Financing gap in climate action

At the forthcoming Climate Change summit in Paris, two parallel threads of conversations will take place in different conference rooms: one relates to reduction in carbon emissions, and the other pertains to capacity building to cope with the effects of climate change. The first one will attempt to tally up the promises made by individual countries (or groups) to reduce their carbon emissions. The other, less well-publicised conversation will, in the sidelines, strive to rack up the commitments made by mostly rich countries and the private sector to fund the adaptation and mitigation efforts necessary to complement the CO2 reduction drive. It is well-known that access to finance will play a pivotal role in climate change policy, following any agreement in Paris. Unfortunately, it is emerging that since the strongest advocates for financing is a group - mostly from developing countries - that has less clout than the perpetrators of global warming, i.e., the developed countries, there will be a major shortfall in this account.

According to Climate Interactive, a think tank affiliated with MIT, the carbon reduction scenario, after adding up all the country-offers made so far, show that global temperature in the year 2100 will increase by 3.5°C (6.3°F).  These projections are based on Intended Nationally Determined Contributions or INDCs announced by each country to cut back its emissions of greenhouse gases (GHG) and have a range of uncertainty from 2.1 to 4.6°C (3.7 to 8.4°F), down from the 4.5°C (8.1°F) of warming above pre-industrial levels forecast if nations continue on the business-as-usual track. Barring some last minute changes, or any major announcement by major emitters' (China, US, EU, India, Russia and Japan) meeting at the INDC Forum in Rabat, Morocco this week, it appears that there is a significant gap between the carbon reductions necessary to keep global warming to a level below 2°C and the INDC offers made so far. This shortfall or "INDC Gap" only adds to the total cost of, and investment necessary for, mitigation and adaptation. 

Now, if we turn our attention to the other component of the climate agreement, we notice a major problem. At the international climate negotiations at Copenhagen in 2009, world leaders gave a commitment to mobilize investment funds of $100bn per year to combat climate change.  As mentioned above, the $100 billion target was based on the goal of keeping temperature rise to below 2°C. Even if we consider $100 billion annual financing promised by rich countries as a benchmark, according to all accounts there is a big Climate Finance Gap. The estimates of this gap vary from 40 to 70 percent according to the sources you use. A recent report by the Organization for Economic Cooperation and Development (OECD) found that rich countries have made a commitment of only $57 billion. This is the most optimistic estimate of the Climate Finance Gap, i.e., 43 percent.  However, even this low estimate is beset by problems of double-counting and includes commitments made by multilateral development banks. Other estimates show a much wider gap in financing. In a scientific paper published recently in Climate and Development, Prof. Sam Fankhauser and his associates from the London School of Economics discuss the various areas where gaps have emerged, and warn of a bleaker picture. Another comparable dire prediction emerges from the International Energy Agency, which estimates that the world needs $1 trillion a year between 2012 and 2050 to finance a low-emissions transition.

The Paris Convention and the negotiations that will lead to a successful conclusion will inevitably be followed by "rounds" of meetings to narrow this financing gap.  One of the hosts of COP21, UN Secretary General Ban Ki Moon is aware that the "financing gap" is likely to emerge as a major stumbling block during the Paris negotiations. Earlier this month, it was announced that finance ministers of developed countries are to discuss climate finance and possibly to agree to a "finance package" on the sidelines of the International Monetary Fund and World Bank annual meetings in Lima, Peru, from October 9-11, 2015. While the World Bank, European Investment Bank (EIB), and European Bank for Reconstruction and Development (ECRB) have all announced that they are planning to scale up climate-related lending, some NGOs have expressed serious doubts about this talk. To quote Wendel Trio, Director of Climate Action Network (CAN) Europe, "The pledges represent important political steps at a crucial time but the donor countries need to provide more clarity on their details. This cannot just be an exercise of relabeling existing aid as supporting climate action."

Fortunately, French President Francois Hollande has been urging industrialized countries all along to up the ante before the Convention starts on November 30. As I mentioned in an op-ed in The Daily Star entitled, Climate Agreement in December: A Miracle in Paris? (August 1, 2015), Hollande had warned that there will be no agreement in December if these countries do not offer a plan to pay the 100 billion euros needed annually to finance the transition to renewable energy in developing countries. This sum, as I argue above, is only a low-ball estimate of the money needed to help developing countries make the shift to greener energy, adapt to climate change, and deal with the losses and damages they will inevitably suffer from such impacts as sea level rise, droughts and storms. Janos Pasztor, Assistant UN Secretary General on Climate, echoed a similar sentiment at a conference last month in Paris when he said, "Financing is absolutely key. $100 billion is not that much when we want to change the whole world into a no-carbon future. For that we need trillions. "

Various estimates, including some done by Inter-American Development Bank (IDB) and OECD, show that given the uncertainty in world economy and austerity measures undertaken by developed countries, the financing gap can be met only by investments (including FDI) from the private sector.

I don't want to sound like an alarmist, but there is increasing concern that the upcoming Paris Conference may witness the same type of bickering that bedeviled the last major climate conference in Copenhagen unless efforts to close the financing gap is nailed down soon.

The writer is an economist and educator who writes on public policy issues.