Climate finance, an enabler to climate action, green finance, investments in clean technologies, are expressions prominently used in the media, reminding us that money – capital – is needed to establish a decarbonized economy. While the stakeholders agree on this notion, the precise terms of the debate remain unclear. Financing programs in emerging countries have dominated the discussions since the first summit of Rio in 1992, albeit with limited outcomes. In Copenhagen, in 2009, the COP15 was supposed to pledge USD 100 billion for the developing countries. Last year, in Sharm El Sheikh, the governments and the International Financial Institutions (IFI) aimed to eventually settle a deal to establish the Loss and Damage Fund. Over the span of more than three decades, these discussions have consistently highlighted the pivotal role of capital as the foundational bargaining point at the core of climate action.
The Cost of the Transition
Experts are still debating the diverse financial mechanisms necessary to facilitate the transition to a decarbonized economy and maintain global warming below 2° by the end of the century, in line with the Paris Agreement. Most outlooks show that the states would have to invest between 2 and 5% of their GDP into the green transition. With a nominal world GDP around USD 90 trillion, according to the IMF, the international community would therefore need to mobilize between USD 1.8 and 4.5 trillion annually. In a 2022 report, McKinsey even estimated that a staggering USD 275 trillion would be required to attain a Net-Zero economic system by 2050, equivalent to three years of the global GDP.
These estimates remain abstract unless compared with similar expenses, in global military budgets for instance. At the end of the Cold War most of the Western states decreased their military budgets precisely below 2% – and with the war in Ukraine most of them have increased their military expenditure even beyond the 2%. The Stockholm International Peace Research Institute (SIPRI) which monitors military expenses per country reported that since 2019 these budgets have crossed USD 2 trillion per year. Last year, they were established at USD 2240 billion. This means that if we reallocate all military budgets to the green transition over the next 25 years, we would barely reach USD 60 trillion – one quarter of the McKinsey’s estimate.
So far, the efforts have been insufficiently low-paced to expect a transformative shift in the global system. To keep the below 2° goal of COP21 alive, at least, USD 35 trillion are needed urgently. Delaying action will only result in a costlier transformation and the more extensive damage control. Once the mechanism, however, is set in place, the investments could gain momentum. Dr. Sultan Al Jaber, president of the COP 28, predicts that ‘the world’ would need to triple the climate investments by 2030 in order to set the momentum in motion and that “finance will be at the heart of the COP28”.
Who is Going to Pay?
If the required amount is not definitively set, there is another lingering question: who is going to pay? The ‘world’ can be broken down into three main stakeholders: states, the private sector and international organizations (IOs). For the developed states, the allocated budgets have been limited and not necessarily attributed to the transition. For instance, in Europe, some countries used them to compensate for the increase in energy price as the result of the war in Ukraine. The best case-scenario is the vote of a programming act, such as Japan, which attributed USD 2 trillion to become a Net-Zero economy in ten years, or in the US with the Inflation Reduction Act voted in 2022, which allocates USD 370 billion over 10 years toward carbon emission (among other objectives).
In addition, governments will have to negotiate public response to green transition as it affects the public’s pocket during a post-COVID economy and inflation in essentials such as grains and fuel. In 2018 in France, for example, a carbon tax on gas triggered a major social protest (the ‘Yellow Jackets’) that only subsided with the onset of the COVID crisis. Although governments promote incentives for the green transition, they allocate limited budgets to meet the objectives. Consequently, the private sector is seen as the primary contributor to the transition.
The official discourse of the governments emphasizes the ‘business opportunities’ in renewable energy. The structural changes of a decarbonized economy could generate USD 12 trillion by 2030. This outstretched hand to bold entrepreneurs does not preclude companies from weighing the feasibility of final costs and comparing potential returns. There is a difference between investment in green innovation and the reorganization of sectors. In the case of the former, new technologies, supported by public research such as blue and green hydrogens could yield profitable investments. In Africa alone, it could create 4 million jobs and generate USD 120 billion in revenue. In the case of the latter, the conversion of ‘hard-to-abate industries’ (steel, cement, petrochemicals, etc.) requires a complete reorganization with no returns. If these industries are not supported, if not coerced to reform, they will postpone the conversion or prolong it for as long as they can. The ideal solution would be to develop public-private partnerships for determining and implementing the national strategies and security issues. Overall, access to funding controls the transition process for companies. Currently, only one-third of senior executives claim to have sufficient financial resources to move toward decarbonization.
Due to the lack of breakthrough in dialogue between the public and private sectors, third parties are sometimes identified as the primary source of green capital. Regional organizations like the European Union have announced an USD 880 billion package for transitioning. Some international organizations like IRENA and the World Bank have also pledged a contribution to the decarbonization process. However, their role is confined to their budgets – and their budgets depend on their members states’ contributions. It is worth considering if certain states have sought to shift the burden of financing by pointing to international organizations, evading their own obligations. In different words, the IOs should pay, reporting to “other” states the burden of the financing. This strategy, often veiled under other arguments, raises questions about accountability.
Emissions, Responsibilities, & Stocktakes
During the COP27 held in Sharm El Sheikh, a significant outcome was the establishment of the Loss and Damage Fund aimed at supporting developing countries. The conference served as a crucial reminder that it is the industrialized countries bear the responsibility for emitting 75% of the greenhouse gases (GHGs) that have contributed to global warming. The mounting voices from the Global South demanding accountability and recognition were heard, acknowledging that the consequences of climate change hit hardest away from the Global North. For instance, Pakistan for its part emitted 1% but was devastated by flooding in September 2022 resulting in what may be perceived as damages worth USD 30 billion.
If we follow this reasoning, it becomes evident that industrialized countries should bear a greater financial burden, potentially through a proportional contribution based on their carbon emissions since pre-industrialization (and not only in recompense for the current situation defined in the COP21). Should the principle be accepted, it could extend not only to all countries but also to implicated sectors and corporations. This concept is already happening in state legislation in the US, whereby a state will sue for damages from a national/international company to cover expenses incurred by natural disasters resulting from climate change. The already mentioned ‘hard-to-abate industries’ in energy, construction, transport, commercial agriculture, etc. could therefore take the responsibility of the estimated damages inflicted by the sectors.
However, determining complicity in these matters raises complex questions. For example, should the state in which a liable company is located also be held accountable? Some corporations have disappeared or merged into others not necessarily in the original country. Similarly, the extraction of raw materials, during the colonization period, destroyed the local resources, like the primary forest in Borneo (Indonesia). Initiating this debate is a necessary step in the global pursuit of accountability, but it poses challenges for the Global North, which exercises control over the international organizations responsible for addressing these matters. Top officials are aware of the sensitivity of this issue. In January 2023, John Kerry, the US vice-president during the Obama administration hinted that this discussion was deemed null and void. When he visited Abu Dhabi after the COP27, he publicly stated that the United States would not accept an ‘imposed standard of liability’. This meant that the US, with a carbon footprint three times that of the global average, refused to contribute its share in terms of compensation.
The scope of the ‘loss and damage’ domain highlights the role of International Financial Institutions. At the global level, the IMF and the World Bank may have strong leverage while the empowerment of the multilateral development banks (MDB, like the Asian Development Bank, ADB, located in Manila) will be discussed during COP28. These institutions possess the profile and expertise to act as pivotal actors in centralizing and promoting climate financing. However, it is important to recognize that these institutions have limited capacity. The cumulative assets of the first 10 MDBs reach USD 5 trillion, insufficient to effectively address the climate problem. They would need to triple their assets to be in a position to face the challenge. Moreover, their core activity is development and not climate action even if the two domains will overlap more and more in the future. Drawing a parallel with the health sector, Dr. Al Jaber emphasizes the need to enhance the accessibility, availability, and affordability of climate finance. It is our hope that COP28 will yield the urgently needed solutions to address these challenges.
