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Last week, the UN Foundation and the UN Department of Economic and Social Affairs kindly asked me to talk at an informal session on the coherence between development and climate finance. I learned a lot, and it helped me understand a little better the various positions on the issue, including around merging climate and development finance targets. I (still) came away thinking that unless climate finance agreements address development needs more coherently, the poorest countries are likely to lose out.
Some developing country representatives worry that merging climate and development finance discussions might weaken the comparative legal strength of climate finance targets. Climate finance transfers are a (Paris Agreement) treaty commitment and the target level was decided by parties to that treaty ($100 billion to be met by 2020, $300 billion by 2035). In contrast, while the target of 0.7 percent of GNI in overseas development assistance (ODA) for developed countries has appeared in various UN resolutions and conference declarations since 1970, it has always been couched in language about “making concrete efforts towards” reaching that target.
As an utterly not-lawyer, I’m not clear how much difference that distinction makes. I’m at a loss to understand how a collective finance goal under a treaty could be legally binding on the budgetary obligations of any particular country. That’s to say nothing of the fact that the US, at least, never ratified it. But one thing is clear: while most developed countries remain far from reaching the 0.7 percent aid target using the ODA measure that rich countries have designed (thank you Nordics for your regular exceptionalism), developed countries collectively claim they did meet the $100 billion climate finance goal using the measure rich countries designed.
That’s the good news, and reason to think the new $300 goal might also have more chance of being met than the 0.7 percent target. The perhaps bigger bad news is that international finance has ended up looking like a grim, green case of Gresham’s Law: really bad “climate finance” is driving out somewhat better “development finance.” The “$100 billion” really wasn’t worth $100 billion, and it came at the cost of effective ODA for development that really is worth tens of billions. The $300 billion goal is set to make the problem worse.
The climate finance classification system—again, designed by the OECD club of rich countries with no say in the process from recipient countries, just like the ODA classification —is extremely flexible about what can be counted. Flexible to the point of making an octopus look arthritic. That flexibility covers both the kind of finance (grants, loans, “mobilized” private finance) and what investments the finance supports (solar plants, forest conservation, films set in forests, education).
In donors’ defense, strictly defining adaptation spending by sector or activity is probably an exercise in futility given development is adaptation. Mitigation spending should be more straightforward to define, but is hardly simple, apparently giving donor countries a lot of leeway. But the high, loosely defined climate finance target is particularly problematic because it prioritizes mobilization over impact.
If donor governments want to maximize climate finance reported at the lowest cost to their budgets, the secret is to provide or take credit for finance provided at or near market rates: direct lending provided at an interest rate above what they pay to borrow; guarantees and loans to (or alongside) private investors who are making healthy returns in developing countries. Especially given mobilization is also incredibly loosely defined to include private finance that would have flowed absent any public support, this is easy to manage, particularly in upper-middle-income developing countries.
It is not as easy in low-income countries, where default risks are higher and there is much less international private sector appetite to invest, which will be why less than ten percent of climate finance flows to those countries alongside less than three percent of “mobilized” private climate finance.
Meanwhile, the priority for external financial support expressed by the poorest countries is for development and adaptation finance, not mitigation finance, which makes sense. Low-income countries aren't big emitters, and have the greatest need for more development as part of an adaptation response. But because donors can count the (generously estimated) grant element of climate finance as ODA, they have a strong incentive to shift ODA spending from development and adaption in poorer countries to support climate finance in richer developing countries, where two thirds of finance goes to mitigation.
And while ODA really works to promote development in the world’s poorest countries, given the skewed incentives perhaps it shouldn’t come as a surprise that it is hard to find evidence that the aid tagged as mitigation financing is reducing emissions versus business as usual. The new $300 billion commitment is going to triple the incentive to shift aid away from impact.
If the climate agreements were bringing in additional finance rather than redirecting existing flows, this would be less of a concern. But it is hard to make the case that there is much additional in the current $100 billion of climate finance, especially for the poorest countries and especially for development and adaptation. As a share of provider economies, total development finance fell as a share of GNI from 0.45 percent in 2009 (when the $100 billion target was agreed) to 0.44 percent in 2022, suggesting no additional financial effort (and even in absolute terms, it increased by only a little more than $60 billion). Looking at ODA claimed as climate finance, and compared to donor country GNI, less than zero of that should be counted as additional. ODA to countries eligible for grants and credits from IDA, the World Bank’s soft lending arm, has also been falling as a percentage of their GNI since 2009. Meanwhile, “mobilized” private financial flows toward infrastructure in developing countries have fallen since 2009.
It is worth noting that, accounting tricks aside, there is a real tradeoff: “good” mitigation finance should look different from “good” adaptation/development finance. The most effective mitigation spending is probably used to create a big new market for zero or low carbon approaches in high emitting countries at low cost. Imagine the project in Indonesia or Brazil that massively expands solar production using huge loans subsidized just a smidge below market prices. The best adaptation financing is likely used where climate change is already hitting the poorest people hardest. That would likely be subsistence farming in the Sahel, where crop yields are already considerably lower than decades ago and pretty much the only way many will escape worsening poverty is to find opportunities off the land. Effective development finance supports adaptation: more developed countries are more resilient. But effective mitigation finance doesn't (perhaps even shouldn't) support development: it should go toward getting not-quite economically and financially viable low-carbon projects or activities to viability (even if they are still less financially viable than emitting alternatives). There is an unavoidable resource allocation issue that negotiators should address.
Fixing the mitigation-adaptation/development problem is going to take biting the bullet and cross-referencing climate and development finance targets. In particular, it is going to take climate agreements guaranteeing levels of development and adaptation funding in the form of country-programmable ODA to the world’s poorest countries as the first and primary target of climate finance.
In a better world, it should also involve recipient countries determining, or at least having an equal say in determining, what funded activities count toward mitigation finance (preferably collectively, to stop a definitional race to the bottom). Anything that counts as mitigation should also be part of recipient nationally determined contributions (NDCs) to the Paris Agreement. In addition, mitigation spending shouldn’t be able to count as ODA. But if it does, it should only count as contributing toward the climate finance targets if it is new and additional (defined as part of a collective country programmable ODA/GNI increase above the percentage of GNI of donor counties in 2024). And “mobilized private finance” shouldn’t count toward climate finance totals at all, because it is so poorly defined and easy to game.
Had those rules applied at COP29 last month in Baku, one thing is pretty certain: rich countries wouldn’t have agreed to a $300 billion target because such rules imply greater fiscal effort on the behalf of rich countries for each dollar of finance counted. Frankly, I’d rather have seen a lower headline number involving better money, but perhaps it is too late for that.
At the very least, though, donors should commit at future climate and development conferences alike that they won’t make the world’s poorest people pay twice for climate change—both suffering the greatest harm from global warming, and losing the development finance that they need to support adaptation. Especially if climate finance targets are more binding than overall ODA targets, the commitment to ODA levels for the poorest countries must come first.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
Image credit for social media/web: John Hogg/World Bank