How to Slow Climate Change While Fighting Poverty

Rabah Arezki | 09 November 2022
No image

Falling aid budgets and ballooning debt in the developing world are impediments to climate action. Green aid projects can bring poorer countries on board.

This year’s U.N. Climate Change Conference, or COP27—which opened on Nov. 6 in Sharm el-Sheikh, Egypt—has been called “Africa’s COP.” Voices from developing economies, most prominently Barbadian Prime Minister Mia Mottley, have become louder in demanding that richer countries compensate them for “loss and damage.”

That term, used in climate negotiations, refers to the irreversible consequences caused by climate change to which poor countries or communities cannot adapt. When options to adapt exist, they are not affordable to these countries or communities. The debate over loss and damage is occurring at a time when the future of traditional aid is in doubt. Indeed, political support for aid budgets has been dwindling.

Donor countries have increasingly been under pressure from a series of crises—from the global financial crisis in 2008 to the COVID-19 pandemic to Russia’s war in Ukraine—which have raised their debt levels. Fiscal and monetary space is increasingly limited, and taxpayers are facing rising costs of living. Politicians in advanced economies will increasingly face the difficult choice between giving citizens more financial support at home and providing aid internationally.

In the past few years, several donors have announced significant reductions in the amount of allocated development aid. The United Kingdom, an historically committed aid donor, is a case in point. Last year, the British government passed a motion to reduce its aid by 0.2 percent of gross national income. The recent turmoil the country faced in financial markets signaled potentially more global turbulence, which will push even richer countries to consider cutting foreign aid further. Other countries, such as Australia, Japan, and Saudi Arabia, have also scaled back their aid packages.

What is needed, however, is not less but more aid to help developing countries tackle the dramatic consequences of an unprecedented series of crises. Indeed, developing countries, unlike advanced economies, had no fiscal, monetary, or social space at the onset of these crises. Former U.S. Treasury Secretary Larry Summers recently warned about the dangers for the international community of not stepping up to support developing countries. He pointed to the mounting risks to the global economy, which will have disproportionate consequences for developing countries and risk further fracturing the cohesion of the global community.

One key priority for the global community is not only to increase aid but to make it much greener to help developing countries tackle the challenge of climate adaptation. Green aid encompasses financial and technical assistance to governments and direct investments in projects in both mitigation and adaptation to climate change.

Green project investments include managing biodiversity and coastal areas, fostering ecotourism, and addressing environmental health hazards.

Examples of green projects include building dams to generate hydroelectricity, such as the Three Gorges Dam in China, and preserving forests, such as in the Congo Basin or the Amazon, which have a major role in the global climate system. Other avenues for green project investments include managing biodiversity and coastal areas, fostering ecotourism, and addressing environmental health hazards.

These projects can be operated at the regional, national, or community level. Adaptation projects, which developing countries need most, urgently have become the orphan of the fight against climate change. That is because governments in developing countries lack the financial resources. And without a financial backstop, the private sector will not invest in certain green projects, especially those linked to adaptation.

The need for green aid has never been greater, especially as private sector investment flows toward green projects are faltering. Indeed, the high hopes for private sector-led green investment raised by the Glasgow Financial Alliance for Net Zero, a coalition of leading financial institutions committed to accelerating the energy transition, have been dampened.

The coalition carried the promise to tap into the massive global saving glut and direct a large chunk of it toward green investments. The $130 trillion announced last November in available financing from investors toward green assets is being scaled down, and private sector actors are quietly reneging on their climate finance promises.

Russia’s war in Ukraine has rekindled concerns about energy security and put the energy transition on the back burner. High natural gas prices have led large economies such as Germany but also China and India to resort to coal. It is ironic that European countries, which have for years reprimanded developing countries for their use of dirty fuels, are now scaling up their consumption of coal.

Developing countries have long been arguing that it is in their rights to exploit fossil fuels and that the burden of cutting emissions should be on richer nations. Relying on dirty energy becomes even more important if they fear aid may not be forthcoming. More green aid in the form of financial guarantees can help boost private investments in green projects that would not otherwise be viable. To avoid gridlock between rich and poor countries at COP27, green aid must play a central role as a catalyst for the private sector to invest in climate action.

To pivot from traditional aid toward greener aid, the international community must first tackle the looming debt crisis in developing countries.

To pivot from traditional aid toward greener aid, the international community must first tackle the looming debt crisis in developing countries. The G-20-sponsored Common Framework for debt treatment, which requires private creditors to participate on comparable terms to overcome the collective action problem, has thus far failed to deliver a comprehensive solution to debt restructuring.

The World Bank’s chief economist, Indermit Gill, recently argued that the Common Framework needs to be akin to the Heavily Indebted Poor Countries Initiative, launched in 1996, so that all developing countries get equal and speedy treatment. In other words, debt relief for developing countries needs to be expedited.

Failure to resolve that looming debt crisis would simply make any green aid a transfer to private creditors at a time when developing countries’ governments need resources. Furthermore, in a recent report, the United Nations proposed a framework for debt-for-climate swaps, in which debtor governments would agree to take action to reduce emissions in exchange for a partial cancellation of their debt.

Yet measuring the impact of climate actions will first and foremost rest on availability of data and disclosure standards. Adhering to these observable standards is also key to attracting private green investment. International organizations should develop these standards, and national regulators should enforce them. The private sector’s environmental, social, and governance (ESG) standards, which are usually adopted on a voluntary basis, have been plagued with greenwashing, such as the Dieselgate scandal, when Volkswagen faked emissions levels in its cars between 2006 and 2015.

Other forms of greenwashing include conspicuous ads boasting about the eco-friendliness of major oil companies that have otherwise been facing major litigation for their deliberate actions around the developing world. As the criticism of ESG cements itself and money flows out of ESG funds, international organizations need to urgently set a standard and adhere to it.

Concretely, the Finance in Common initiative, which brings together most development banks—together representing $2.2 trillion of lending activity annually—could adopt a common green standard as a group. The catalytic effect of such standard-setting by development banks could be enormous as it spills over to government agencies and private sector actors.

Making aid greener is not about reallocating traditional aid toward a specific sector that is environmentally friendly. Green aid is truly about scaling up and transforming aid. An important breakthrough at COP27 could come from donor countries extending a significant package of green aid through development banks, with the World Bank in the lead. Calls for extending the investing capacity of development banks, including by leveraging their balance sheets, have become louder. More needs to be done to ensure that additional aid is transformative.

In a recent speech, U.S. Treasury Secretary Janet Yellen spoke about the urgent need for a “road map” for development partners to coordinate and support poorer countries in these dire times. The pivot toward green aid should be seen as an opportunity to bring together advanced and developing countries to decisively fight against climate change without losing sight of the fight against poverty.

Rabah Arezki is a senior fellow at the Harvard Kennedy School. He previously held senior positions at the African Development Bank, the World Bank, and the International Monetary Fund. 

This article was originally published on Foreign Policy.
Views in this article are author’s own and do not necessarily reflect CGS policy.