Finance needs on climate change

Ahmed Mustafa, Tuesday 1 Nov 2022

Financing for green projects in developing countries will be a major issue at the upcoming UN COP27 Climate Change Conference in Sharm El-Sheikh.

Finance needs on climate change
Finance needs on climate change


The present global economic crisis means that many developed countries are failing to live up to the targets they have committed themselves to in order to combat climate change, with large economies such as Germany and the US even bringing coal-burning power stations back on line in a bid to counter the present energy crisis.

Many of these power stations were supposed to be decommissioned to reduce emissions of the greenhouse gases responsible for global warming, and the failure of the developed countries to reach their targets also comes against the background of further pressure on the emerging and developing economies to increase the pace of change to green and sustainable energy.

Countries that are responsible for almost two-thirds of global greenhouse-gas emissions have thus far been reluctant to provide the funds needed for those transformation efforts. This is despite the fact that at last year’s COP26 Conference in Glasgow, statements were made to mobilise $100 billion a year of financing for the emerging economies, considering these essential to help ensure mitigation efforts.

However, even at that time, leading US asset manager BlackRock issued a report concluding that the “emerging market economies need $1 trillion a year of public and private finance in order to transition to a low-carbon economy in the fight against climate change” or almost ten times the UN target.

The report said that “to reach the target financing, public bodies would need to contribute $100 billion a year in grant-equivalent financing, which could in turn be leveraged with additional public and private sector investment… that is to accelerate their efforts to reach net-zero emissions by 2050.”

The figures were based on provisions of the Paris Agreement reached at the COP21 Conference in 2015 on global warming targets. But any pledges made later at Glasgow are probably now in jeopardy because of the economic difficulties facing the world, developed and developing countries alike.

As a result, pressure is building on the international community to address the issue of the financing needs of the emerging and developing countries at Sharm El-Sheikh despite the gloomy outlook of the global economy. Part of the economic problems the world is currently seeing is precisely the result of climate change, bringing drought and other costly natural disasters.

Earlier this month, the International Monetary Fund (IMF) said that the “developing economies would need significant climate financing in the coming years to reduce their emissions and to adapt to the physical effects of climate change.” It is estimated that these economies “need an investment of $1 trillion a year by 2030, solely in the renewable energy sector to stay on track to achieve the net-zero greenhouse-gas emissions target by 2050.”

It added that the “developing economies alone will require up to $300 billion a year by 2030 to adapt agriculture, infrastructure, water supply, and other parts of their economies to counterbalance the physical effects of climate change.” Moreover, if efforts to reduce emissions fall short of the global temperature objectives set by the Paris Agreement – keeping temperature increases below 1.5 degree Celsius above present levels – the need for adaptation financing will also rise sharply for the emerging markets and developing economies.

In a report released last week ahead of the annual meetings of the IMF and World Bank, the IMF said it expected the financing needs of the emerging and developing countries to reduce greenhouse-gas emissions (mitigation finance) and adapt to the current and predicted physical effects of climate change (adaptation finance) could come to more than $1.75 trillion a year.

Such huge amounts needed on an annual basis are beyond the capabilities of the governments of the countries concerned. Private and institutional investment is necessary, and this will be a main issue to be discussed at the COP27 meeting.

Various international bodies are publishing estimates of the needed finance for green projects and the transformation of economies around the globe. A report by the US Bloomberg New Energy Finance (BNEF) released last week concluded that clean energy investment must be four times greater than fossil-fuel investment this decade up to 2030.

It analysed figures from different sources, including from the International Energy Agency (IEA). “The ratio for investment in low-carbon energy supply to fossil-fuel energy supply changes dramatically this decade. The ratio was 0.9:1 last year and 0.97:1 in 2020 but has never crossed 1:1,” it said.

The ratio needs to be 4:1 now and for a decade to come, even though the world is complaining of declining investment in fossil fuels, the report said. Earlier this year, IEA head Fatih Birol told the UK Financial Times that the world needs to invest at least $3 trillion in oil and gas projects to avert a severe energy crisis and make up for lower investment since 2009.

If the BNEF scenario is correct, there is a need for more than $15 trillion of investment in the coming decade.

Most investment in the emerging and developing countries will be public, the BlackRock report suggests. The “main barrier to investment (by private players) is the extra risk involved in investing in emerging markets, including political, legal, regulatory and macroeconomic risk... To fix the problem, public investors would need to be prepared to take on more of the risk and assume a greater exposure to potential losses,” it said.

The delegates at the COP27 Conference will nevertheless do their best to persuade private financing bodies, from banks to investment funds, to commit to playing their part in facing up to the global dangers of climate change, including by financing the green transition in the developing countries.

A version of this article appears in print in the 3 November, 2022 edition of Al-Ahram Weekly

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