Development finance and climate finance: achieving zero poverty and zero emissions

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1 June 2015

Ahead of the Financing for Development conference in Addis, Paul Steele asks whether changes are needed to the way we address climate and development finance.

Should public money from Europe used to build wind farms, such as this one in Mulan, around 170km north east of Harbin City in Heilongiang, China, constitute official development assistance? (Photo: Land Rover Our Planet, Creative Commons, via Flickr)

Is spending to make agriculture in Bangladesh climate resilient best labelled as climate finance or development finance – or is it impossible to separate the two?

Is it fair to label public money from Europe to build wind turbines in China part of official development assistance? 

A new discussion paper from IIED recommends a way forward on these issues – and we want to see if you agree with our proposals. I suggest that it is useful to distinguish between different types of international climate finance (adaptation and mitigation) and different types of recipient (Least Developed Countries (LDCs) versus middle-income countries) – as illustrated by the climate finance compass below (Image: IIED/Adam Cohen).

A climate finance compass, showing adaptation, mitigation, LDCs and MICs (Image IIED/Adam Cohen)

In LDCs, there are strong links between adaptation finance and development finance, so I suggest this should be counted as official development assistance (ODA).

But in middle-income countries, the links between mitigation finance and development finance are weak. I suggest that this should be additional to ODA. Instead, it could be counted using the new metric of total official support for sustainable development (TOSD).

These are important issues for both the Financing for Development Conference in Ethiopia in July 2015 and the Paris negotiations in December 2015.

Have we got this right? Please share your comments below and help shape IIED's advocacy for the forthcoming critical events.

In the negotiations for the Financing for Development conference, the links between the climate and development issues have been recognised. The second version of the negotiating text (PDF) states: "We acknowledge the importance of taking into account the three dimensions of sustainable development and building climate and disaster resilience considerations into development financing to ensure the sustainability of development results. We recognise that well-designed development actions can capture multiple local and global benefits, including those related to climate change. We recognise the need for transparent accounting for climate finance and welcome the ongoing work in the UNFCCC."

The stand-off

The relationship between development finance and climate finance is hotly contested. Those who stress the differences – often LDC climate negotiators highlight the text in the United Nations Framework Convention on Climate Change (UNFCCC) that climate finance should be "new and additional" and that climate finance is based on the principle that the "polluter pays" with the countries that industrialised first, responsible for the bulk of historical climate emissions. In contrast, development finance, as measured by ODA, is based on global 'solidarity'. 

Those who stress the similarities between climate and development finance – OECD donors point to the need for development finance to be climate-proofed, for climate finance to have maximum development benefits and for climate finance to learn the lessons from aid in terms of effective delivery at country level.

Climate finance is of course still an emerging area with no agreed definition and no international coordination body as exists for ODA. What is the best way to bring together these two opposing perspectives on the relationship between development and climate finance?

Development finance still urgently needed

There is wide agreement that international development finance will need to be increased and to be used more effectively, particularly in least developed countries, to meet the SDG target of eradicating extreme poverty by the year 2030.

Estimates suggest that the annual incremental costs up to 2030 of SDG achievement (in constant 2010 prices) will be about US $70 billion for health, $40 billion for education, $40 billion for food security and $22 billion for water and sanitation. This makes around $170 billion per year of international public funds compared to current bilateral aid disbursements of $134 billion in 2013.

Is the best climate adaptation resilient poverty reduction?

Could international public finance to achieve the SDGs be the best way to also achieve climate resilience, rather than through specific 'adaptation' programmes?

A richer, healthier, better-educated population is the best way to achieve transformational adaptation – with the people who are most vulnerable to the impacts of climate change migrating from climate-prone areas to cities, moving away from agriculture and other weather-dependent livelihood activities, and instead being able to access the education, finance and support to enable them to stand up to climate shocks.

I believe this is a more cost effective, long-lasting approach than stand-alone climate adaptation specific projects, such as improved weather forecasting or climate-resilient agricultural technologies.

Should climate adaptation finance be counted as official development assistance?

Climate adaptation finance, particularly in least developed countries, is hard to separate from development finance. Indeed, all bilateral donors count this as ODA. We believe it is important to both spend on basic provision for health, education, water/sanitation and food security (as required to meet the SDGs) as well as to make sure that SDG spending is resilient to climate change. 

Do you agree?

Is mitigation finance crowding out poverty reduction?

International public climate finance is growing, particularly to support mitigation in middle-income countries, and there is some evidence that it is crowding out finance to meet the SDGs, particularly in LDCs, where aid is falling.

Bilateral climate aid was US $23 billion in 2013 or 17 per cent of total bilateral aid, with 60 per cent of this spent on mitigation, primarily in middle-income countries. The "principal" spending on mitigation in middle-income countries was $8 billion in 2013, or six per cent of total bilateral aid commitments. This contrasts with a declining share of total ODA for LDCs, which fell to 40 per cent of total bilateral aid in 2012.

Is too much aid money being redirected to finance mitigation in relatively well-off countries?

Should climate mitigation finance in MICs be additional to ODA?

I believe that international public climate finance for mitigation in middle-income countries should be additional to ODA to protect financial support for the SDGs. This will limit the risk that ODA money is diverted from funding poverty reduction, and will allow a more accurate picture of development-related finance. 

How can we ensure developed countries continue to spend on mitigation?

It is my view that OECD countries will still have incentives to finance mitigation activities because they will want to promote exports of their renewable technologies and meet their own climate emission reduction targets more cheaply through investment abroad.  

And they can still get credit for the spending through the OECD's recent move to measure total official support for sustainable development.

Have we got it right? Or do you have a different perspective?

Your views

Please comment with your views. We want to hear what you think and learn from experiences of others to make sure that our work in this area is properly informed and based on good evidence. Post your comments below or send me an email.

Comments received by 12 June will be used to inform IIED's immediate work in this area, and subsequent views and feedback will be used to shape IIED's longer-term plans and advocacy.

Paul Steele (paul.steele@iied.org) is IIED's chief economist.

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