Who will foot the bill for green development in poor countries?
AMID the wreckage of the 2009 Copenhagen climate summit, an agreement that rich countries would, by 2020, furnish developing ones with $100 billion a year to help them mitigate and adapt to global warming looked like a rare achievement. This commitment will also be a big talking point at the next annual UN summit, due to start in Durban on November 28th. With almost no hope of a big new pact, many expect progress on the formation of a global Green Climate Fund to be one of its few successes. Yet there is huge uncertainty about how developed countries will deliver on their promise, including what role the fund will play.
The good news is that there is already a surprisingly large flow of climate finance—as investment into warming abatement and resilience measures is called. According to the first big study of the issue, by Climate Policy Initiative (CPI), a think-tank, at least $97 billion a year is going to developing countries, mostly from private lenders in rich countries. They contributed around $55 billion, with another $39 billion drawn from public budgets and capital markets by multilateral and bilateral development banks. Western taxpayers provided at least $21 billion of the latter amount. Less than $3 billion flowed from Western carbon markets (to offset emissions) and as philanthropy (see chart).
This does not mean the rich world is close to fulfilling its promise at Copenhagen. That accord referred to “new and additional” money, and it is obvious that most of last year’s investment would have happened in any event. It is also unclear what sorts of funding should count towards the totals that were pledged. The Copenhagen Accord refers to both public and private sources of capital. Yet many developing countries and NGOs argue that it should be aid money, delivered from public budgets, and with no strings attached. A more coherent view is that it should be money used to cover the “incremental costs” of low-carbon developments. This is a term in the growing lexicon of climate finance that refers to the additional cost of low-carbon investments—building a wind farm, say, compared with lower-cost alternatives such as coal-fired power stations. By contrast the CPI study, which uses broad definitions of climate-related schemes—to include railways as well as renewable energy and forestry, for example—captures the total sums invested.
Its findings are nonetheless striking. The figure of $97 billion, caveats admitted, is much bigger than most people, the study’s authors included, would have expected. Andrew Steer, the World Bank’s special envoy for climate change, attributes this partly to an exaggerated impression of paralysis created by the UN process. “The world of action on climate change is a long, long way ahead of the world of negotiation,” he says. Most progress has been made on measures to mitigate warming, such as renewable energy, which account for $93 billion of CPI’s total estimate. Last year about $200 billion was invested in renewable energy, low-carbon transport and energy efficiency in developing countries—more than a third of the global total.
The magnitude of the private sector’s contribution to climate finance suggests an obvious lesson for the Green Fund. It needs to be designed in such a way as to encourage much more of the same. And with the global investment industry sitting on over $100 trillion of assets, this would be true even if Western governments had $100 billion to spare from their budgets, which they do not.
The ability of development banks to obtain large amounts of private capital through borrowing also suggests how this might be done. The loans they dispense are further multiplied when it comes to individual projects, because their funding encourages additional private investment. According to the World Bank, loans issued at market rates by multilateral lenders are typically leveraged with private capital by a factor of three to six, and soft loans and grants by a factor of eight to ten.
This suggests the promised $100 billion a year could, if loosely defined, be raised with a relatively small contribution from Western taxpayers. According to a proposal by Bloomberg New Energy Finance, a research firm, it might consist of $30 billion of equity, some of which could be provided by developing-country investors, which would then be used to raise $70 billion of cheap debt, $50 billion of which would come from private lenders. Having thus brought down the cost of capital, the “incremental costs” of renewable-energy projects over the standard sort would be relatively low. These could be covered by between $5 billion and $10 billion a year from public budgets, philanthropy and new sources of cash, such as taxes on bunker fuels or carbon markets.
This plan would not impress most developing countries. Yet it would at least be feasible, fiscally and politically, for rich ones. Limiting the role of the new fund would reduce a risk of it getting bogged down by disagreements between its many owners. It would also put more onus on developing countries to become more attractive recipients of investment, green or otherwise. Liberalising financial sectors and scrapping wasteful fuel subsidies would be good ways to begin.