Climate and socioeconomics: two mutually exacerbating problems
Socioeconomic challenges and the climate crisis are mutually exacerbating. It is apt that, at a key conference in July 2023, ministers and high-level representatives from government, business and civil societies from 140 countries pushed for “integrated and accelerated action on climate and the Sustainable Development Goals”.1
On the one hand, climate change impacts on a nation’s socioeconomic wellbeing in significant ways. Most evidently, climate disasters inflict developmental setbacks and can significantly impact a nation’s GDP. This will continue for as long as adequate steps are not taken for climate mitigation and adaptation. The move away from fossil fuels threatens to disrupt the livelihoods of workers and communities if the transition is not properly managed and can result in greater public debt burdens.
On the other hand, the prevailing socioeconomic conditions of a nation, particularly its ability to fund necessary actions for adaptation and mitigation, directly impacts on its vulnerability to climate change. Global South nations are struggling to finance big-ticket items in climate adaptation, such as defenses against rising sea levels, salinity intrusion and floods, more resilient road and bridge infrastructure, and water conservation.2
Where is the justice?
As the world increasingly puts a price on environmental and climate impacts, it is evident that the climate transition will be costly – but this should be apportioned fairly. In the process of arriving at a point of wealthy post-industrialization, over 270 years, North America and Europe have contributed 70% of the stock of GHG emitted from fossil fuels and industry.3 By contrast, developing countries continue to struggle with energy poverty – strikingly, 13% of the global population (in developing countries) still does not have access to electricity, according to UNCTAD. The per capita emissions of developed countries remains much higher than of developing countries.
Unlike the Global North, the Global South’s quest for socioeconomic progress is now encumbered by climate considerations: earlier industrialization, which generally took place without due regard for climate considerations, is said to have used up 86% of the planet’s carbon budget4, leaving little scope for further emissions by socioeconomic development in the Global South. Although Africa has contributed negligibly to the changing climate, it stands out disproportionately as the most vulnerable region in the world largely due to prevailing low levels of socioeconomic growth in the continent.5 It would be unjust to expect the Global South to sacrifice their socioeconomic progress to tackle the climate problem that was primarily the Global North’s doing.
Is there a way out?
The high cost of capital is arguably the most fundamental issue standing in the way of the Global South’s ability to tackle the twin challenges of climate change and socioeconomic development. The numbers speak for themselves: across developing countries, the cost of capital for energy projects in 2022 was almost three times higher than that in developed countries.6 If this persists or worsens, the gulf between developed and developing countries will continue to widen, in terms of withstanding climate challenges and making socioeconomic progress. The just transition will simply be a pipedream.
High borrowing costs are an impediment to the deployment of both public and private capital. 30 of the largest global banks have committed USD870bn annually to finance climate solutions, and venture capital investment in businesses providing climate solutions reached USD70.1bn in 2022.7 However, it remains to be seen how much of the committed private climate finance will flow to developing countries. To scale private finance globally, public finance should also be deployed to lower the cost of capital for private investors who, due to risk perceptions, require a rate of return that is three to ten times higher in developing economies than in the EU or the U.S..8
Climate finance to the rescue?
Unlocking finance is at the heart of a just transition. This is a mammoth task, not only because of the amount of finance required.9 New research published by Allen & Overy and the Climate Policy Initiative (CPI) in September 2023, which tracks climate finance to projects in the real economy that have mitigation or adaptation benefits, indicates that:
- USD6.2tn of climate finance is required annually between now and 2030, and USD7.3tn by 2050, to deliver Net Zero – a total of almost USD200tn. However, tracked global climate finance is only expected to pass USD1tn for the first time in 2022.
- Africa is severely lacking in climate finance, especially private climate finance. Research published by CPI and A&O indicates that public funding (which is generally scarce) comprised 86% of total climate finance in Africa over the past decade but just 4% in North America.
Equally (if not more) dauntingly, the task of unlocking finance for a just transition is challenging because, according to UN Secretary-General António Guterres, “the international financial architecture is short-sighted, crisis-prone, and bears no relation to the economic reality of today”. The brokenness of the system is evidenced by developing countries facing debt overhangs, significantly higher borrowing costs and limited access to liquidity in times of crisis.10 Achieving a just transition will therefore require no less than breaking out of the traditional financing mold, to bring about a revamp of the international financial system.
The Bridgetown Initiative
At the UN 2023 SDG Summit in April 2023, the Bridgetown Initiative 2.0 called for six actions to build a more equitable development finance architecture: (i) provide immediate liquidity support, including rechannelling at least USD100bn of unused Special Drawing Rights through the IMF and multilateral development banks; (ii) restore debt sustainability today and in the long-term and support countries in restructuring their debt with long-term low interest rates; (iii) dramatically increase official sector development lending to reach USD500bn annual stimulus for investment in the SDGs (SDG Stimulus); (iv) mobilize more than USD1.5tn per year of private sector investment in the green transformation; (v) transform the governance of international financial institutions to make them more representative, equitable and inclusive; and (vi) create an international trade system that supports global green and just transformations.11
Several of these are discussed below, along with other measures and proposals for facilitating a just transition.
(a) Rethinking public and private debt servicing
Developing economies are weighed down by debt and rising interest rates: 52 low- and middle-income developing economies are either in debt distress or at high risk of debt distress, accounting for more than 40% of the world’s poorest people.12 According to Avinash Persaud, Member of the High Level Expert Group on Climate Finance, “over fifty per cent of the increased debt of many climate-vulnerable countries is a result of the loss and damage associated with natural disasters. If this goes unaddressed, it will sink them before they can adapt”.
Bold actions are needed to create fiscal space for developing countries to plan beyond their immediate financing needs and to build climate resilience. Positively, in June 2023, the UK, France, the U.S., Spain, Barbados, the World Bank Group and the Inter-American Development Bank launched a call to action to bilateral, multilateral and private sector creditors to offer climate-resilient debt clauses by the end of 2025, with a group of early movers offering the clauses by COP28. In the October 2023 Nairobi Declaration, African leaders called for a 10-year grace period on interest payments and new debt relief measures. Continued consideration should be given to designing debt instruments that allow for flexibility in debt servicing, particularly in times of crisis when liquidity is most needed.
(b) Leveraging carbon markets for a just transition
There continues to be interest in the use of carbon credits markets to further the aims of a just transition. Despite the perception that carbon credits are a “financialisation of African nature and the climate crisis”, actual and proposed initiatives indicate that carbon markets have the potential to bring down the cost of capital for developing countries, generate new finance for adaptation efforts in developing countries, and advance sustainable development goals.
Efforts to leverage carbon credits markets for just transition purposes include: (i) a Harvard proposal which suggested that investors can invest in green projects at concessional rates, and in return receive credit towards their own targets to the extent their investment reduces the cost of capital;13 and (ii) the Energy Transition Accelerator, which is a joint initiative between the U.S. Department of State and private partners aiming to “support country-driven energy transition strategies through a high-integrity voluntary carbon market framework that will generate carbon credits representing verified greenhouse gas emissions reductions and make them available to qualified private sector and sovereign government buyers”.14 Looking ahead to COP28, details of the UN-backed mechanism under Article 6.4 of the Paris Agreement are expected to be hammered out. If so, it may pave the way for increased use of carbon credits for just transition purposes, subject to usual concerns such as ensuring the integrity of carbon credits.
(c) Increasing concessional finance
Concessional finance is an important source of funding for climate resilience and adaptation projects that are unattractive to private investors. However, concessional finance is not growing fast enough – research by A&O and CPI indicate that multilateral development banks (MDBs) have publicly committed to increase their annual climate finance by just 32% annually through 2030, and only six of the 27 largest national and bilateral development institutions have set climate investment targets.
In addition, the eligibility criteria for concessional funding is arguably overly restrictive: MDBs offer very concessional funds only to the poorest countries with a GDP per capita of less than USD1253 per year – this has already provoked calls for the eligibility criteria to be broadened so that concessional finance can be made available to more climate-vulnerable countries and on a pre-emptive basis (instead of after a climate disaster).15
(d) Just Energy Transition Partnerships (JETPs)
JETPs are country-led partnerships and financing mechanisms aimed at helping certain high-emitting developing countries pursue an accelerated just energy transition away from fossil fuels and towards renewable sources. Developing countries that have been announced as partners include South Africa, India, Indonesia, Vietnam, and Senegal. The donor pool has been expanded from countries in the global north to include multilateral development banks, national development banks, and development finance agencies.
However, there are questions around the effectiveness and inclusiveness of this mechanism, as the packages comprise few grants and mostly loans which add to the debt burden of the developing countries. There have also been reports of poor transparency and delays in delivery of finance in the South African JETP.16 It remains to be seen how JETPs will be refined over the duration of their lifetimes to be implemented in line with just transition principles.
(e) Loss and damage financing
Loss and damage financing is particularly important for developing countries that are most vulnerable to the adverse effects of climate change. COP28 is expected to deliver the operationalisation of the loss and damage fund. If the Transitional Committee’s recommendations are adopted at COP 28, the fund will provide financing in the form of grants and highly concessional lending, and may deploy additional financial instruments that take into consideration debt sustainability (e.g. direct budget support and risk sharing mechanisms). The fund is expected to tap on a range of sources, including private, public, and innovative sources.
Closing thoughts
Achieving a just transition requires a global commitment in devising and implementing novel climate finance solutions. In the context of the Bridgetown Initiative, Prime Minister Mottley of Barbados noted, “too many countries are being prevented from fighting the climate crisis and from creating decent opportunities for… their citizens. If countries cannot access the finance they need at rates they can afford, the world will lose the battle”.17 Urgent and effective action, particularly in climate finance, is required to win this battle. In the lead up to COP28 and beyond, ensuring a just transition should be a consistent theme throughout the negotiations.
1. https://unfccc.int/news/a-strong-outcome-at-cop28-is-crucial-for-climate-action-and-the-sdgs
2. https://geopolitique.eu/en/articles/breaking-the-deadlock-on-climate-the-bridgetown-initiative/
3. https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/An-FX-Guarantee-Mechanism-for-the-Green-Transformation-in-Developing-Countries.pdf
4. https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/An-FX-Guarantee-Mechanism-for-the-Green-Transformation-in-Developing-Countries.pdf
5. https://www.unep.org/regions/africa/regional-initiatives/responding-climate-change
6. https://unctad.org/system/files/official-document/wir2023_en.pdf, page 155.
7. Research by Allen & Overy and Climate Policy Initiative, September 2023.
8. Research by Allen & Overy and Climate Policy Initiative, September 2023.
9. According to the UNFCCC Global Stocktake Synthesis Report in September 2023, access to climate finance in developing countries need to be enhanced; assessments found that shifting finance flows to support a pathway towards low GHG emissions and climate-resilient development stood at an annual average of USD 803 billion in 2019-2020, which is only 31-32 per cent of the annual investment needed to meet temperature increase targets under the Paris Agreement.
10. https://www.un.org/sustainabledevelopment/blog/2023/04/press-release-with-clock-ticking-for-the-sdgs-un-chief-and-barbados-prime-minister-call-for-urgent-action-to-transform-broken-global-financial-system/ (26 April 2023).
11. https://www.un.org/sustainabledevelopment/blog/2023/04/press-release-with-clock-ticking-for-the-sdgs-un-chief-and-barbados-prime-minister-call-for-urgent-action-to-transform-broken-global-financial-system/ 26 April 2023
12. https://www.un.org/sustainabledevelopment/blog/2023/04/press-release-with-clock-ticking-for-the-sdgs-un-chief-and-barbados-prime-minister-call-for-urgent-action-to-transform-broken-global-financial-system/ 26 April 2023
13. https://www.lse.ac.uk/granthaminstitute/news/cross-border-investment-is-crucial-to-achieving-a-just-transition/#:~:text=Article%206%20of%20the%20Paris%20Agreement%20allows%20the%20government%20or,their%20own%20Paris%20Agreement%20goals.
14. https://www.lse.ac.uk/granthaminstitute/news/cross-border-investment-is-crucial-to-achieving-a-just-transition/#:~:text=Article%206%20of%20the%20Paris%20Agreement%20allows%20the%20government%20or,their%20own%20Paris%20Agreement%20goals. And https://www.rockefellerfoundation.org/news/u-s-state-department-bezos-earth-fund-and-rockefeller-foundation-announce-next-steps-on-energy-transition-accelerator/
15. https://geopolitique.eu/en/articles/breaking-the-deadlock-on-climate-the-bridgetown-initiative/
16. https://www.lse.ac.uk/granthaminstitute/news/cross-border-investment-is-crucial-to-achieving-a-just-transition/#:~:text=Article%206%20of%20the%20Paris%20Agreement%20allows%20the%20government%20or,their%20own%20Paris%20Agreement%20goals.
17. https://www.un.org/sustainabledevelopment/blog/2023/04/press-release-with-clock-ticking-for-the-sdgs-un-chief-and-barbados-prime-minister-call-for-urgent-action-to-transform-broken-global-financial-system/ 26 April 2023
