How to understand direct government aid for climate change

Washington D.C. Correspondent
Climate financing's fate at COP28 is overshadowed by devastating images of flooding in Pakistan.
Photos in the illustration show the impacts of recent flooding in Pakistan. Illustration by Samson Awosan.

When talks begin later this month in Dubai at the United Nations climate conference, wealthier nations are expected to (finally) say they are “on track” to fulfill their pledge to provide $100 billion in annual funding to help lower income nations address climate change.

“I think the developed countries are on track to meet the $100 billion a year goal, which is good news, against the backdrop of being late, which we all fully admit and regret,” U.S. special deputy envoy for climate Sue Biniaz said at an Atlantic Council dialogue this month on EU-U.S. climate diplomacy.

But these countries are meeting the deadline for that pledge at least two years late, and all sides agree the sum now barely begins to address climate change in lower income countries.

“We will need to be talking about the trillions and how do you unlock the trillions,” Biniaz said.

How to help low- and middle-income countries will be one of the biggest issues at this year’s UN climate summit, known as COP28. As the impacts from global warming intensify, these countries are finding themselves among the most vulnerable.

Many are particularly troubled by the lack of assistance because they have contributed almost nothing to the accumulation of greenhouse gases in the atmosphere. Those emissions have come historically from wealthy countries, which grew their economies rapidly during the industrial revolution, and more recently from China and India.

This is the fifth article in Cipher’s series about climate financing for low- and middle-income countries in the runup to COP28.

Wealthy countries made the $100 billion climate financing pledge at the 2009 UN climate summit in Copenhagen, with a 2020 self-imposed deadline, to help low-income countries both cut their greenhouse gas emissions and protect them against climate impacts through adaptation measures.

Funding has grown over the years, reaching about $89.6 billion in 2021, according to the Organization for Economic Co-operation and Development (OECD), which represents the world’s wealthy industrialized democracies.

In fact, preliminary data available to the OECD indicates countries look likely to have met the $100 billion objective in 2022, said OECD secretary-general Mathias Cormann.

Now countries are contending with what kind of funding is in the pledge, how much more will be needed after 2025 (the starting date for a new climate financing goal) and, above all, the operation of what’s known as a loss and damage fund. That fund, first established at last year’s UN summit in Egypt, aims to pay for climate damage in poorer countries most vulnerable to the impacts of global warming.

Let’s first dissect what makes up the $100 billion and what more is needed. Then we can turn to the loss and damage fund.

The funds being put toward the pledge are short on the type of financing lower income countries need most, critics say.

According to an analysis of figures through 2020 by the advocacy group Oxfam, most of the financing so far has been in the form of loans. Just one quarter has come from grants and direct aid, the types of financing most needed by vulnerable countries already deeply in debt, said Ashfaq Khalfan, climate justice director for Oxfam America, an affiliate of the nonprofit advocacy coalition Oxfam International.

Overall, Oxfam said only a quarter to a third of the financing provided in 2020 was specifically aimed at climate mitigation or adaptation projects in the form of grants, while the rest went to projects where climate action was peripheral or in the form of loans at market rates.

“The pledge has perhaps done more harm than good, as it has given rise to increasingly ‘creative’ methods of accounting,” Keith Bettinger, lead for climate change adaptation and disaster risk reduction with DAI, a private development firm, told Cipher.

Tim McPhie, a spokesperson for the European Commission, indicated to Cipher that accounting for the $100 billion will take time because contributions come from various sources and in multiple forms: “While the data will not be officially confirmed this year, we expect parties to be able to demonstrate their spending in a way which will show that the pledge has been met this year.”

What’s more, it’s likely a majority of the money is going toward cutting emissions, as opposed to adapting. Such a trend is underway despite the 2015 Paris Climate Agreement calling for financing to reach a balance between mitigation and adaptation projects.

Most (60%) of the $89.6 billion in finance tallied in 2021 has been aimed at mitigating climate change by, say, building renewable energy facilities or planting and protecting forests, while 27% was directed toward projects to stave off adverse effects, according to OECD.

Increasingly, money is also needed to help low- and middle-income countries adapt to the impacts of climate change: the storms, flooding, drought and glacial melting that are intensifying as the climate warms.

By 2025, OECD estimates overall climate financing needs for developing countries at $1 trillion annually, which will more than double between 2026 and 2030 to $2.4 trillion. At next year’s UN summit, delegates will have to determine a new financing goal before the current one expires in 2025. They will also decide whether to widen contributions beyond those going to the $100 billion fund, according to a senior U.S. state department official in a briefing on Friday.

“Left unchecked,” a recent UN report warned, “increasing climate risks will inevitably lead to more climate-related losses and damages.”

The report pointed to droughts in East Africa, wildfires in Türkiye, Greece and North America, and flooding in China and South Asia.

These pressures overlap with the increasingly contentious effort to establish the loss and damage fund.

For many poorer countries and their advocates, this fund amounts to compensation from the wealthy countries for their contribution to climate change. For wealthier countries, particularly the United States, the fund has nothing to do with compensation but can provide funds to help countries gird themselves for climate-influenced impacts and recover from them afterward.

Since agreeing to establish the fund at last year’s COP, wealthy and poorer countries have sparred over which international institution — the World Bank or the UN — will run the fund, and how countries will contribute. Poorer countries want the UN to run it and for contributions to be mandatory, while the U.S. has pushed for it to be voluntarily funded and housed at the World Bank, where the U.S. is the largest shareholder.

The two sides compromised on a proposal to have the World Bank oversee the fund on an interim basis when it is launched. The proposal will be taken up by COP28 delegates in Dubai early next month. The proposal would make the fund voluntary but urges wealthy countries especially to contribute.