The selfish case for climate finance

The clock is starting to run down here at COP29 in Baku. The UN climate summit’s final official day is Friday and, even assuming the event follows tradition by running over well into the weekend, there is not much time left for nations to reach a deal on the critical global climate finance target.

Under the Paris Agreement, nations are obliged to agree on the so-called New Collective Quantified Goal at this conference. National environment ministers are at the venue now trying to hammer out a deal.

Developing nations have been calling for contributions as high as $900bn a year. Wealthy countries have been floating numbers as low as $200bn — a suggestion dismissed as “unfathomable” by Bolivian negotiator Diego Pacheco at a plenary session today.

A key question is how much public finance developed-nation governments feel able to promise without triggering a political backlash at home. Their calculations will look very different depending on whether they view this money as charity, or as an investment driven by cold-blooded economic self-interest.

They should see it largely as the latter, argues a new economic paper getting attention among delegates in Baku. Read on for our take.

COP29 in brief

• Leaders at the G20 summit in Brazil issued a statement saying they “commit to successful negotiations” at COP29, and “look forward to a successful” new climate finance goal. But there was no explicit mention of the transition away from fossil fuels, which had appeared in an earlier draft.

• Argentina’s foreign minister said the country would not quit the Paris Agreement. It had sparked speculation by withdrawing its negotiators from COP29.

• The UK, Colombia and New Zealand joined 13 other countries in the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies.

Does climate finance pay?

“I have come here to tell you that climate change kills,” one national leader told the plenary hall last week at COP29. It was the kind of warning we’ve seen repeatedly at these gatherings from delegates of lower-income nations pummelled by worsening extreme weather events.

The speaker, however, was not a developing nation representative, but Prime Minister Pedro Sánchez of Spain, where more than 220 people were recently killed by flooding linked to rising temperatures in the Mediterranean Sea.

Two years ago, COP27 was held in the wake of catastrophic floods in Pakistan, which added to momentum for an agreement to establish a fund to help lower-income nations cover loss and damage costs. The question now at COP29 is whether, after the disaster in Spain — and similarly deadly storms in the US — developed nations will conclude that it is in their own interests to provide the new finance needed to decarbonise the world economy.

An important new academic paper, currently circulating among negotiators in Baku, argues that this is very much the case. Rich countries, it asserts, should view climate-related financial support for poorer ones not as “an act of charity, or moral obligation”, but as “an act of economic self-interest”.

The 144-page paper, by finance professors Patrick Bolton of Imperial College London and Alissa Kleinnijenhuis of Cornell University, sets out a detailed plan for how countries should approach the new global climate finance goal being thrashed out at COP29 — and why they should want to.

It focuses mainly on the low-carbon transition of the power sector, which will account for the biggest chunk of climate finance. Bolton and Kleinnijenhuis find that developing nations will need $958bn a year from foreign sources to finance the early retirement of fossil-fuel power capacity and build new clean power capacity to meet their requirements.

Assuming that public finance can catalyse three dollars of private investment for every dollar provided, rich-world governments would need to cough up $225.9bn of grant-equivalent finance a year just for the power sector. The authors don’t undertake a detailed analysis of the further sums that rich nations would need to provide for adaptation, loss and damage, and emissions reduction beyond the power sector, but call the $441bn overall total proposed by a negotiating group of Arab nations “a reasonable minimum amount”.

To some developed-world politicians, this suggestion will sound like a total non-starter — a piece of mindless and unwarranted generosity with public funds at a time when their voters are already feeling squeezed. COP29 delegates are working “to extract trillions of pounds in climate reparations from poor people in rich countries to send to rich people in poor countries”, claimed a columnist in the UK’s right-leaning Telegraph newspaper last week.

But as the people of Valencia can attest, the costs of climate change are already falling on rich countries, and are set to rise steeply.

That means money invested today to reduce carbon emissions anywhere in the world will reap long-term benefits. And if rich countries (with their low financing costs) want to invest to realise those climate benefits, they can do so especially effectively by providing catalytic grant finance to developing ones, where the high cost of capital is a major obstacle to the energy transition.

Bolton and Kleinnijenhuis attempt to quantify the economic returns from this grant finance by applying the economic framework of a “social cost of carbon” — that is, the economic cost imposed by each tonne of carbon dioxide added to the atmosphere, through its contribution to the damaging effects of climate change. For their base calculation, they use the estimate of $190 per tonne that’s been used by the US Environmental Protection Agency under the Biden administration, though they note that other economists have suggested this figure is too low.

The result? If developed nations provide $2.8tn in grant-equivalent finance for emissions mitigation in developing countries over the next decade, they can expect economic benefits of at least $7.9tn: a return of 182 per cent. Crucially, this number represents only the economic benefits to the developed nations themselves, not to the world as a whole.

The calculations could be shifted, the authors add, by changes in the contributor base. If the US were to agree to the commitments outlined, only to renege under president-elect Donald Trump, the economic returns for other nations would fall (though they’d likely remain in positive territory). It’s worth remembering that the EPA under Trump slashed the social cost of carbon used for its calculations to $5 per tonne — a number that would destroy the economic logic in the calculations outlined above.

It’s also important to note that the economic argument here relates specifically to climate finance aimed at reducing emissions in developing countries. The case for adaptation and “loss and damage” finance is more emphatically a moral one — and the authors acknowledge that these areas will require international funding on the same order of magnitude.

There are other important details and caveats. The authors stress that climate finance must be deployed with careful attention to the specific energy needs of each country. In particular, sufficient climate finance must go towards both fossil fuel capacity retirement and renewable energy deployment. Any plan that neglects either of the two, they warn, will fail.

The implication of all this is that developed governments should rethink their national climate strategies to put far more emphasis on international climate finance.

Last week, UK Prime Minister Sir Keir Starmer won plaudits for announcing a new national climate plan with a target of reducing greenhouse gas emissions by 81 per cent on 1990 levels by 2035. But the government’s statement, which celebrated the UK’s “international leadership”, made no mention of the country’s position on international climate finance.

“Domestic climate ambition by developed countries,” without expanded climate mitigation finance for developing ones, is “not good enough”, Bolton and Kleinnijenhuis write. The failure to provide this finance, they argue, is a policy choice that will place developed nations “in a position of incurring escalating climate damages and adaptation costs at home”.

Quote of the day 

Don’t use the word ‘donor’. That implies charity. There is a climate debt that needs to be paid.

— Jiwoh Abdulai, Sierra Leone’s minister of environment and climate change 

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