Climate change is expensive. How should the world pay to fight it?

Alberto Pezzali/AP
Delegates gather in the Action Zone at the United Nations climate summit in Glasgow, Scotland, Nov. 11, 2021.

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If one thing became clear at the COP26 gathering of world leaders this month, it’s that tackling climate change is going to be expensive.

Making the leap to decarbonized energy is pricey. So is adapting to a warming planet that unleashes more wildfires, storms, and heat waves. Meanwhile, many communities already bearing the brunt of climate disasters are among those least equipped to foot the bill. 

Why We Wrote This

The whole world is heating up. So who should pay for that? That fundamental question of fairness lies at the heart of countries’ wrangling over justice and climate change.

All of this means that “climate finance,” the money needed to both fight climate change and try to adjust to it, is increasingly taking the spotlight. Under that glare, it is revealing the underlying global inequities that make collective climate action so challenging. 

At the United Nations climate conference in Glasgow, Scotland, delegates grappled with the responsibility of – and broken promises by – wealthy nations to fund climate action around the globe. But attention also turned to private financiers, including a new alliance of more than 450 insurers, banks, and asset managers with around $130 trillion in capital. All are committed to canceling out all the carbon emissions in their portfolios by midcentury, after first making major reductions in emissions by 2030.

But lower- and middle-income countries remain skeptical that private finance will solve their crises. They are urging a reevaluation of how the world will pay to protect its most vulnerable citizens.  

If one thing became clear at the COP26 gathering of world leaders this month, it’s that tackling climate change is going to be expensive.

Making the leap to decarbonized energy is pricey. So, too, is adapting to a warming planet that unleashes more deadly wildfires, storms, and heat waves. Meanwhile, many of the communities already bearing the brunt of climate disasters are among those least equipped to foot the bill. 

All of this means that “climate finance,” the money needed to both fight climate change and try to adjust to it, is increasingly taking the spotlight. And under that glare, it is revealing the underlying global inequities that make collective climate action so challenging. 

Why We Wrote This

The whole world is heating up. So who should pay for that? That fundamental question of fairness lies at the heart of countries’ wrangling over justice and climate change.

At the United Nations climate change conference here, delegates from Africa, Asia, and Latin America chided wealthy countries for not fulfilling a promise to drum up $100 billion a year for climate-related projects. Developed countries had agreed to that payment plan at another U.N. summit in 2009, an acknowledgment that they were disproportionately responsible for the greenhouse gases already in the atmosphere. By 2019, they were still $20 billion behind. At the conference this year, delegates from developing countries said this parsimony had undermined their trust in the U.N. process. 

Here’s the thing: Even $100 billion isn’t a big number when it comes to climate change. Not when you add up what it would take to climate-proof the world in the next few decades while also cutting emissions as fast as possible. 

“The $100 billion, quite frankly, pales in comparison to the actual needs,” says Iskander Erzini Vernoit, a policy adviser at E3G, an environmental think tank in London. “And I think COP26 has been useful for establishing that recognition.” 

Trillions, not billions

Indeed, the summit made clear that transforming how the world is powered, built, and managed – from building offshore wind farms and smart grids to installing storm barriers and preserving mangrove forests – will require trillions, not billions, of dollars in new investments. By 2030, the energy sector alone would likely need $4 trillion annually to put carbon emissions on track to reach net-zero by midcentury, according to the International Energy Agency. 

Government spending by itself won’t pay for this transition. So attention in Glasgow turned to private financiers, including a new alliance of more than 450 insurers, banks, and asset managers with around $130 trillion in capital. All are committed to canceling out the carbon emissions in their portfolios by midcentury, after first making major reductions by 2030.

The details are fuzzy about how, exactly, the financial institutions will measure this “net-zero” approach to assets, or how quickly they will move away from fossil fuels. But the alliance, and other commitments within the financial sector, are a step in the right direction, says Yannick Glemarec, executive director of the U.N.’s Green Climate Fund (GCF), which was set up to provide money for developing countries. 

Alastair Grant/AP
Delegates convene in a room as discussions continue at the U.N. climate summit in Glasgow, Scotland, Nov. 12, 2021. The question of who is going to finance adaption for climate change and pay for climate disasters remains a thorny one.

“If we want to finance climate [action] at scale to avert catastrophic climate change, all the pieces have to come together,” he says. 

The GCF has committed $10 billion in grants and loans since 2015, when countries signed agreements at the last big international climate summit, held in Paris. 

But he is hopeful that the fund can start to ramp up programs now that the United States and other donors have pledged more funding. He sees the fund’s role as helping to mobilize private capital – those needed trillions of dollars – by investing in projects that private financiers might deem too unpredictable, such as a solar energy plant in an emerging African market. The goal is to get those projects off the ground and show that they are commercially viable, which, he says, can prompt private investment.

“Once you have a commercial track record you’re not speaking about uncertainty. You’re speaking about risk. Bankers cannot deal with uncertainty. They can deal with, and price, risk,” he says.   

But who pays for adaptation? 

The catch for developing countries, though, is that while investors may be keen on green technology, which both cuts emissions and makes profits, it’s harder to raise private capital for what’s called adaptation. Those are the storm barriers and fortified buildings and drought-resistant crops and other efforts communities will increasingly need as the planet warms. Lower income countries, many of which are facing the most extreme risks from climate change, may struggle to finance these crucial investments. 

And that, delegates at COP26 pointed out, could exacerbate global inequities, even as diplomats talk about increased worldwide financing.

“We need to ensure the developing world isn’t left behind by their unequal access to global capital,” says Mr. Vernoit, who previously served as a U.N. climate negotiator for Morocco. 

In the corridors of Glasgow, negotiators from low- and middle-income countries seemed skeptical that private capital could pick up the slack left by rich donors that had missed their aid targets. 

“Adaptation is public goods, and the private sector is not very interested,” says Mizan Khan, a delegate from Bangladesh.

But neither, worry many lower income countries, are wealthy nations.

In his speech in Glasgow, Indian Prime Minister Narendra Modi said developed countries should provide $1 trillion in climate finance “at the earliest” and said their commitments should be tracked, just as scientists track carbon emissions. “The proper justice would be that the countries which do not live up to their promises made on climate finance, pressure should be put on them,” he said. 

The COP26 agreement, signed last Saturday, urged a doubling of public financing for climate adaptation by 2025, compared to the $20 billion provided in 2019 – itself a fraction of the pledged climate aid. But wealthy countries resisted additional commitments to compensate lower-income countries for climate-related losses. 

Developing countries already face wrenching choices about how to decarbonize, such as whether to take money from health or education and put it to clean energy, says Harjeet Singh, a Delhi-based senior adviser to Climate Action Network International, a campaign group. The backtracking by donors creates a political dilemma on top of this – and threatens collective climate action overall. 

“If they don’t get enough confidence about where the money will come from, why would they change a paradigm?” he asks. 

“We don’t know how to access the trillions”

Professor Khan and other delegates complained that money from GCF and other multilateral lenders took too long to arrive, was often in the form of loans and not grants, and rarely went to front-line communities impacted by climate change. (Mr. Glemarec said GCF had sped up its review process to take a year, down from more than two previously.)  

Diego Pacheco Balanza, Bolivia’s chief negotiator, said Bolivia has been trying to conserve its carbon-rich forests and improve their management, working with Indigenous groups, but that it couldn’t get GCF to fund its programs. “Forests are under a lot of pressure. ... We need to have good incentives in order to avoid the degradation of the forests,” he says. 

As for private capital, “we don’t know how to access the trillions of dollars that are outside” formal aid channels, Mr. Pacheco says. 

In reality, if financial institutions do redirect trillions of dollars into net-zero assets, only a fraction would be allocated to investments in developing countries, given the perceived risk. But that fraction matters when it comes to climate financing, since the global pool of savings is so large.

Mr. Glemarec reckons that building climate-resilient infrastructure in the global south can be an investment opportunity, provided GCF or other government-backed lenders go first. He’s also set up a $500 million private equity fund for coral reef protection, sustainable tourism, and fishing in 16 countries in Africa, Latin America, Asia-Pacific, the Caribbean, and the Mediterranean. GCF has committed $125 million. 

“We are the first to lose our money if it goes wrong. But if it goes right, this $500 million of equity might finance anywhere between $2.5 to $5 trillion of actual investment,” he says. If so, he adds, “we will have demonstrated that investing in the protection of a coral reef is a legitimate investment for a pension fund or a bank.”

Still, he agrees that some climate adaptation projects in low-income and indebted countries simply won’t make the grade. “Some of these needs will have to be financed with public money because there is no business model,” he says.

   

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