Development financing framework needs an overhaul to help poor countries cope with climate disasters
Developed countries have so far failed to fulfil an earlier pledge of US$100 billion a year for developing countries. But now estimates of climate finance needed are much larger
THE disparity between rich and poor countries has always been stark; they’ve become even starker when it comes to climate finance. The recently concluded COP27 Climate Summit in Egypt seemed to achieve a historic breakthrough: After two weeks of talks, delegates agreed to establish a “loss and damage’’ fund to help poor and vulnerable countries cope with climate disasters. Sceptics are likely to scoff at this and so far, neither the size of the fund nor how the financing is to be mobilised is clear. More than a decade ago, rich nations pledged to channel US$100 billion a year to developing countries to help them adapt to climate change. This pledge was not fulfilled and has eroded trust, says a report prepared for the UN and presented at the start of COP27.
The report, “Finance for Climate Action’’, argues that it is important to make good on the pledge of US$100 billion, which is expected to be fulfilled next year – three years past its target date – thanks largely to increased funding by multilateral development banks. But the needs of emerging and developing countries, excluding China, are now far larger: as much as US$1 trillion annually in 2025, and then more than doubling to US$2.4 trillion by 2030. These funds are needed for three broad areas of climate action – energy transition; mitigation and adaption; and loss and damage. The report puts forth that developed countries and multilateral development banks should be on the hook for US$1 trillion of the funding, and the rest should be sourced domestically.
The report also emphasises that the much-enlarged estimates of the capital needs are based on a “very different’’ concept, and “not the new US$100 billion’‘. “The latter was negotiated, not deduced from analyses of what is necessary for a purpose.’’
To be sure, securing capital of this magnitude will always be an uphill climb, but the current macroeconomic backdrop is particularly challenging. Economies are only just beginning to open up, and new strains of Covid-19 are still emerging. As the report points out, a third of all developing countries and two-thirds of low-income countries are “at high risk of debt distress’’. At the same time, years of inaction on climate change have spawned disasters that are particularly devastating to poorer countries. A case in point is the flooding in Pakistan earlier this year, which has caused some US$30 billion in damages and affected 22 million people.
In 2019, eight out of 10 countries most affected by extreme weather events belonged to the low- and middle-income category, and half were the least developed countries. “Despite having contributed the least to the problem, EMDCs (emerging and developing countries) are on the frontline of the climate crisis, and they will need support from the international community to adapt to climatic changes and mitigate the worst impacts,’’ said the report.
Still, COP27 did achieve another landmark – a call for an overhaul of the international financial architecture that has been in place for decades since the second world war. Multilateral development banks have traditionally been the main conduits for development aid, but their generally risk-averse profile puts poorer countries at a disadvantage.
Poorer countries are charged significantly higher interest rates compared to wealthier countries. Under a new framework, loans could be aligned with climate goals, with clauses to suspend payments should a developing country be hit by a natural disaster or a pandemic. As the climate emergency grows, a reform of the framework for development and climate finance is urgent. Unless financing is accessible, the damage to lives, livelihood and loss of biodiversity from climate change will be incalculable.
Copyright SPH Media. All rights reserved.
