Cash for Climate: how the financing numbers break down

September 16, 2009

     By Duncan Green     

climate change science v politics cartoonCash will be king in the next few months as the crescendo of climate change negotiations builds to the big December summit in Copenhagen. In the words of Alf Wills, a South African negotiator, ‘no money, no deal’ (although European Commission President José Manuel Barroso is also credited with the soundbite). If developing countries are going to get anything like justice in any deal, they need big money to help them to adapt to climate changes not of their own making, and just as much funding if they are to shift to a low carbon economy fast enough to stop the planet from overheating. Some obvious questions: How much? Where from? How will it be administered?

How much? For adaptation, Oxfam estimates $50bn extra per year now, but rising to what could be several times more as both the impact and our understanding of the required responses grows; the World Bank puts it at $75bn. Mitigation is also an expensive affair – nothing less than a mass planet-wide low carbon conversion of the developing world’s energy, agriculture and infrastructure systems. The World Bank reckons that will cost $400bn a year by 2030 (compared to current financing of some $8bn a year up to 2012 – bit of scaling up to do there). As a point of comparison, the global aid budget comes to about $100bn a year.

Where’s it going to come from? One of the touchiest issues is how much, if any, of this money should come out of aid budgets. The argument for doing so is that a lot of good adaptation (reducing vulnerability to disasters, investing in agriculture) is just good (albeit accelerated) development work. The argument against is that this is a new, additional problem that poor countries have to deal with, not of their own making, so how can you ask them to forego schools and clinics to deal with it? India is already spending nearly three times as much on adapting to climate change as it does on health, while the World Bank said in this year’s World Development Report, released yesterday, that “Already, policy makers in some developing countries note that more of their development budget is diverted to cope with weather-related emergencies.”
Cannibalising $50bn per year of aid commitments to pay for adaptation could mean something of the order of 8.6 million fewer people receiving treatment for HIV and AIDS, 4.5 million extra child deaths, and 75 million fewer children in school in 2010 than could otherwise have been the case. The UK government’s attempt at a compromise is to put a ceiling of 10% of its aid that can be counted as adaptation finance. Oxfam, by contrast, fears that this could merely be the thin end of the wedge, and is arguing that international accounting rules should be amended specifically to bar counting adaptation finance as aid. And governments certainly shouldn’t be allowed to get away with double counting the same money as both aid and adaptation finance (as they have done with debt relief and aid, for example).

If cash is not to come from aid budgets, then we are into ‘innovative financing’ territory, looking at taxes and levies on everything from currency transactions to carbon and carbon trading to arms deals. The French government seems the keenest on these mechanisms, which have definitely ceased to be the sole domain of the lunatic (read NGO) fringe, and are entering the mainstream. German Finance Minister Peer Steinbrück last week proposed such a 0.005% tax on all financial transactions by banks, insurance companies and investment funds – so even wider than the Tobin Tax on currency transactions (admittedly, Steinbrück wants to use the tax to claw back the costs of the financial crisis rescue packages, but the principle is the same).

And how is the money to be channelled? Here the real fear is that the climate change process seems to have learned almost nothing from the chaotic mess that is the aid industry, whose vast numbers of donors and dedicated ‘vertical funds’ (90 on health alone) make life a reporting nightmare for understaffed developing country administrations. 20 different bilateral and multilateral climate change funds are already proposed or in operation. And adaptation finance shows every sign of failing on other issues familiar from the aid debate, like transparency, accountability and developing country ownership. Countries need to be thinking about introducing a single recipient fund with democratic representation in governance, as Bangladesh seems to be doing.

Another issue is predictability. If poor country governments are to make the major, long-term investments that are required, they need a guarantee that the aid spigot will not suddenly run dry. Aid has proved a fickle source of finance in the past. So what will happen to rich countries that renege on their pledges? Perhaps climate change needs something on a par with the WTO’s dispute settlement procedure – for example a compliance mechanism, in which default is penalised by withholding a corresponding number of emissions rights in the following year, which would instead be auctioned to make up the difference.

For more on adaptation financing, see ‘Beyond Aid’, Oxfam’s new briefing paper, published today.

Update: October 09: the World Bank team at the Bangkok climate change meeting has released new estimates on adaptation financing, calculating that developing countries will need $75-100bn per year on average from 2010-2050.

September 16, 2009
Duncan Green