Last month, the United Nations Environment Programme (UNEP) published another alarming report, highlighting that global average temperatures are on track to surge by a staggering 2.6°C by 2100. In fact, the UNEP’s 2022 Emission Gap Report concludes that without a 45% reduction in total greenhouse gas emissions by 2030, containing temperature increases to the 1.5°C target set during the Paris Agreement is becoming increasingly unachievable. With COP27 taking place in Sharm El-Sheik this month, the implications of these findings illustrate the urgent necessity to accelerate the global energy transition with the appropriate mobilisation of finance. However, despite being at the forefront of the climate crisis, most developing countries are still struggling to raise the necessary finance to fund their long-term transition. As the window of opportunity to avoid irreversible climate change continually shrinks, it leads to the fundamental question, where are the funds?
This year, the G77 group of developing countries have succeeded in pushing through the ‘loss and damage’ debate on the COP agenda. As vulnerable nations continue to be disproportionately affected by climate change, the long-term costs associated with the loss, infrastructural damage and destroyed food systems start to weigh in considerably on some countries’ already meagre financial resources. In Pakistan for instance, an unprecedented flood earlier in June this year, is estimated to cost the country more than $30 billion, according to the World Bank. Furthermore, Pakistan’s PM Shehbaz Sharif further warned that the country could be locked into a “debt trap” as natural disasters are likely to become more frequent, and hence the associated costs will follow suit.
However, many developed nations, such as the US, have deliberately avoided the subject, perhaps due to the fear that it could represent an unlimited liability. Owing to their historical cumulative greenhouse gas emissions, the payment of such compensations could hypothetically, in the long-term, become limitless with intensifying climate change. Nevertheless, the UN secretary-general António Guterres highlighted that such compensations are a “moral imperative” in the context of basic climate justice. But the lack of compensation payments to climate-struck countries only hinders their ability to transition to net zero, as they spend their funds on recovering from the destruction caused by extreme weather.
In addition to the above, despite a pledge to provide $100 billion in climate finance, back at COP15 in 2009, developed countries have so far failed to attain the objective in 2020. The US for instance provided only $7.6 billion in 2020 in proportion to their fair share of $40 billion of the funds in relation to their emissions. What is particularly striking about the failure of this target, is the fact that $100 billion only represents a small fraction of the total funds needed to lead a global transformation of the economy towards net zero. The IMF estimates that it could take between $3-6 trillion of investments per year across all economic sectors to be able to mitigate climate change through a reduction in emissions by 2050. This is in addition to the current further costs of $140-300 billion required per year by vulnerable countries to adapt to the current physical impact of climate change.
Given the current context in which global temperatures are set to exceed the Paris Agreement objectives, the additional flow of funds to development is becoming indispensable to achieve the required reduction in emissions by 2030. More specifically, developed nations, despite accounting for more emissions, would be unable to achieve the reduction in emissions only through their own de-carbonisation.
Until now, most sources of finance devoted to climate change have mainly revolved around the public funds of wealthy countries. Large private sector investments in developing countries have traditionally been limited on account of the high risks associated, including through currency exchanges or political instabilities. At the conference, however, there have been renewed calls for Multilateral Development Banks (MDBs) such as the World Bank and for the IMF, to provide more concessionary finances for green projects, such as for renewable energy developments. The Prime Minister of Barbados, Mia Mottley, suggested that at least $650 billion could be raised from MDBs for such purposes. While a modest amount in comparison to the trillions of US dollars needed per year, the intended effect of such initiatives is to leverage investments from the private sector by attracting more interest to invest in developing countries. The aim is that if MDBs and private investors were to successfully engage together in blended financial initiatives, it could potentially attract more funds from the private sector through more incentives and confidence. However, the implementation of blended finance projects still remains very limited.
Ultimately, despite the urgency to drastically reduce emissions worldwide, the international
mobilization of finance required to fund this global transition appears to fall short of what is needed. As the large financial gap in funding remains particularly acute for developing countries, the uncertainty regarding the attainability of the Paris Agreement objectives still remains prevalent.