Shrinking and Bridging the Global Climate Finance Gap

This year’s, COP, the big UN climate conference, opened with the Independent High-Level Expert Group in Climate Finance saying trillions of dollars were required annually for developing countries to meet climate goals, the ONE campaign documenting that donors had utterly failed to deliver on their existing pledges of $100 billion in additional annual finance for climate, and celebrations around a new “loss and damage” facility currently worth a few hundred million dollars (by no means all of which is new money). The precipitous drop-off in zeros between calls for new climate finance and new finance delivered suggests we need a rethink. In a new CGD note on climate and development, I argue for a greater focus on technology and multilateral finance to help lower and level the global costs of low-carbon investment.

The High-Level Expert Group on Climate Finance calls for fifteen times the international private finance to developing countries and a fivefold increase in concessional finance by 2030 (this alongside hugely ambitious domestic resource mobilization targets). Under the circumstances, it seems only wise to think about what might help if that funding doesn’t emerge. Regarding ODA (official development assistance, or “aid”) in particular, the goal is much more money and a heavy re-apportionment to climate mitigation. But my worry is that while we won’t get the “much more,” we might get the re-apportionment, as donors continue to meet pledges of new and additional finance by instead diverting traditional development funding. At a minimum, we need an approach that protects development financing for low- and lower-middle-income countries, and which builds mitigation support on top. That is why agreeing to a strong definition of “new and additional” when it comes to climate financing is such an important first step. It is a step that have been taken a decade or two ago, but next year would be better than never.

In the note, I suggest one way to get mitigation targets and financing realities closer together: reducing the cost of mitigation through further technology advance. Historically, we’ve considerably underestimated the speed by which costs for clean energy would drop. And the more prices drop, the less need for subsidies and external finance. It is largely technology advance that lies behind the fact that rich countries have decouple growth from CO2 emissions (in the UK, GDP has climbed 40 percent since 1990, while emissions have fallen about 40 percent over the same period). And it is largely technology advance that means, worldwide, the amount of carbon dioxide emissions associated with a given level of output has dramatically fallen over the last quarter century. At a GNI per capita of $10,000, for example, the amount of carbon dioxide emitted per person per year has fallen from around 2.9 to 2.1 tons since 1995 (See Figure 1). Between 1995 and 2019, CO2 emissions per dollar of GDP in low income countries have fallen nearly 60 percent.

Figure 1. Tons of carbon dioxide per capita against GDP per capita

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Source Data: World Bank World Development Indicators

To be sure, global progress toward decarbonization is not fast enough, but again, it is technology change not global finance that has driven it so far, and there should be a far greater focus on driving technology advance in global discussions around preventing further climate change.

All that said, there is still a much larger role for international finance to play—in particular, multilateral development bank financing. The note describes how multilateral banks can play a vital role in equalizing the global cost of finance for low-carbon investments, and they can do it at comparatively limited cost to donors—tens of billions rather than hundreds of billions. That’s the least we can expect—even if it might still be more than we get.