It is now well recognized that the impacts of climate change will have significant economic costs in climate vulnerable countries. Scientists and economists have estimated that the cost of inaction to take action against the impacts of climate change will be enormous compared to the cost of mitigation and adaptation. Many studies show that the economic cost of climate change is very high. According to the famous “Stern Review” (2006), the cost of inaction is five percent of global gross domestic product (GDP) each year, and the capital estimate is 20 percent of GDP or even more. Poor countries will face costs amounting to more than 10% of GDP with a warming of 5 to 6 ° C by the end of the century. On the other hand, US economist William Nordhaus estimated in 2006 that due to a 3 ° C increase in temperature and precipitation, there would be a cost equivalent to 3% of global GDP.
Taking these elements into account, world leaders have made a political commitment to work together to reduce global warming by reducing greenhouse gas (GHG) emissions and taking adaptation measures. Two important ways to achieve this goal are technology and finance. These two elements are linked because without funding, innovation and access to technology cannot be achieved.
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Some of the damage caused by climate change is either irreversible or only partially reversible. This means that once the damage is done, we cannot recover the original environment and natural resources. For example, the extinction of species, the loss of ice caps and the loss of unique cultures cannot be reversed. Some of the impacts, such as on agricultural production, infrastructure, water resources, energy, health and migration, are partly reversible if adaptation policies are undertaken.
However, the cost of adaptation to deal with the impact of climate change can be enormous. These costs will multiply a few hundred times due to late action. Mitigation measures are needed to reduce or minimize the GHG emissions that cause global warming. Most climate-vulnerable countries are not significant emitters of GHGs. Therefore, most countries actually need to develop adaptation policies and need the resources to do so.
How the resources necessary to bear these enormous costs will be mobilized remains a difficult question. There are two main mechanisms for financing climate change. These are direct contributions from governments of developed countries and market mechanisms. The first mechanism is preferred by developing and least developed countries, while the second mechanism is preferred by developed countries. Since poor countries are victims of GHG emissions from developed countries, there has been a demand for compensation from the latter. However, there has always been resistance from rich countries to the call to directly compensate poor countries as victims. As an alternative, at COP15 in Copenhagen in 2009, developed countries pledged to channel $ 100 billion per year by 2020 to affected poor countries. The Global Climate Fund (GCF) was set up to disburse the money. It was expected that the needs of climate-vulnerable countries would be met through this fund.
However, the climate fund faces several limits. The GCF was unable to meet its goals due to the faulty architecture of climate finance. At the upcoming 26th Conference of the Parties (COP26) of the United Nations Framework Convention on Climate Change (UNFCCC), strong and actionable decisions are expected to be made by parties on issues related to climate change. finances. Specifically, a few important ones are as follows.
First, the amount mobilized to date is less than the commitment of $ 100 billion per year. Recent estimates from the Organization for Economic Co-operation and Development (OECD), updated with 2019 data, indicate that $ 78.9 billion in climate funds have been mobilized. The sources of this money have been mainly bilateral government grants or loans, multilateral public climate finance, multilateral development banks (MDBs) and multilateral climate funds. The amount of private funding is very low – only 14% of total climate funds, which come in the form of guarantees, units of collective investment vehicles (CIVs), lines of credit, syndicated loans, direct investments in companies, etc.
But the stake here is not only the insufficiency of the mobilization effort, but also the components of this climate fund and the way in which it is estimated. Oxfam (2020) claims that the OECD estimate of the climate fund is inflated and that the real climate fund is much less, because many unrelated components have been included in this fund. The organization estimated that public climate finance in 2017-18 was only in the range of $ 19-22.5 billion, compared to $ 59.5 billion reported by the OECD. Among a number of revealing findings, the report also states that climate-related development finance accounted for 25.5% of bilateral overseas development assistance (ODA) in 2017-18.
Second, questions also arise as to whether climate funds benefit recipient countries or donor countries. In many cases, the funds are not intended for country-led projects, and are not even relevant for climate action. Countries include initiatives such as climate projects that are unrelated to climate change mitigation or adaptation. For example, aid projects or road construction projects are counted as climate funds by some countries.
Third, the climate fund is geared towards mitigation projects. Mitigation funds represent 64 percent of total climate funds and are mainly used for the energy and transport sectors. However, Least Developed Countries (LDCs) and Small Island Developing States (SIDS) bear the brunt of climate change and need funds for adaptation more than mitigation. According to the United Nations Environment Program (UNEP), the current adaptation needs of developing countries are US $ 70 billion per year, and by 2030 they will need US $ 140 to 300 billion. US in adaptation costs. In addition, the current Covid-19 pandemic has put more pressure on climate-vulnerable countries. Therefore, securing the largest share of the climate fund for adaptation is crucial to advancing a climate resilient economy.
Therefore, COP26 must implement the climate fund to resolve these anomalies and shortcomings of the current climate finance mechanism. Developed countries, MDBs, multilateral climate funds and other institutions are expected to commit to increasing grant-based public finance for climate vulnerable countries. They should also commit to increasing funding for adaptation in these countries — at least 50 percent of total public climate funds.
Climate finance reporting should be streamlined so that climate projects can be easily identified along with their end results. The climate-related part of any project should be decoupled from the whole project, and only funds for the climate-related part should be considered as climate finance. Non-concessional funds should not be considered climate finance. More clarity on the accounting standards for climate funds is needed. Additional climate funds should be available for actions carried out locally and taking into account the needs of the local population, including women, in a country. Local populations should be involved in formulating their own national climate risk reduction strategies.
The concern about the adequacy, additionality, accessibility, predictability and sustainability of the climate fund has always been present since the creation of the GCF. More than a decade after the fund’s launch, these concerns have grown even more prominent, rather than resolved. The need for a better climate finance architecture is stronger than ever as promises on climate finance are broken. We will see in a few weeks how COP26 will ensure predictable and sustainable financial resources for mitigation, adaptation and technological cooperation.
Dr Fahmida Khatun is Executive Director of the Center for Policy Dialogue (CPD).