In last year’s Human Development Report, the United Nations Development Programme highlighted the role of climate change in shaping prospects for the poor.
It found, for example, that Indian women born during a flood in the 1970s were 19 per cent less likely to have attended primary school. This is just one sign of the developmental effects of climate change – and, therefore, an indication of the need for funding to help poor countries to adapt and to cut carbon emissions.
However, while most agree on the scale of the funding required, there is also a consensus that multilateral financing tools have not raised enough money so far. Moreover, the means of providing and distributing the cash remains a subject of debate.
“In looking forward at what might be possible, both on mitigation and adaptation, a number of ideas have been floated but I’ve not yet seen convergence around any of these ideas,” says Elliot Diringer, director of international strategies at the Pew Centre on Global Climate Change.
The estimated amount of funds needed seems overwhelming. According to the World Bank, ensuring that new factories, power plants, transport systems and buildings use clean technology could cost an extra $30bn a year.
However, the authors of the Human Development Report point out that the funds needed to stabilise the concentration of greenhouse gases in the atmosphere are not unaffordable.
“Between now and 2030, the average annual cost would amount to 1.6 per cent of GDP,” they write. “This is not an insignificant investment. But it represents less than two-thirds of global military spending.”
The question is how to raise these funds, how to establish contribution levels from different countries and how to distribute the funds.
Among the earliest funding channels established was the Global Environment Facility, the financial mechanism for the United Nations Framework Convention on Climate Change (UNFCCC). The GEF manages grants to developing countries through funds such as the Least Developed Countries Fund, established to help the world’s poorest 50 countries to prepare adaptation programmes.
A levy model was provided for under the Clean Development Mechanism’s Adaptation Fund, through which 2 per cent is raised on CDM projects. Via these projects, countries and companies can reduce emissions anywhere in the world and count them towards their own reduction targets.
While most agree that this mechanism has yet to generate sufficient funds, the advantage of a market-based model such as this is its sustainability. “It’s a self-financing mechanism that creates a reliable flow that is not dependent on donor governments,” says Mr Diringer.
The Adaptation Fund is also flexible, says Tom Mitchell, research fellow at the Institute for Development Studies. “There’s a possibility that other polluter-pays-type taxes could be put under this funding mechanism,” he says. “For example, a levy on international air travel or shipping.”
Some funds are tackling climate change through efforts to prevent deforestation. At last year’s Climate Change Conference in Bali, Norway pledged an annual $600m to help developing countries launch pilot projects and national strategies for cutting emissions from deforestation and forest degradation.
Loans are part of the financing picture, too. The World Bank recently launched two climate investment funds: the Clean Technology Fund, aimed at funding projects that reduce greenhouse gas emissions; and the Strategic Climate Fund, which is intended to foster new approaches that help poorer countries adapt to climate change.
“Essentially it will be used to co-finance investments in developing countries that want to move in this direction and have plans for investments at a scale that meet the criteria,” says Warren Evans, director of the World Bank’s environment department, which is co-ordinating work on the funds.
The launch of the funds proved controversial, with many concerned to see climate change financing taking place through loan mechanisms, rather than grants, and others worried that the World Bank funds would influence negotiations taking place under the auspices of the UNFCCC.
However, Mr Evans points out that the funds are an interim measure. “They are not intended to be the future climate finance architecture,” he explains. “In fact, we have a subset clause that states that whenever the negotiations reach an agreement and those go into effect, these funds get closed down.”
Multilateral banks will play a leading role in financing of climate resilient and low carbon development, says Mr Evans. “What we’re trying to do with the Climate Investment Funds is to demonstrate how that could be achieved,” he explains
Like many of the financing channels being established, however, the Climate Investment Funds rely on voluntary pledges by donor governments, points out Mr Diringer. “There’s never been a regularised mechanism by which donor governments provide set amounts on a predictable basis,” he says. “A comprehensive climate agreement is more feasible if it includes some form of steady financing to help developing countries both mitigate and adapt to climate change.”
As well as lack of predictability, some see problems in the plethora of funding mechanisms. “At the moment it’s too complex,” says Mr Mitchell. “There are many different funding rules with different political interests – none of which are very clear to developing countries who need to access the money.”
However, donors, governments and multilateral institutions are not the only sources of funding helping poor countries lower their carbon footprint and adapt to climate change.
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Large foundations and development agencies such as Oxfam are including climate change initiatives in their activities as the link between global warming and poverty becomes more apparent.
This meeting of development and climate expertise is important, says Simon Anderson, principal researcher at the International Institute for Environment and Development’s climate change group. “If extreme events increase in frequency, as they are projected to do, then we can start to count the human cost of adaptation,” he says.
“The climate change fraternity doesn’t overlap much with the development fraternity,” adds Mr Anderson. “We’re trying to make that interface happen as much as possible.”
There is growing evidence of this interface. Microfinance lenders, for example, are starting to address climate change through products designed for farmers and entrepreneurs. In India, ICICI Bank’s products include weather insurance to help protect clients from crop failure while Opportunity International Bank of Malawi has developed a weather-indexed insurance product.
“The formal negotiations are only one little slice of it, providing some direction,” says Mr Mitchell. “There’s a whole steamroller in place that’s going on with or without that framework.”
Part of that steamroller is private sector investment. Companies have the potential, through commercial activities, to expand into emerging markets by developing and distributing low-carbon products and technologies that are also affordable.
Even so, market-based initiatives have their limitations. “There’s a strong incentive for private investment on mitigation because there’s a much greater profit potential,” says Mr Diringer. “It’s harder to see private investment flowing of its own accord to adaptation, particularly in the poorest and most vulnerable countries that don’t have the resources to create any sort of return on the investment.”
Given this reality, helping poor countries cope with climate change – particularly when it comes to adaptation – may continue to rely on a variety of solutions, whether private, charitable or under the auspices of governments and multilateral institutions.