Climate funding is in short supply. So some want to rework the financial system

Money is one of the biggest obstacles to dealing with climate change — especially in poor countries hit hardest by disasters.

Not enough is being spent to cut the pollution that's heating the planet or on things that could help people adapt to a hotter world, like flood defenses and infrastructure that's built for more extreme weather. As a result, developing countries, which bear little responsibility for fueling climate change, are at risk of suffering crippling losses and damages as temperatures rise.

That funding shortfall, which has endured for years, will be at the heart of the United Nations climate negotiations that start this week in Dubai. As the United Arab Emirates prepared to host this year's climate summit, known as COP28, it said that “fixing climate finance” is a top priority. That includes making sure wealthy nations finally deliver on a long-standing but chronically unmet promise to give $100 billion a year in climate financing to their poorer neighbors.

But talks are already underway to replace that pledge, which is more than a decade old and inadequate for the climate challenges that developing countries face, experts say. As the host of this year's conference, the UAE will need to lay the groundwork for a new funding target.

Extreme weather this year has driven home the urgency of talks for greater funding. COP28 comes at the end of what will almost certainly be the hottest year ever recorded on Earth, and developing countries are in “immediate danger,” says Wanjira Mathai, managing director for Africa and global partnerships at the World Resources Institute.

“I think the pressure will be put on very significantly at COP28 for the finance to flow,” Mathai says. “Action has to be the focus going forward. And that action costs” money.

Developing countries need a lot more money for climate change

Industrialized countries like the United States built their wealth producing and using fossil fuels. The U.S. is by far the biggest historical contributor of greenhouse gas emissions that are heating the planet. Developing nations from Peru to the Philippines have contributed far less pollution, but they're suffering disproportionate harm because of their smaller economies and geographic locations.

So in 2009, industrialized countries set a goal to give developing nations $100 billion a year by 2020 to help them adapt to climate change. In 2015, countries extended the pledge to 2025. They also said they'd set a new goal that reflects the “needs and priorities of developing countries” before the old one expires. That is the new target that COP28 will help determine.

The latest assessment by the Organisation for Economic Co-operation and Development (OECD) found developing nations received $89.6 billion from public and private sources in 2021, an increase of almost 8% from the year before, but still short of the $100 billion annual goal. The OECD says wealthy countries appear to have met the funding target in 2022, though the data is preliminary and unverified.

But recent tallies show that what's currently being spent on climate change is a fraction of what's actually needed. A report published recently by the U.N. says developing countries need at least 10 times more money for adapting to the effects of human-driven climate change than what they've been getting. The OECD says developing countries will need around $2.4 trillion every year for climate investments between 2026 and 2030.

The cost of underinvestment is becoming clear. Severe flooding in Pakistan in the summer of 2022 that was likely fueled by climate change killed at least 1,700 people and caused more than $30 billion in damage and economic losses. That's more than the $21.3 billion of public funding that all developing countries combined received in 2021 to help them adapt to the impacts of global warming, according to the United Nations. Early this year, international donors pledged more than $9 billion to help Pakistan recover.

That leaves developing nations in a bind. They need help, but whatever money is promised for the future, it is likely to fall short of what's needed. And they'll be relying on wealthier countries that failed to deliver in the past.

“That $100 billion is a very important symbol of trust” between wealthy countries and developing nations, “and so, of course, it's important to keep that going” with a new goal that reflects the climate risks that poor countries face, says Rishikesh Ram Bhandary, assistant director of the Global Economic Governance Initiative at Boston University.

However, Bhandary says efforts to boost climate finance have moved beyond national pledges from big historical polluters and are now focused instead on something even larger: overhauling the global financial system to better channel money to vulnerable nations.

Attention shifts to the World Bank and International Monetary Fund

A lot of attention is focused on development organizations such as the World Bank and the International Monetary Fund (IMF). Those institutions take funding from member countries and use it to raise more money from private investors. The institutions then lend those funds to developing countries at lower interest rates than they could typically get on their own.

Over the past year, calls have grown to make those organizations bigger — and better at getting more cheap money to countries that need it most.

Finance experts say there are signs that those institutions are starting to respond to the pressure.

“Climate change is a threat to global peace, security, economic stability, and development,” the heads of the World Bank and IMF said in a joint statement in September.

Officials from the World Bank and IMF say they are meeting regularly to coordinate their climate programs. The World Bank has also started working with corporate leaders to figure out ways to increase private investment in emerging markets. And it is collaborating with multilateral development banks, like the African Development Bank and the Asian Development Bank, to try to lend more money to developing countries.

When it announced the bank collaboration in October, the World Bank said measures that had already been implemented or were under consideration could boost the banks’ lending ability by up to $400 billion over the next decade.

That is still just a portion of what is needed. A report commissioned recently by the Group of 20 nations said multilateral development banks need to help raise an additional $1.8 trillion per year of climate investments in developing countries by 2030.

“The finance needs are huge,” says Aki Kachi, a senior climate policy analyst at the NewClimate Institute, a German nonprofit that advocates for more aggressive action on climate change. “I mean, we're talking about rebuilding, essentially, the whole global economic system, our energy systems, our transport systems, the way we heat our buildings, the way we cook, the way we farm, how we source our supplies — the natural resources — the transport logistics.”

“We're talking about changing a lot,” Kachi adds, “and that takes a lot of money.”

Cutting countries’ debt loads could help them boost their own climate investing

Easing countries’ foreign debt burdens is increasingly seen as a critical way to free up money that developing countries could use to prepare for climate change.

Around 50 countries are facing “severe debt problems,” says Lars Jensen, a senior economist with the U.N. Development Programme. That means those nations often forgo investments in areas like education, health care and climate action in order to continue repaying their overseas lenders.

Nigeria is one of the countries under serious debt pressure. An estimated 96% of government revenue went to paying the interest on its loans in 2022. And the country faces “major challenges” meeting most of its goals for sustainable development. Those goals include making cities and communities more resilient to extreme weather and ensuring people have access to clean and affordable energy. Nigeria was hit by intense rain and deadly flooding in 2022 that was made worse by climate change.

“[These] debt troubles are really contributing to a severe development crisis — a systemic development crisis, if you want to call it that — in the Global South,” Jensen says.

While some countries simply borrowed too much money and spent it on things that didn't help their economies, Jensen says many others are victims of factors outside their control such as swings in commodity prices, soaring interest rates and “natural disaster shocks” related to climate change.

“Often, they are hit by a disaster, they do still have to pay their old debt, and then a lot of the disaster help that comes to them is actually in the form of more loans,” which puts them deeper in debt, says Lara Merling, a senior research fellow at the Center for Economic and Policy Research. “That's kind of the vicious cycle.”

Soon after floods swamped Pakistan last year, a report in October 2022 from the U.N. Development Programme listed the country as one of 54 developing economies that face serious debt problems. Later that month, Pakistan was approved for a $1.5 billion loan from the Asian Development Bank to improve food security and support employment in response to the floods and disruptions in global supply chains. That was quickly followed by another loan from the bank for $475 million to help Pakistan pay for flood recovery and reconstruction. Less than a year after those loans were approved, Pakistan had to get a bailout this summer from the IMF to keep from defaulting on its debt.

Vulnerable nations have been pushing for years to get debt relief when disaster hits. Grenada was able to secure a “hurricane clause” in its bonds as part of a debt restructuring in 2015. The provision allows the Caribbean country to temporarily stop paying lenders if it is struck by a natural disaster. The idea has been catching on. The World Bank announced a policy in June to allow certain countries to pause debt repayments in the event of "crisis or catastrophe." Countries should be able to “focus on meeting the urgent needs of their people instead of on loan repayments,” the World Bank said.

Merling called it the “bare minimum” that lenders can do. She says countries still don't have good options to restructure their debts. So rather than default, Merling says many countries go for years spending much of their budget paying down debt.

Kenya suspended salary payments to thousands of government workers earlier in 2023 to keep from defaulting on its loans. An adviser to Kenyan President William Ruto said defaulting would force the country into dragged-out restructuring negotiations with lenders. In October, Ruto sought $1 billion in loans from China.

“[We've] seen for those handful of countries that have defaulted and are negotiating, it's taking years and years” to restructure their debts, Merling says. “And they're still coming out on the other side with a huge percentage of their revenue dedicated to debt service.”

It “becomes sort of like a Ponzi scheme,” Merling adds. “Because you're just borrowing more and more to just keep making interest payments on your previous debt and only really default when things are just impossible and you actually cannot pay anything anymore.”

Ruto and other African leaders recently called for a global deal for debt relief.

The UAE says climate finance for poor countries is a priority at this year's U.N. talks

The challenge is trying to adjust how global financial systems and organizations operate when countries are already suffering the impacts of climate change.

“I think it's very clear that it's not changing fast enough,” says Kachi of the NewClimate Institute. “And we really need to accelerate that pace of change drastically.”

In a statement issued in June with the heads of the World Bank and the IMF, Sultan Al Jaber, president of this year's U.N. climate summit in Dubai, expressed similar frustration. Climate finance “is nowhere near available enough, accessible enough and affordable enough — especially for countries in the Global South,” he said.

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