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We need a new global agreement on climate and development finance
Comment: A more effective UN-led framework could involve a binding financial target, a role for emerging economies and the consolidation of funds
Moazzam Malik is Managing Director of the World Resources Institute and Honorary Professor at the UCL Policy Lab.
At COP29 in Baku in November, the world will meet to agree a new target for climate finance. The stakes are huge, given the record temperatures and heatwaves, floods and droughts wreaking havoc globally.
Addressing climate change and its consequences – and supporting broader human development – needs urgent investment. But the international financial system is struggling to respond. Is the time now ripe to agree on a new framework for international climate and development finance? Can the G20, led by Brazil, and international leaders meeting at the United Nations in New York in September, set the stage for COP29?
Almost 54 years ago, in 1970, the world came together at the UN to set a target for rich countries to support poorer countries. They pledged 0.7% of national income as “official development assistance” (ODA) to improve economic outcomes and reduce poverty. At the Copenhagen climate talks in 2009, world leaders met again and pledged to mobilize $100 billion annually to finance climate action by 2020. They said this would be “new and additional” to development finance.
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Since then, with the exception of a few European countries, rich nations have failed to meet the 0.7% target. In 2022, ODA peaked at $211 billion, or 0.37% of the OECD’s combined national income. Almost 15% of this was used to finance refugee-related costs in OECD countries themselves. The climate commitment was met in 2022, two years late. Without increased ODA levels, the 33% of ODA classified as climate-related cannot reasonably be claimed as “additional.”
In practice, maintaining this distinction between climate and development finance has proven difficult. For example, is planting trees in an urban landscape a climate investment because they absorb emissions, an investment in health because they reduce street-level temperatures, or an investment in biodiversity because they create habitats for wildlife?
The challenge of navigating these distinctions means it is difficult to track commitments or ensure meaningful accountability for promises made. And it leaves many countries juggling a false trade-off between investments for the planet and for their people.
Trillions needed
It is clear, however, that finance for poorer countries needs to increase dramatically. Despite progress in recent decades, development needs remain significant, with major setbacks during the pandemic. The G20 High-Level Expert Group on Climate Finance estimates that by 2030, $5.4 trillion per year will be needed for development, climate and nature. Of this, $1 trillion per year will be needed in external finance for developing countries for climate and nature alone, of which around half will need to come from international public finance.
International public finance – including new and additional aid financing from rich countries – is needed to provide concessional resources to the poorest and most indebted countries. It is necessary to anchor capital increases to international financial institutions that can leverage this at least tenfold, in part by borrowing from private capital markets. These institutions, together with other development finance institutions and strong policy environments, are essential to attract private lenders and investors, whether by reducing risk or helping to develop investment pipelines.
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In addition to additional financing, poorer countries need money that better responds to their needs. In recent years, the relentless cycle of summits has generated dozens of initiatives. The landscape is fragmented, with more than 80 funds or instruments in the climate space alone. This has become increasingly difficult for poor countries to navigate. There is an urgent need for a moratorium on new funds and to agree on principles and coordination mechanisms for all external financing – based on the aid effectiveness principles agreed in the 2000s.
Binding commitment of 0.7%?
Taking these elements together, is it time to abandon the voluntary ODA framework developed in the last century to address the problems of the last century? Can countries come together now to agree on a new framework for official climate policy? It is development assistance, with a binding commitment for rich countries to finally deliver on the 0.7% national income pledge by, say, 2030?
Such a target, negotiated under a UN framework, would double the flow of aid financing. This financing would anchor the multilateral, public and private investments that are needed to close the financing gap. A negotiated process could also bring in emerging countries like China, which already provide significant financing. It could clarify definitions and shift arrangements for monitoring climate and other development spending from the OECD to the UN to improve accountability. And it could begin to consolidate the range of instruments and make them more responsive to the needs of poor countries.
With public finances under pressure around the world, many will say this is simply unaffordable. But international surveys indicate that people are willing to contribute 1% of their income to tackling climate change. Will politicians have the courage to engage their constituents? And at the G20, at the UN, in the run-up to Baku and beyond, will they have the vision to work internationally to agree a new deal that delivers development and climate justice?