Dark side of climate finance An analysis by Foreign Policy

An article by the Foreign Policy Journal highlights significant issues with the current state of climate finance, particularly as the UN Climate Change Conference (COP28) unfolds in Dubai. The publication dives deeper into questions surrounding insufficient funds currently allocated to climate projects, the lack of pre-requisites projects have to fulfill to be considered as such as well as problems within the World Bank, the biggest lender of loans to poor countries to tackle climate change. Caliber.Az reprints this article.

"As the 2023 United Nations Climate Change Conference (or COP28) gets underway in Dubai, the call for rich countries to provide more money to poor countries to fight climate change has taken center stage. But if the record on climate finance is any indication, poor countries should be careful what they wish for.
The conventional critique of climate finance is that it’s too little. In July, the United States and other members of the G-20 refused to endorse a proposal for the World Bank to triple its lending with new capital from its largest shareholders. According to unconfirmed estimates by the Organization for Economic Cooperation and Development, rich countries only last year—and just barely—met a promise made in 2009 to provide $100 billion in climate finance per year, a figure to which they just added $300 million as seed money for a climate loss and damage fund for the world’s poorest countries.

So far, so familiar, and you will surely hear the call for more funds repeated during and after COP28. But while the critique of the amounts pledged is correct, it is only the tip of the iceberg that is the climate finance mess. And the clamor for money fails to address a fundamental problem with climate finance the way it works today: All too often, it competes with the actual needs of developing countries that these transfers are supposed to serve.

The dirty secret of climate finance is that much of it is displacing traditional development aid. Calls for more climate finance are important, but if current practice is any guide, a large share of the funds will be taken from budgets that fund critical development priorities, such as health, education, women’s rights, infrastructure construction, and humanitarian aid.

Exhibit A is a recent study from CARE International, a global nongovernmental organization focused on poverty and social justice. By its estimates, 52 percent of climate finance provided by 23 rich countries from 2011 to 2020 was money that previously went to development budgets, including programs focused on health, education, and women’s rights. In other words, on account of climate policies, poor countries have seen deep cuts in critical aid programs with demonstrated short- and long-term benefits. The numbers look even worse when you consider the long-standing development spending pledge of 0.7 percent of gross national income. If you take that number as a minimum for development spending and posit that climate finance should come on top, only 7 percent of wealthy countries’ climate finance qualifies as additional funding, according to CARE.

The British government, for example, classifies climate finance as development aid, for which the government has a spending target of 0.5 percent of gross national income. Britain’s treatment of this target as a de-facto ceiling has meant that any climate finance counted towards aid automatically displaces funding for development projects. Other leading providers of climate finance, such as Germany, France, and the United States, have also siphoned off climate finance from development spending. Japan, the world’s largest climate funder, provides no finance that is additional to its 0.7 percent pledge for development aid, according to CARE.

The diversion of aid from school feeding programs, maternal healthcare, road construction, programs to assist small farmers, and other purposes is devastating for poor countries. Recent progress toward the U.N. Sustainable Development Goals has been weak, and some indicators of economic development have worsened in the past few years. The economist Charles Kenny argues that we have the knowledge to meet these goals but need significantly greater financial resources to do so. Yet wealthy countries are ignoring this advice, redirecting development funds to climate projects that often do little to advance actual development in the countries they are supposed to help.

Even when rich countries are not raiding other budgets, how they define climate finance is creative, to say the least. An analysis of a United Nations database of climate projects by Reuters showed that climate aid had been used to fund airports, hotels, rainforest-themed movies, a coal plant, and fighting crime. When an Italian chocolate chain opened stores in Asia, the company received a $4.7 million subsidy that the Italian government booked as climate finance. According to the Reuters report, climate specialists agreed that the identified projects 'have little or no direct connection to climate change.' The researchers also found that more than $65 billion was spent on projects so poorly reported that it was impossible to say what the money was spent on or even the continent where it was sent. Projects cumulatively worth more than $500 billion were canceled—but remained on the books to count toward climate pledges. There are no uniform official rules for what counts as climate finance, and rich countries appear to be under no obligation to provide details.

What constitutes climate finance is also mostly undefined at the World Bank, the largest provider of finance to poor countries. Loans for improving teacher quality, access to healthcare, and municipal transparency are labeled as having climate co-benefits, but these claimed benefits are not spelled out. While it is sometimes possible to intuit benefits, most project documents lack estimates of greenhouse gas emissions reductions, and the World Bank still has no standardized reporting of emissions estimates. The bank’s own claim that it has funded projects resulting in 194 million tons of carbon dioxide reductions per year has not been verified by independent sources—and, given the lack of emissions documentation for many projects, may indeed be unverifiable. In June, the World Bank said it would restructure its reporting on climate.

That’s not the end of it. Poor countries often receive only the remnants of climate funds that are fully booked as aid but channeled through private-sector firms in rich countries. An analysis by Carbon Brief using data from the British Development Tracker found that 54 management consultancies, mainly headquartered in Britain and other rich countries, received billions of pounds in government funding to provide advice to poor countries on how to fight climate change. In Nigeria and Ghana, 88 percent of UK climate aid from 2010 to 2023 was disbursed through international consulting firms. Despite concerns about the fees charged by these firms, the actual value of their work, and insufficient building of local capacity, the British government continues to rely on rich-country consultancies to deliver climate aid.

All of this comes on top of an even more fundamental flaw underlying the concept of climate finance: The premise that if only the rich world gave poor countries more money, the latter could develop their economies on the basis of renewable energy and get rid of fossil fuels. This may sound benevolent to someone sitting in Washington or Berlin, but it contradicts what we know about the needs of poor countries and the relationship between energy, development, and climate resilience. By focusing only on the energy transition, rich governments are forcing a hypothetical green growth model on the developing world that never even worked in their own countries.

For the most part, rich countries have yet to acknowledge what poor countries really need to address climate change: resilient buildings and infrastructure, cheap and reliable electricity, early warning systems, air conditioning, cold storage for food and medicines, dikes, dams, paved roads, and all the things that sustain a safe and secure life. This level of development is taken for granted in rich countries, but it can only be attained with economic growth. That growth, in turn, cannot be delinked from much higher levels of energy use and energy access in poor countries compared to what they have today.

These countries are desperate for abundant, cheap, and easily available energy to fuel cars, trucks, and buses; power industry; and provide less toxic ways to cook indoors than traditional wood, charcoal, and dung. Instead, well-meant policies by rich countries threaten to be disastrous in practice. A ban on financing of natural gas projects not only deprives poor countries from a much-needed energy source. It will also make it harder for poor countries to use wind and solar energy, because these sources are only intermittent and need to be backed up by other ways to generate power.

Rich countries have a long way to go to help poor countries fight climate change in any meaningful way. On top of refusing to fund much-needed energy projects, they have siphoned off money from aid budgets, handed aid money to private-sector firms in their own countries, and counted just about anything they want as climate projects.

At COP28, participants have agreed on the creation of a loss and damage fund to help poor countries cope with climate-related events, although the exact projects and mechanisms for distribution are still unclear. With this fund, rich countries have yet another opportunity to untangle the climate finance mess. They could commit resources to clearly defined climate projects where the money actually ends up in poor countries, stop siphoning funds from critical development needs, reiterate support for resilient infrastructure, and acknowledge the as yet unavoidable role of fossil fuels in poor countries’ development trajectories—thereby going a long way to restore trust. There is still time in Dubai to do the right thing".