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Developing countries need new ideas to fill climate finance gap

Mock money bags and banknotes are piled up during a protest at the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain November 12, 2021
explainer

Mock money bags and banknotes are piled up during a protest at the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain November 12, 2021. REUTERS/Dylan Martinez

What’s the context?

At U.N. COP27 summit, discussions ongoing over helping poor nations fund efforts to fight climate change and use renewable energy

  • Debt-ridden countries frustrated by lack of climate funds
  • Debates at U.N. COP27 in Egypt on how to harness more cash
  • Just energy transition partnerships seen as key solution

SHARM EL-SHEIKH, Egypt - When it comes to climate finance, most people agree on one thing: there isn't enough of it - whether to help developing countries power their economies more cleanly, or adjust to the impacts of fast-warming world.

The need to fill the gaps has become more urgent in recent years as rising global temperatures have melted glaciers, fuelled super storms and boosted extreme heat, as well as worsening the severe floods, droughts and wildfires hitting larger parts of the world more frequently.

At the same time, there is recognition - especially in the wake of COVID-19 stimulus packages and Russia's invasion of Ukraine - that wealthy governments can find money to deal with crises when they choose to.

Vulnerable poorer nations, meanwhile, are being buried under growing mountains of debt and are increasingly disillusioned with an unmet promise by donor nations to channel $100 billion a year to them from 2020 – a level of funding that is set to be reached only in 2023.

But the totemic $100 billion goal - agreed back in 2009 - has become "irrelevant" as needs have grown exponentially, said economist Avinash Persaud, who advises the Barbados government on climate finance.

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With trillions of dollars washing around the world's financial markets, governments, experts, investors, businesses and green groups have been putting their heads together to work out how to harness much larger sums to provide renewable energy and adapt to a warming world.

Here are a few of the innovative ideas being pursued at the COP27 climate summit now underway in Egypt:

Just Energy Transition Partnerships

This new type of donor-backed funding plan, for emerging economies with carbon-heavy energy systems, kicked off at COP26 in Glasgow last year with an $8.5 billion deal for coal-reliant South Africa, backed by Britain, France, Germany, the United States and the European Union.

It has taken a year for the South African government to craft and approve its investment plan for the money – a plan that will focus on phasing down coal power, boosting green hydrogen and switching to electric vehicles.

South Africa's economy will need 1.5 trillion rand (about $83 billion) in the next five years to reach the country's 2030 emissions reduction target, with the donor package aiming to incentivise greater private-sector investment, according to the plan.

"We want access to new, at scale, and predictable finance that does not increase the debt burden," said South African President Cyril Ramaphosa, releasing the investment plan in early November.

The push to avoid additional debt has been a controversial part of the discussion, with civil society groups calling for grants rather than the cheap loans that will make up the bulk of the funding, to cushion the impacts of the green shift on impoverished communities and ensure the transition is socially fair.

Other just energy transition partnerships (JETPs) are on the cards for coal-dependent Indonesia – a plan could be announced next week during the G20 summit in Bali - and for Vietnam.

Talks with India and Senegal have proceeded more slowly as they are still seeking to boost fossil fuel production alongside renewables to meet rising energy demand at home and overseas - an obstacle for some donors such as Britain.

Energy Transition Accelerator

The United States is teaming up with the Bezos Earth Fund and the Rockefeller Foundation on an initiative announced at COP27 that would enable developing-country governments to issue carbon credits for emissions reductions generated by their efforts to decarbonise their national energy systems.

The idea - whose practical details will be hammered out over the coming year - is that companies with stringent emissions-cutting targets would make additional reductions by buying the offsets, generating a steam of revenue that the issuing governments can use to fund their shift to green energy.

While some green groups have given the plan - set to be tested by Chile and Nigeria - a tentative welcome, they emphasised that the carbon credits it generates must be high-quality and the energy transition the programme supports must respect the needs and rights of local communities affected by the shift.

Other climate campaigners were more scathing, arguing that the accelerator - promoted by U.S. climate envoy John Kerry in Egypt - looks like an attempt by the Biden administration to sidestep its responsibility to provide more climate finance, which it is struggling to get approved by Congress.

"Carbon markets have historically failed to fulfil climate goals and often profoundly harm communities and undermine human rights," said Kelly Stone, a senior policy analyst with ActionAid USA. "(Kerry's) claims that this time will be different aren't enough."

The Bridgetown Agenda

This global level plan targets a broader-scale transformation of the world of development finance, including the World Bank and the International Monetary Fund (IMF), which have come under growing pressure in the past year to step up the share of their funding targeted at climate action.

Championed by Barbados Prime Minister Mia Mottley and French President Emmanuel Macron, the "Bridgetown Agenda" aims to reform the institutions' allocations so that more goes to countries struggling with debt levels made worse by climate disasters, and to measures that build resilience against climate threats.

At COP27, Macron and Mottley outlined plans to push the agenda forward by next spring when the two financial institutions hold key meetings.

Mottley called for the creation of a new "climate mitigation trust" which would use $500 billion in IMF Special Drawing Rights to attract private capital of $5 trillion by reducing investment risk and offering other guarantees.

Activists hold banners as they demonstrate at the Sharm El Sheikh International Convention Centre, during the COP27 climate summit, in Sharm el-Sheikh, Egypt, November 9, 2022

Activists hold banners as they demonstrate at the Sharm El Sheikh International Convention Centre, during the COP27 climate summit, in Sharm el-Sheikh, Egypt, November 9, 2022. REUTERS/Mohammed Salem

Activists hold banners as they demonstrate at the Sharm El Sheikh International Convention Centre, during the COP27 climate summit, in Sharm el-Sheikh, Egypt, November 9, 2022. REUTERS/Mohammed Salem

Taxing fossil fuels

As fossil fuel firms have raked in monster profits from spiking energy prices this year, calls - including from U.N. Secretary-General Antonio Guterres - are growing for a windfall tax on coal, oil and gas companies.

Guterres said the money could go to help poor countries deal with rising "loss and damage" driven by climate change, as well as to help families cope with the rocketing costs of energy and food.

Persaud pointed out that just a quarter of oil producers' $200 billion in profits over the past three months would be enough to help Pakistan repair and recover from this summer's destructive floods. Mottley suggested a levy of $0.10 per dollar.

But problems with a levy on fossil fuel sales or company profits include how to make it a permanent funding stream, as revenues from dirty fuels are expected to decline over time as clean energy grows. Enlisting powerful corporations to pay such a tax also would be tricky.

Secretary-General of the United Nations Antonio Guterres, Egyptian President Abdel Fattah al-Sisi and others attend the COP27 climate summit in Sharm el-Sheikh, Egypt November 7, 2022

Secretary-General of the United Nations Antonio Guterres, Egyptian President Abdel Fattah al-Sisi and others attend the COP27 climate summit in Sharm el-Sheikh, Egypt November 7, 2022. REUTERS/Mohammed Salem

Secretary-General of the United Nations Antonio Guterres, Egyptian President Abdel Fattah al-Sisi and others attend the COP27 climate summit in Sharm el-Sheikh, Egypt November 7, 2022. REUTERS/Mohammed Salem

Adaptation Pipeline Accelerator

According to a recent U.N. report, adaptation needs in the developing world are set to skyrocket to as much as $340 billion a year by 2030. Yet international funding to help countries adapt stands today at less than one-tenth of that amount.

At COP26 last year, developed countries agreed to double support for adaptation to $40 billion a year by 2025.

But that will not be enough to cover growing demand for projects like insuring small-scale farmers against extreme weather or building higher sea walls to stop cities flooding.

To help countries like Rwanda and Cambodia find the finance they need to put into practice measures they have identified in their national adaptation plans, the United Nations Development Programme is teaming up with global climate funds and private financiers to build a set of bankable projects.

The new "Adaptation Pipeline Accelerator" is an attempt to form an investment plan - a bit like the JETPs - that will bring a far bigger and more cohesive approach to solving the problem of scarce adaptation finance and bring in private-sector money, a senior U.N. official said on background ahead of COP27.

"We need to throw the global financial kitchen sink" at it, he said.

(Reporting by Megan Rowling; editing by Laurie Goering.)


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