Is there as much climate finance as you've been told?

After a year of record-breaking extreme events, from devastating floods in Pakistan and the United States to unprecedented heat waves across Europe, Asia, and Africa, it is clear that governments around the world face a hefty bill to tackle the impacts of climate change. Finance for reparations and risk preparedness is expected to be high on the agenda at the upcoming 27th United Nations Climate Change Conference, or COP 27, in Egypt. The latest available data show that even before the COVID-19 pandemic and the war in Ukraine shook the global economy, growth in available climate finance had already slowed over the past ten years. This trend is likely to affect low- and middle-income countries the most, as their ability to withstand the worst impacts of climate change depends on funding to upgrade their infrastructure and mitigate their present and future carbon footprints. But how much finance is actually being provided? How much is needed? Where is it being spent, and on what? And is as much being spent on this issue as high-income countries say? Current figures According to the Climate Policy Initiative, or CPI, a nonprofit which analyzes yearly financial flows at a global level, total funds spent on climate mitigation and adaptation averaged $632 billion per year in the years 2019 and 2020. The sum includes money coming from public and private sources, and is both domestic and international, meaning it includes money spent by governments and companies in the global north on addressing climate issues in their own countries. Right now, CPI figures suggest low-income nations in the global south are receiving less money than high-income countries. Only $70 billion is identified as being spent across Africa, the Middle East, Latin America and the Caribbean, while $188 billion is being spent in North America and western Europe — largely by private investors interested in solar photovoltaic and onshore wind. CPI uses two-year averages to smooth out variations in the data. It is estimated that in 2017 and 2018, the average spending was $574 billion. In 2015 and 2016, the average was $463 billion. Across the course of the decade, funding rose by around 74%. CPI researchers, however, caution that the figures are not adjusted for inflation. Given how much economic conditions such as inflation and foreign exchange rates will vary between jurisdictions, the exact impact of inflation is impossible to estimate. However the real term rise in funding would be far lower. While more money is made available every year, the pace at which it is released doesn’t match the urgency of the climate crisis. In order to meet global 2030 climate goals, the researchers calculated, annual investment in climate response would need to reach $4.5 trillion, a nearly six-fold increase compared to today. The elusive $100 billion In 2009, at COP 15 in Denmark, high-income countries promised they would deliver $100 billion per year by 2020 and through 2025 to help low- and middle-income nations address climate change impacts such as rising sea levels, heatwaves, flooding, and cyclones. But that goal is yet to be met, and at COP 26 last year in Glasgow, United Kingdom, the deadline was extended to 2023. According to the Organisation for Economic Co-operation and Development, tasked with tracking progress towards the $100 billion goal with data provided by donor countries, the total finance mobilized in 2020 stood at $83.3 billion, of which a majority, around 58%, was spent in mitigation projects to reduce emissions. Since the $100 billion figure does not account for inflation, its value has also decreased over time: researchers have calculated that if adjusted for inflation the target should be $139 billion today. Quality finance While the conversation around climate finance often focuses on numerical targets, analysts have pointed out that the quality of the pledges matters as much as their quantity. For example, CPI research shows that in the 2019/2020 period 61% of the total climate finance was provided in the form of loans, which recipients will have to pay back mostly at market rate, with no particular benefits. While loans can help high-income countries pivot to a greener infrastructure, whether it’s clean mobility or renewable energy, low- and middle-income countries are likely to struggle to repay what they borrowed with interest, while the costs of climate impacts pile up. The situation adds to the debt crisis plaguing emerging economies, as Mohamed Nasheed, former president of the Maldives and ambassador for the Vulnerable 20 Group reminded delegates at the recent World Bank and International Monetary Fund annual meetings. Nasheed warned that low-income nations “living not just on borrowed money but on borrowed time” may default on half a trillion dollars of debt if high-income countries don’t take climate response seriously. According to the NGO Oxfam, loans provided with no or little preferential conditions should not be accounted for in the same way a grant would be, because the effort they require on the part of the contributor, and the benefit for the recipient, are much lower. Donor countries also tend to overestimate climate contributions of projects that are not specifically targeting mitigation or adaptation goals. After scrutinizing the figures reported by the OECD through this lens, Oxfam says only up to $24.5 billion out of the declared $83.3B represent impactful climate finance. According to research by the NGO CARE, high-income countries have also failed to provide “new, additional finance” they promised in 2009. The researchers examined the $220 billion of public climate finance reported from 2011 to 2018, and found that only $14 billion of this total — around 6% — did not come from countries’ pre-existing official development assistance budgets. Mitigation, adaptation and loss and damage According to CPI, relatively little funding — only $46 billion a year — is going to help adapt to the problems caused by climate change. The rest is spent on mitigation. To date, both global and development-focused climate finance remain skewed towards mitigation, which includes low- and high-tech actions to curb global emissions, ranging from tree planting to clean energy development. Typically, mitigation comes with a clearer business case: Investors can expect a return in terms of direct profit or carbon credits. Adaptation outcomes are harder to quantify, because they involve preventing social, ecological, and cultural losses that don’t come with a price tag. Historically, this imbalance has affected low-income countries which may lack the capacity to channel large scale mitigation investments or develop their own robust adaptation measures. However, as climate science advances and impacts on the ground exacerbate, the boundaries between the two categories may start to blur. In their latest landmark report, the scientists of the U.N. Intergovernmental Panel on Climate Change conclude that greenhouse gas emissions in the atmosphere have undeniably increased the frequency and intensity of various extreme events across the globe, a scientific certainty that adds weight to the idea of historical climate responsibility and is likely to reshape the way finance is discussed and categorized. COP agenda As funds for both mitigation and adaptation grow more slowly than the climate community was hoping, this year of brutal natural disasters, a number of which scientists can now attribute to climate change, will likely reignite the conflict over finance at COP 27. Led by Pakistan, a group of low- and middle-income nations is prepared to pick up where delegates left off last year and demand the creation of a framework to address loss and damage, a term encompassing all irreparable environmental, financial, or social damages that communities face when adaptation is not an option anymore. In Glasgow, low- and middle-income countries had proposed the creation of a financing facility to strengthen the framework established in 2013 at COP 19. The proposal, which would have involved pooling money to redistribute as compensation for loss and damage, was eventually voted down, but delegates from these countries are ready to present it again this year. If successful, this coming round of negotiations will deliver the creation of a loss and damage facility, and it will be up to negotiators to work out how the money will be collected and distributed at the next COP. In particular, delegates will prioritize the need to unlock finance in a timely manner, as disasters continue to strike with unpredictable severity. Today it is widely accepted that the $100 billion figure was arbitrary from the start, offering an accessible number for the world to start grappling with the magnitude of the crisis. Since COP 26, countries such as Italy, Japan, the Netherlands, Norway, and Sweden have increased their financial pledges towards the global south, and many more are expected to renew their promises in Egypt. The climate community now knows that trillions are needed to cover mitigation, adaptation as well as irreparable environmental degradation. A potential facility targeting loss and damage may be another tool in this regard, but the ultimate goal remains to increase access to the abundant capital that high-income countries have at their disposal and won’t, or can’t unlock. To achieve this, observers at COP 27 will focus not only on countries and private sector participation, but also on the strategic role of multilateral development banks as institutions able to harmonize international finance flows, so they can keep growing in the coming decades.