Can the developed world keep its climate funding promise?

This article is published in collaboration with Project Syndicate. 

In 2009, the world’s rich countries pledged to mobilize $100 billion a year by 2020 to help poor countries tackle climate change. Since then, that promise has come to be regarded as a key test of the developed world’s resolve to do its part in the fight against global warming.

Reaching the $100 billion target is important. Poor countries must believe that rich countries will honor their pledges. Otherwise, the prospects for an effective international agreement at the United Nations Climate Change Conference in Paris in November and December could be at risk.

Fortunately, there are encouraging signs that the commitment will be honored. But larger financial flows are needed, particularly from the private sector. According to the OECD and the Climate Policy Initiative, developed countries collectively mobilized $52.2 billion in 2013 and $61.8 billion in 2014 to help poor countries reduce greenhouse-gas emissions and build resilience against the effects of climate change that can no longer be avoided.

While it is important to note that this figure is only an estimate, it represents a preliminary but credible indicator of climate finance, based on information provided by developed countries. If one assumes greater leverage for private-sector investment, the number would be higher. Similarly, conservative assumptions about how much “genuinely extra” money is being spent to fight climate change through overseas aid and the multilateral development banks might have produced a lower figure.

In reaching their estimate, the researchers took into account major investments by both the public and private sectors in a wide range of projects. Examples include the funding of small-scale renewable energy projects in Uganda by the United Kingdom, Germany, Norway, and the European Union, as well as the African Risk Capacity – supported by the UK and Germany – which offers insurance to governments against drought and other natural disasters.

What the report reveals is the relatively low level of investment by the private sector in projects that will increase poor countries’ resilience (though the authors acknowledge that limited information might mean that the true amount is higher). This is both a challenge and an opportunity; with the right incentives, a sharp rise in private investment that enhances resilience could go a long way toward meeting the $100 billion target.

Reaching that goal will require increased confidence in the policies and institutions of the countries in which the money is to be spent. New processes for sharing and reducing risk will be necessary. In this effort, development banks and bilateral aid institutions have much to offer.

It is crucial that this new climate finance be used to complement the even-larger investments in sustainable development that will be necessary over the next few decades. A central aim for climate financing should be to establish and implement the policies, regulations, and frameworks that will create the appropriate incentives for investors. This could provide very large “multipliers.”

Source: Bruegel based on OECD (2015) and Standing Committee on Finance (2014)

According to the Global Commission on the Economy and Climate, some $90 trillion will need to be spent on infrastructure over the next 15 years, mostly in developing and emerging economies that are experiencing rapid growth and urbanization. If that infrastructure locks in dependence on fossil fuels, it will be very difficult to reduce global emissions of greenhouse gases.

However, if countries invest wisely in the transition to a low-carbon economy, they will stimulate innovation and generate decades of sustainable growth. Thus, it is important that climate finance be used to foster public and private investment in low-carbon infrastructure and technologies, particularly to lower the cost of capital, which is crucial to scale up projects and encourage renewable-energy adoption.

Furthermore, climate funding provided by rich countries should help improve resilience to climate change in the most vulnerable countries. It should also be used to avoid deforestation and to protect fragile resources, including oceans and biodiversity. And it should boost innovation and break new ground for climate action, including novel ways for the public and private sectors to work together, such as projects on carbon capture and storage.

Some of the $100 billion will be channeled through the newly created Green Climate Fund; but the existing multilateral development banks should also play a central role, along with national aid agencies and departments. Money spent on sustainable development and climate action should be mutually reinforcing. And finance ministries in developing countries should reaffirm that, in addition to fostering growth and poverty reduction, wise action to mitigate climate change can lower levels of air pollution and raise energy efficiency.

Success will ultimately depend on rich countries’ willingness to live up to their promises. Their leaders must recognize that financial support for action against climate change in developing countries is not only morally right; it is also in the interest of their constituencies and, indeed, the world community.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nicholas Stern is Chairman of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and President of the British Academy.

Image: Splinters of ice peel off from one of the sides of a glacier in a process of a unexpected rupture. REUTERS/Andres Forza.