Why climate finance is failing developing countries

Climate change is a global crisis, however, it disproportionately impacts developing nations, amplifying their vulnerabilities and economic challenges. While developed countries - historically the major culprits of greenhouse gas emissions - have pledged financial support, the reality often falls short of promises. This article delves into the growing economic threats of climate change for developing countries and underscores the urgent need for effective climate finance.

👉 Why do developing nations need climate finance? What are the current climate finance obligations? And why does this fall short?

Climate change is a global challenge that impacts every corner of the world. However, it poses particularly significant challenges to developing countries, amplifying existing vulnerabilities and compounding development issues. Let’s take a closer look at the ways in which climate change is negatively impacting developing nations: 

Instability, Conflict, and Displacement

The escalating pressures of climate change amplify pre-existing vulnerabilities in developing nations, creating heightened instability, especially within fragile and emerging regions. Often referred to as "threat multipliers", the repercussions of climate change can act as catalysts for conflict. The United States Department of State's Global Fragility Strategy underscores environmental degradation as a significant trigger for societal unrest. 

The surge in extreme weather events - a direct outcome of climate change - has intensified conflicts in already fragile territories, leading to the displacement of 80 million people. Predictions from the World Bank estimate that, by 2050, as many as 143 million people could find themselves uprooted due to climate-induced reasons. Looking further into the future, by 2070, a significant portion - close to 20% - of the Earth's surface might become inhospitable.

Food and Water Security and Global Health

According to the Food Security Information Network’s (FSIN) Global Report on Food Crises 2023 258 million people faced high levels of acute food insecurity in 2022, marking a substantial rise from 2021, when the number stood at 193 million. This surge cannot be attributed to one factor alone; however, the ever-increasing climate shocks and extremes are undeniably driving these figures up. In developing nations, a significant portion of the population lives in rural locations. Their livelihoods are often dependent on agriculture, placing them on the frontline of the adverse impacts of our planet's shifting climate dynamics.

This changing climate not only jeopardizes food security but also amplifies health risks. With increasing warmth comes the increased threat of vector-borne infectious diseases like Zika, dengue, and chikungunya. The World Health Organization has warned of a spike in climate-related disease fatalities. It estimates an additional 250,000 deaths annually between 2030 and 2050, highlighting the fragile balance between food security, climate change, and global health. 

Economic Development

The economic implications of climate change are particularly concerning for developing countries, putting their growth trajectories and societal well-being at risk. The World Bank has projected that due to the escalating challenges posed by climate change, anywhere from 32 million to 132 million individuals could find themselves pushed into poverty by the close of this decade. Financial assessments also suggest that developing nations stand to bear substantial economic burdens due to climate impacts. Projected losses range between $290 billion to $580 billion annually by 2030. 

Let’s explore some of the primary reasons why the economies of developing nations are under threat: 

• Dependence on agriculture - Many developing countries rely heavily on agriculture as a primary source of income, employment, and food security. Climate change can lead to erratic rainfall patterns, prolonged droughts, or devastating floods, all of which directly impact crop yields and livestock.
  
• Limited financial resources - Developing countries often lack the financial means to invest in adaptive measures or rapidly recover from climate-induced disasters. This financial constraint makes them more susceptible to long-term economic damage from extreme weather events.
  
• Infrastructure vulnerabilities - The infrastructure in many developing nations, whether it's roads, bridges, or buildings, are often not built to withstand extreme weather events. The cost of rebuilding after disasters can strain these countries' already limited resources.
  
• Geographical challenges - Many developing countries are located in regions especially vulnerable to climate change effects, such as rising sea levels, hurricanes, or desertification. Ports, for example, which are crucial for trade in developing nations are at risk from rising sea levels. The future scenario is even graver: by mid-century, coastal areas home to approximately 300 million people may be exposed to devastating floods, threatening lives, infrastructure, and economies.
  
• Health impacts - As we’ve already discussed, climate change can exacerbate the spread of certain diseases, especially in tropical regions typical of many developing countries. An increase in health crises can strain medical resources and result in significant economic costs.
  
• Loss of ecosystem services - Many developing countries rely on ecosystem services for their livelihoods, such as fisheries or forest products. Climate change can threaten these ecosystems and, by extension, the economies that rely on them.
  
• Population Displacement - extreme weather events or gradual changes like sea-level rise can displace large populations, leading to "climate refugees." Such displacements can result in the loss of skilled labor, reduce productivity, and increase social tensions.
  
• Supply chain disruptions - As global trade networks become more intertwined, disruptions in one region due to climate change can have ripple effects on the economies of developing countries, especially if they are heavily reliant on specific export or import goods.
  
• Limited access to technology - Access to technology that aids in predicting, monitoring, and responding to climate threats is often limited in developing nations. This lack of information can hinder timely and effective responses to emerging threats.
  
• Debt and economic dependency - Many developing nations are burdened with significant debt, limiting their fiscal space to address or adapt to climate change. Additionally, economic dependency on a few commodities makes them vulnerable to global market fluctuations exacerbated by climate impacts.

Many of the impacts of climate change outlined in the previous section are also the same reasons why adapting and mitigating the effects of climate change is so difficult for developing countries. 

Foremost among these is the issue of financial constraints. While the costs of adapting to changing climates are soaring, developing countries often grapple with limited financial resources, making it difficult to invest in essential infrastructure upgrades or resilience-building projects. Developed nations might have the means to fund seawalls, advanced irrigation systems, or renewable energy transitions, but for many developing countries, these projects can strain already stretched national budgets.

Beyond financial hurdles, the lack of technological access and expertise further complicates matters. Many advanced adaptation measures, from early warning systems for extreme weather events to drought-resistant crop technologies, are out of reach for these nations. Their limited research and development capacities mean that they often rely on external aid or technology transfers, which might not always be forthcoming or tailored to their specific needs. Additionally, local knowledge, which can be crucial for effective adaptation, is sometimes overlooked in favour of one-size-fits-all solutions.

Social and political challenges further compound the adaptation dilemma. Rapid urbanisation, for instance, often leads to the growth of informal settlements in vulnerable zones, like floodplains or coastal areas, amplifying the risks associated with climate change. Governance issues, including policy incoherence, lack of institutional capacity, or challenges in coordination among different levels of government, can impede the smooth rollout of adaptation initiatives. 

This underscores the critical necessity for developing nations to garner the backing of the international community, highlighting the pivotal role of climate finance in addressing global challenges.

Historically, industrialized or developed nations have been the primary contributors to global greenhouse gas emissions, which are largely responsible for the current climate crisis. While these countries reaped the benefits of rapid industrialization and economic growth, the resulting environmental costs have been global, disproportionately affecting those nations that contributed least to the problem. 

From an ethical standpoint, the principle of "polluter pays" suggests that those who have caused or significantly contributed to environmental degradation should bear the costs of remedying the harm. Therefore, many argue that developed nations have a moral obligation to provide financial support and resources to help developing nations, which are often on the frontlines of climate change impacts yet possess fewer resources to adapt or mitigate these challenges.

The international community is increasingly recognizing this obligation and the Global North has been called upon to increase funding to combat climate change. In fact, in recent years several international treaties have even incorporated these obligations. Let’s take a closer look at the current climate finance commitments.

👉 To find out more about the industrial revolution and how it contributed to climate change head over to our article on the topic.

First up, a quick clarification on what we mean by climate finance: 

1992 - UNFCCC

The United Nations Framework Convention on Climate Change (UNFCCC) was established in 1992. One of its foundational principles is the concept of "shared responsibility with varied capabilities'', which is rooted in the understanding that nations differ greatly in their contributions to climate change and their abilities to address and adapt to its effects. Recognizing that substantial financial investments are essential both to curb emissions significantly (mitigation) and to adjust to the negative consequences of a shifting climate (adaptation), the UNFCCC called for wealthier nations to provide financial support to countries that are less wealthy and more susceptible to the impacts of climate change. 

1997 - Kyoto Protocol

The Kyoto Protocol introduced the Clean Development Mechanism (CDM), enabling developed countries to invest in emission-reducing projects in developing nations. In return, they would receive carbon credits to meet their emission targets.

2007 - Bali Action Plan

The Bali Action Plan was a significant milestone, underscoring the need for long-term financing for developing countries. The plan set a goal to amass $100 billion annually by 2020. 

2009 - Copenhagen Accord

While not legally binding, the Copenhagen Accord stressed the importance of sufficient climate finance. It called on developed countries to pledge "new and additional" resources, aiming for $30 billion between 2010-2012 and $100 billion yearly by 2020.

2010 - The Cancun Agreements

The Cancun Agreements, established during the 16th Conference of the Parties (COP16) formalized the goal of providing climate finance amounting to $100 billion per year to support climate action in developing countries. It established the Green Climate Fund as a dedicated finance mechanism and the UNFCCC's principal funding mechanism. The GCF supports developing countries in mitigation and adaptation efforts against climate change. It became operational following the Paris Agreement in 2015 and has become one of the primary channels for climate finance. 

2015 - Paris Agreement

The Paris Agreement is a global commitment to address climate change, emphasizing bolstered financial support for developing nations. Developed countries re-affirmed their $100 billion annual pledge by 2020.

2019 - Green Climate Fund mobilization

In 2019 the GCF completed its first replenishment (i.e. an expression of global solidarity and partnership with countries), securing pledges worth $9.8 billion from developed nations. This move marked a step towards the $100 billion annual target.

2021 - Glasgow Climate Pact 

At COP26, held in Glasgow, a pact was reached to enhance climate finance through the establishment of a new Loss and Damage Fund to support countries suffering from the impacts of climate change. Key provisions of the pact include: 

• Reiteration of the $100 billion annual climate finance commitment, with adjustments reflecting current economic conditions.
• Mobilisation of additional climate finance from all sources, including the private sector.
• A commitment to ensuring accessible, predictable, and consistent climate finance.
• Emphasis on strengthening developing countries' capabilities to access and manage these funds.

👉 Head over to our article to learn everything you need to know about the Loss and Damage Fund.

However, there is still a lot to be ironed out when it comes to how the fund will function. No agreements have yet been reached on how large the funding stream will be, who will be obliged to fund what, and what circumstances are required for funding to be made available. It’s hoped that much of the details will be ironed out at the upcoming COP28 in Dubai. 

👉 To read more about the upcoming COP28 and what to expect, why not take a look at our article.

Yet despite the gathering momentum when it comes to climate finance, developed nations have so far failed to meet their long-standing climate pledges. 

Developed countries fall significantly short of their commitment to contribute $100 billion annually to support climate actions in developing nations. In 2020 for example, a total of $83.3 billion in climate finance was provided and mobilized by developed countries. 

A concerning finding by Oxfam suggests that not only is the actual funding provided substantially lower than what's officially reported, but a vast majority of this aid is in the form of loans. This mode of assistance exacerbates the economic strains of these countries, especially during periods of escalating interest rates, as they plunge deeper into debt while attempting to address the challenges of climate change.

Additionally, rather than allocating fresh resources, a substantial portion of the assistance provided is merely the redirection of pre-existing official aid, with over half of the climate finance targeting the most disadvantaged countries presented as loans. Countries such as France, Austria, Japan, and Spain have preferred to use this mechanism of financing, with France allocating a staggering 92% of its climate finance as loans. The situation is similar with multilateral institutions, with 90% of climate finance from bodies like the World Bank being loan-based in the period of 2019-20.

This approach is deeply inequitable and richer nations have been accused of undermining crucial climate discussions by not taking their commitments seriously. Moreover, there's a pressing concern regarding the lack of attention towards adaptation funding. Recent severe climatic events, such as unprecedented heatwaves in India, Pakistan, and Central and South America, underscore this urgency. 

Much attention is now focused on the development of the “Loss and Damage Fund”. This is especially important in the face of looming costs for developing nations tackling the impacts of climate change - the costs of which are projected to skyrocket to $580 billion annually by 2030.

Developing countries, aiming to meet the objectives set by the Paris Agreement, are in dire need of financial aid. While a widely discussed goal is $100 billion, it's a mere drop in the ocean. As per a recent analysis by the United Nations Framework Convention on Climate Change, these nations need upwards of $6 trillion by 2030 to realize even half of their pledged Nationally Determined Contributions.

The financial gap when it comes to climate finance is concerning. In 2020, data from the Organization for Economic Co-operation and Development and Oxfam indicated that climate finance flows from developed to developing nations ranged between $21 billion and $83.3 billion, a significant shortfall. Adding to the complexity, a large portion of these funds is delivered as non-concessional loans, increasing debt burdens in many recipient countries.

The challenges faced by developing nations are twofold: achieving development goals while also addressing climate change mitigation, adaptation, and associated costs. Considering that nearly 900 million individuals lack access to electricity and over 4 billion have no social safety net, the magnitude of the challenge becomes clear.

In addition to ensuring that developing countries have access to sufficient levels of climate finance, the United Nations Conference on Trade and Development (UNCTAD) has outlined four priorities for improving current climate finance mechanisms that would help to ensure that developing nations are better served by these mechanisms:

• Debt relief - With 60% of low-income countries nearing or already in debt distress, it's crucial to offer immediate relief. Establishing a comprehensive multilateral debt process could potentially break the continuous cycle of escalating debt and climate crisis. This also implies increasing grant-based sources of financing. 
  
• Innovative use of IMF's Special Drawing Rights (SDRs) - SDRS are conditionality-free, debt-free sources of liquidity and so they should be more effectively utilized to maximize the development and climate impact. This could include redirecting them to multilateral development banks, ensuring fair allocation, or even creating new SDR asset classes tailored for climate resilience.
  
• Harnessing development banks - The global network of government-backed development banks, from multilateral to national levels, can play a pivotal role in increasing finance availability. Their local expertise can bridge solutions across nations, ensuring a holistic approach to both the technical and societal aspects of green transitions.
  
• Mobilising private finance - It's imperative to incentivize and regulate private finance to align with climate goals. New instruments like green bonds and climate debt swaps are promising but still insufficient in scale. The threat of greenwashing, where actions are deceptively promoted as environmentally friendly, also looms large, underscoring the need for rigorous oversight.

The intensifying effects of climate change are threatening the future and stability of developing countries. While these nations bear an outsized impact of global warming, they struggle to secure essential resources for mitigation and adaptation. Developed countries, the primary contributors to greenhouse gas emissions historically, are morally obligated to aid these nations financially. Yet, despite global pledges, the actual financial assistance provided is inadequate and often structured as loans, which further strain the already fragile economies of these countries. With the pressing need to combat climate change, it's crucial to prioritise equitable, substantial, and effective financial support for these vulnerable nations. While there's optimism surrounding the "Loss and Damage Fund", clarity is awaited on its specifics. Meanwhile, the immediate need for robust climate finance remains unfulfilled.

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