Striking the Right Balance: Climate Finance for Developing Countries

Climate change presents serious implications for development in developing countries. The United Nations Human Development Report in 2016 found that over 1.5 billion people in developing countries live in multi-faceted poverty, and experience energy insecurity and inequality in access to social services. The climate change issue could exacerbate developmental challenges, slow down economic growth, and create a crisis in economic development of these countries. Studies such as the World Development Indicators of 2016 have revealed that economic development is linked with high-carbon growth, given its dependence on extensive use of fossil fuels that cause massive emissions of greenhouse gases. It is against this backdrop that it has become increasingly imperative for the global economy to make a quick transition to a new, low-carbon strategy for growth. In order to achieve this rapid transition, developed countries should pay a substantial share of the total global costs of this transition, given their ability to pay and their historical role in causing the climate change problem.

Developing countries are currently grappling with climatic and developmental challenges. Financing actions that are necessary permanently to eradicate or decrease the dangers of climate change, or to enable developing countries to adjust to climate change, has become central to global negotiations on climate policy. Climate finance ensures that developing countries refrain from taking the high-carbon development route of the past, and bolsters the resilience of their populations to the effects of climate change. However, the bulk of climate finance emanating from industrialized to developing countries has aimed at mitigation rather than adaptation programs. One explanation for this is that adaptation finance provides an exclusive benefit for recipient-developing countries, while mitigation programs generate a public good enjoyed by all countries, including the donor-developed country.

Yet there are signals that this imbalance in the priority given to mitigation and to adaptation may be shifting. The 2015 Paris COP21 Agreement on climate change has called for increased funding for adaptation and greater balance between funding for mitigation and adaptation. Such commitment is important, but there are still complex issues to resolve.

First, the amount of adaptation finance is still significantly lower than the amount needed. The Climate Policy Initiative Report in 2018 estimates that total adaptation finance, from public sources, currently stands at US$22 billion per year. The report indicates that investments from private sources, which continue to be hard to find out, could be a lot higher. Overall, the United Nations Environment Programme in 2016 projected that the total adaptation finance needed stands at about US$56 billion to US$73 billion per year.

Second, some developed countries sometimes divert mitigation and adaptation funds to countries where such funds can provide development benefits for them, rather than where adaptation aid is most required or where mitigation resources can most efficiently tackle climate change. This targeting elucidates the preference of developed states to direct their climate finance bilaterally rather than through newly established multilateral bodies, such as the Green Climate Fund, which is charged with the responsibility of distributing such funds. This targeted development results in an inefficient allocation of funds from the perspective of meeting climate-related objectives.

Third, climate finance institutions, such as the World Bank’s Carbon Fund, are not properly funded and have been slow to endorse projects and provide funding for prospective recipients. The slow process may be attributed to the fact that proposals are expected to meet the requirements of several donors, including the World Bank, at every stage. Access to this fund and the Green Climate Fund has been particularly challenging for developing countries.

Despite the numerous challenges confronting climate finance in developing countries, a solid and effective Green Climate Fund remains critical to global action, and necessary to aid the international community’s climate goals pursuant to the Paris agreement. It can channel funds to help redirect global financial flows towards climate-resilient, low emissions investments. Although the Green Climate Fund has already committed billions of dollars to support Small Island Developing States, and Least Developed Countries and Africa, much more is needed. It can still channel a substantial amount of the US$100 billion of climate fund that needs to be mobilized.

Furthermore, developing country governments will need to assist a number of endeavours to satisfy the adaptation objectives listed in their Nationally Determined Contributions (NDCs) and related plans. These endeavours include raising consumer demand for climate adaptation products and services that quantify, decrease, and/or transfer climate risks; raising the supply of these products in domestic markets; and de-risking adaptation investments using distinct strategies and financial mechanisms.

Gideon Odionu is a Nigerian lawyer and doctoral student at Peter A. Allard School of Law, University of British Columbia.