Climate Finance: How to move from the Trillions to the People?

Climate finance has emerged as a major concern not just for African countries, but for the developing world at large. Global warming is estimated to generate a median loss of 1.5 percent of annual GDP in developing countries and in sub-Saharan Africa (IPCC, 2022). At the same time, there is a rising occurrence of catastrophic events – droughts, floods, pandemics – that lead to the loss of years of development at once. It is poor people, women, and children that are the least able to protect themselves and bear the brunt of these shocks.

A recent meeting of African think tanks, under the Amplifying Africa’s Voices Initiative co-convened by ACET and the Finance for Development Lab (FDL) discussed existing knowledge on the pressing topic of climate finance and highlighted the need for further work to advance the cause of an effective and fair green transition on the African continent.

The key tensions between development and climate needs were not resolved at COP27. We are still very far from a credible agenda for a fair transition to a de-carbonated world. From a fairness perspective, Africa needs to be compensated for the emission gap (AfDB 2022). The continent generates 3% of global emissions, and yet it suffers most from climate change. North Americans emit 14 tons of CO2 per person annually; Chinese and Europeans 7 tons, and Africans emit just 1.1 tons. The African Development Bank estimates that climate debt requires a transfer from the rich world to Africa of more than $150b/year until 2050. But as the world aims for net zero carbon emissions by 2050, Africa’s aspiration is not just to be compensated for damages but also to use green development pathways. African countries should be able to take advantage of their comparative advantages, including renewable energy, green hydrogen production, and credible carbon offsets.

Think tanks need to be much closer to the ground to start bringing this vision closer to reality.

Where is climate finance for Africa?

Climate funds mobilized for African countries still fall far short of the amount needed to avoid the worst impacts of climate change and support adaptation and resilience. Worse, some of the funds that have been raised crowd out traditional development aid, and much of what is spent is tilted toward mitigation. A recent ACET report showed that for the period 2020-2030, the average annual climate funding needs for Africa are estimated at over $140bn per year – around $30bn for adaptation, $70bn for mitigation, and $40bn for loss and damage. This compares to current flows of only $20bn per year.

It is not going to be easy to raise these large amounts in a world of tight budget constraints. Several initiatives are needed, including reforming multilateral development banks (MDBs) and rechanneling of Special Drawing Rights (SDRs). Moreover, different aspects of the problems require different types of financing:

• Adaptation finance should be largely financed by MDBs, since it covers projects with the characteristics of public goods. Allocation criteria should be related to climatic vulnerability, not just to poverty.
• Funding for climate mitigation should come largely from the private sector, and be supported with instruments to mitigate country risk through FDI, PPPs, guarantees, and other enhancements from MDBs.
• Loss and damage funds should be grants-based and may require a new global tax instrument to be put in place – for example in the domain of transport, carbon, or capital flows.

Most importantly, to move from trillions to people, we need to go beyond “back of the envelope” estimates and get closer to the ground to meet people’s needs. There are indications that rates of return on adaptation projects can be in the triple digits (see e.g. IMF 2022). But pipelines of actual projects ready to be financed remain hard to come by, especially for adaptation, but also for mitigation. To flow, climate finance needs to be irrigated by a pipeline of proposals. Getting there requires fieldwork to determine how to reduce vulnerability. It also requires large amounts of funding for technical assistance to build up financeable proposals for desirable projects. AUDA-NEPAD has provided this kind of capacity building and project preparation.

Listening to people’s voices

How can think tanks and civil society be more involved? There are already models in the continent that can be emulated. Through a series of webinars called “What is the voice of Africa?”, the Egyptian Center for Economic Studies (ECES) has explored solutions proposed by African countries’ speakers to address their concerns about climate change.

Africa’s youth need to play a fundamental role, as they will be the primary bearers of the impacts of climate change. The South African Institute of International Affairs (SAIIA) has been working on capacity-building programs with young scholars on climate. The Kenyan Institute for Public Policy Research and Analysis (KIPPRA) organized a Youth in Climate Change Action Symposium which informed policy briefs in preparation for COP27. But in Sharm-El-Sheikh, a big gap remained between closed-door negotiations and debates among civil society actors.

More pressure is needed to open up formal negotiations to demands emanating from citizens. At the national and global levels, we need mechanisms to hold leaders accountable, and for their pledges to be translated into concrete actions.

Defining climate change vulnerability

The newly approved Loss and Damage Fund was one of the successes of the COP27, as this has been an African priority in global climate negotiations for more than a decade (SAIIA, 2022). But central questions on the mechanism, its funding, and conditions of access remain wide open.

Conversations took place during COP27 on the urgency of defining economic and non-economic impacts of climate change, including factoring in social characteristics such as gender or age. A much better understanding is clearly needed about the connection between efforts to improve adaptation to global warming and loss and damage. Such adaptation measures include projects to build defenses against sea-level rising, reducing the salinity intrusion and floods, making resilient road and bridge infrastructure, and increasing water conservation. As an important additional benefit, adaptation will improve food security in a world with greater variability in food prices.

At the regional and local levels, work is needed to understand how efforts on adaptation can be better integrated to reduce the costs of natural disasters. In East Africa and the Sahel, the nexus between humanitarian or food insecurity needs is linked to efforts in adapting to climate change. Estimating needs and returns on certain investments could be a step forward in making the case for much more financing from the international community.

What is green growth?

In the future, African economic growth will have to be green. What constitutes green growth – growth that is sustainable and inclusive – remains to be imagined. Some elements are becoming clearer, but they need to be brought together into a coherent whole. Solar and hydroelectric energy can become a source of comparative advantage. With adapted technology transfers, economies could leapfrog to higher levels of productivity in many fields.

Progress in these areas requires large investment, technological transfers, and proper planning. In some cases, global reforms are needed. African initiatives to transform and strengthen carbon offsets markets could unlock large sources of financing: at $50/ton, $15b of annual revenue and 50 million jobs can be generated (Climate Action 2022). Those flows would compensate for global environmental services.

A tight connection between growth and Nationally Determined Contributions (NDC) needs to be achieved, which would help define needs, chart green development pathways, and link projects to funding sources. For instance, the Kenya Institute for Public Policy Research and Analysis (KIPPRA) has recently introduced a task force with the Kenyan government and World Bank representatives, as well as other think tanks, which will look at the incentives and outcomes of green initiatives in Kenya. A national framework has been drafted and is awaiting approval for implementation. A further research and evaluation project will look at the integration of the green economy in Kenya and determine the outcomes to be evaluated.

Amidst a growing number of initiatives, this meeting clarified important questions that remain to achieve green development pathways: charting green growth with economic transformation and infrastructure investment, connecting them to financing sources, protecting vulnerable people and economic systems through adaptation, compensating losses, and rewarding global public goods contributions. Ultimately, it also implies reforming institutions to provide more voice and accountability from decision-makers.