More climate finance is needed, but where should it come from?

As the world struggles to limit global temperature rise to 1.5 degrees Celsius, funding to help low- and middle-income countries adapt to climate impacts and reduce future greenhouse gas emissions is still lacking, leaving LMICs scrambling to seek finance elsewhere. While current climate actions are insufficient to help countries meet their climate targets, scaling up action will only lead to more debt, said Raphael Lam, deputy division chief of Fiscal Affairs at the International Monetary Fund. Speaking at an event by the Center for Global Development earlier this month, Lam — along with other experts from the IMF, World Bank, and Beijing-based think tank China Center for International Economic Exchanges — discussed alternative sources of funding, including carbon taxes and pricing, and the role of the private sector. But what remained unsaid was that the annual United Nations Climate Change Conference, or COP, process is so far failing to deliver on the promised climate finance commitment of $100 billion per year from high-income countries — initially agreed in 2009 at COP 15. Climate finance has been a contentious issue for decades in climate negotiations, and there is still no agreed-upon definition of what it is. Climate policy experts allege this lack of clarity is a way of sabotaging climate finance negotiations so that high-income countries that have prospered from decades of high-carbon industrial growth don’t have to pay reparations. LMICs state that financial support for climate action cannot be in the form of high-interest loans or grants that will fuel further debt, but is instead something owed to them, as they are historically lower emitters yet most vulnerable to climate impacts. “About half of the low-income countries are currently either in or near debt distress, so they have no opportunities to borrow,” said Ruud de Mooij, deputy director of the IMF’s Fiscal Affairs Department. It is against this backdrop that countries are looking for ways to balance their development needs with the added demands placed by the climate crisis. Experts suggested countries should cut down on subsidies to fossil fuels and promote carbon pricing, which captures the external costs of emissions — including damage to crops from flooding and health care costs from heat waves — and ties them to their sources by placing a price on carbon dioxide emissions to disincentivize use, reduce emissions, and promote a shift to greener sources of energy. One example is putting a carbon tax on fossil fuel usage. So far, carbon pricing has proven unpopular as it can put the burden on the end users, making essential items unaffordable for many, such as fuel for private vehicles. Carolyn Fischer, research manager at the World Bank’s Development Research Group, said carbon pricing has to be done in a phased way to manage people’s expectations of costs, something that Canada is already in the process of doing. Fischer added that as countries stop subsidizing fossil fuels, they will be in a position to use this money to provide relief to households. “You can use these revenues to redistribute to households, particularly vulnerable ones so that the net effect on their buying power isn't changed, and they can afford to shift their consumption patterns away from emissions intensive energy sources and goods,” she said. “Delaying carbon pricing will be costly,” said Lam, because it will require policymakers “to use other less efficient spending measures in order to reach the same emission targets over the long-term.” Another way to raise climate finance, experts said, was by facilitating a bigger role for the private sector, which can play a bigger role in helping scale up green technologies, especially in LMICs where governments are short on budgets to boost efforts. While many LMICs are loath to consider private investments in climate as climate finance — India’s environment minister Bhupendra Yadav has previously said that private finance for climate mitigation cannot be climate finance — experts say to meet climate targets, private investment will be needed. IMF’s Mooij said governments need to facilitate investments from the private sector in green technologies: “The government has to be in the lead, but the private sector has to do most of the investment. We know that 90% of the technologies for low carbon investment already exists. We have to make sure that there's diffusion of these technologies towards the developing countries,” he added. A key missing piece, Mooij said, is a global coordinator to drive these policies. This is where both the Group of 20 biggest global economies and the African Union can play a role, he added. At last month’s G20 summit in India, world leaders said they would work toward tripling renewable energy capacity globally, but remained vague on the numbers. All this bodes well for climate policy, said Mooij, given G20 countries are responsible for over 75% of the current carbon emissions. Additionally, the AU’s seat at the G20 as an observer could help make the global ramping up of a policy decision smoother, as it would have already been a part of a consensus building process, and any disagreement would have already been aired and addressed alongside G20 nations. So where does that leave the role of the U.N.’s climate summit in Dubai next month? Min Zhu, vice chairman of the China Centre for International Economic Exchanges, said he remained positive that COP 28 can deliver on climate finance. “I see the momentum as gathering, particularly on the financing … I think there’s [a] good chance for us to work together, and this is really most important for global cooperation,” he added.