necessary to limit warming and invest in adaptation. Climate advocates say it will be critical for higher-income countries to recommit to their climate finance contribution plans — and to push for a more ambitious post-2020 target.

“We need to see the reassurance that the $100 billion will be met,” said Joe Thwaites, associate at the World Resources Institute, speaking Friday at an online event hosted by the Center for Global Development.

“It’s really important that developed countries use the moment over the coming year to make clear what their post-2020 climate finance commitments are going to be. That will go a long way to trust-building and ensuring that COP26 is a success,” Thwaites said.

For years, country representatives have sparred over how climate finance should be counted.

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The latest figures from the Organisation for Economic Co-operation and Development, which tracks climate finance, indicate that it increased to roughly $79 billion in 2018. Many climate advocates take issue with the fact that this figure includes not just grants but also loans, which have to be paid back, as well as private sector finance.

The “Climate Finance Shadow Report,” published by Oxfam to accompany OECD’s latest figures, charges that “the excessive use of loans and the provision of non-concessional finance in the name of climate assistance is an overlooked scandal.”

Oxfam and others advocacy groups have argued that the $100 billion ought to be limited to public finance from bilateral and multilateral donors and that it should only include the “grant equivalent” amount of funding provided, as opposed to the full face value of loans and other financial instruments.

But there is another concerning question about the climate finance that donors are currently providing to meet the $100 billion target: Is some of it funding they would likely have provided anyway in other forms of development assistance?

When international negotiators agreed to the $100 billion target in 2009 — and formally adopted it as part of the United Nations Framework Convention on Climate Change in 2010 — part of the agreement was that climate finance should be new and additional to development assistance that donors would otherwise provide.

At the time, they did not establish a globally agreed standard for what “new and additional” should mean, and while climate finance has increased since 2009, it appears likely that a significant portion of it was simply relabeled or even diverted away from other priorities, according to some analysts.

Researchers with the Center for Global Development compared the increase in climate finance since 2009 with the overall increases in official development assistance and “other overseas flows” — two categories of public funding — over the same period. They reasoned that if the increases in climate finance resulted from new money, then they would show up as overall increases in development assistance.

They found, however, that since 2009 climate finance has increased by $62 billion, while development assistance only increased by $41 billion over the same period.

“The next phase in climate finance needs to be one that focuses not only on the volume of financing, but also what that finance achieves.”

— Rachael Calleja, senior research associate, CGD

That means that even if all of the additional $41 billion in development assistance were categorized as climate finance — a generous assumption — then there would still be $21 billion of climate finance that could not be accounted for by growth in development assistance. At least a third of this public spending for climate, they concluded, was therefore likely relabeled or diverted from existing assistance programs.

“It’s clear that providers haven’t met their commitment to additionality. Part of the challenge is obviously that in the absence of a globally agreed standard, providers can define ‘additionality’ however they like,” Rachael Calleja, senior research associate at CGD, said at Friday’s online event.

Calleja and her colleagues found that more than half of the countries obligated to provide climate finance under the Paris Agreement have adopted a definition that counts any climate finance as “new and additional.”

“If funding isn’t new and additional, then it could mean that some public spending is being, at best, rebadged as climate-related but, at worst, reallocated away from other developmental priorities,” Calleja said.

“It’s difficult to see how either scenario is in line with the spirit of the climate agreements,” she said.

One reason for concern is that climate finance and development assistance tend to have different profiles in terms of how they are spent.

A large share of climate finance goes to mitigation projects in middle-income countries. If that means interest-free or grant funding is being pulled from other development priorities in lower-income countries, there could be a significant opportunity cost associated with some climate-related spending, Calleja said.

The overlap between development spending and climate finance speaks to a fundamental challenge, WRI’s Thwaites said.

Given that all development programs should be sensitive to the increasing impacts of climate change, there is a sense in which “everything becomes climate finance,” he said. At the same time, there is also a need for, “very targeted, transformational climate finance that’s really focused on bending the emissions curve and meeting urgent adaptation needs.”

As negotiators look toward the next climate finance target, they will likely face pressure to adopt more specific language to differentiate and preserve these interconnected goals, and a greater focus on effectiveness might be one way to do that, Calleja said.

“I think the next phase in climate finance needs to be one that focuses not only on the volume of financing, but also what that finance achieves,” she said.

About the author

  • Michael Igoe

    Michael Igoe is a Senior Reporter with Devex, based in Washington, D.C. He covers U.S. foreign aid, global health, climate change, and development finance. Prior to joining Devex, Michael researched water management and climate change adaptation in post-Soviet Central Asia, where he also wrote for EurasiaNet. Michael earned his bachelor's degree from Bowdoin College, where he majored in Russian, and his master’s degree from the University of Montana, where he studied international conservation and development.