Climate Financing and Development: Friends or Foes?

Jessica Brown, Nicola Cantore, Dirk Willem te Velde
2010

Summary

Will finance for climate change adaptation in developing countries compromise support for meeting the Millennium Development Goals? This study analyses country proposals for climate change funding put forward at recent UN-led climate change negotiations. It argues that while the aims of development and adaptation to climate change often overlap, additional funds are needed to meet the specific challenges of global warming. If not, aid may be diverted from development needs to adaptation, resulting in the neglect of aid to certain regions and sectors.

Climate finance is crucial to help developing countries adapt to climate change and adjust to a new low-carbon development path. At the same time, Official Development Assistance (ODA) is provided to help countries grow, develop and reduce poverty and is often discussed in the context of meeting development goals such as the MDGs.

At the UN-led climate change negotiations, of 26 proposals for climate finance put forward by individual and groups of countries, half call for up to two per cent of developed country gross domestic product (GDP) to be spent on climate action in addition to ODA. A few proposals mention a specific value for an adaptation fund (for example, 67 billion dollars) but are not clear on whether this can be paid out of ODA. A few proposals call for new and additional channels of climate finance (using a Multilateral Climate Technology Fund). Some proposals include principles such as the ‘polluter pay’ principle, a green or carbon levy or an air passenger duty.

A quantitative analysis of current aid spending, MDG finance gaps and expected future adaptation costs finds both overlaps and differences between current aid allocations and future adaptation finance needs.

  • Overall, if aid is diverted to finance adaptation, sectors such as health, education and aid for trade would lose out, whilst aid to the water sector would increase.
  • If aid is allocated according to future climate adaptation needs, it is likely to lead to a shift of resources into Asia, Latin America and Middle East and away from (sub-Saharan) Africa.
  • If there is no additional finance for adaptation to climate change, development efforts may be jeopardised.

Given resource scarcity, donors and their partners must set priorities for the activities that will most efficiently and effectively achieve development goals.

  • Although traditional ODA funding can help developing countries cope with global warming by strengthening social and economic development, specific climate change impacts call for further resources.
  • Aid recipients need to distinguish between climate finance provided in addition to aid and aid that would be partly used for climate finance.
  • Donors must distinguish between climate finance and aid that use the same mechanisms; climate finance using separate channels involving public transfers; and climate finance through private channels.

Source

Brown, J., Cantore, N. and te Velde, D. W., 2010, 'Climate Financing and Development: Friends or Foes?', Overseas Development Institute, London