Climate aid to developing nations to take a hit amid global headwinds

India had proposed a loss and damage fund last year, but the COP26 final text steered clear of it

The contentious issue of climate financing by the Global North to developing nations could catch more heat during the upcoming Conference of Parties (COP27) in Egypt next month. Key climate aid provider countries are likely to divert their development budgets towards soaring energy prices and the impending cost of Russia-Ukraine war refugees. This would lead to climate funding constraints for countries such as India.

India in its nationally determined contributions (NDCs) has expressed the need of low-cost global finance for meeting its own climate targets. It had also promoted a 'loss and damage' fund during the last COP26, which could also face fiscal pressure.

Ian Mitchell, senior policy fellow and co-director, development cooperation at the Centre for Global Development, Europe says first Covid and now energy price rises have fiscally affected a lot of provider countries. “Rather than the promised increases, it is possible that there are cuts in the development budget of European nations towards climate aid: the UK has already cut some funds for climate,” Mitchell says.

Another challenge that has also emerged is Ukraine, which is eligible for global aid but would cut into the development budgets for other programmes including climate. “Aid rules also allow hosting refugees to be counted as aid, and those countries treating their ‘aid’ budgets as fixed will need to make cuts elsewhere. The cost of hosting refugees will be very high for the UK and other European countries,” Mitchell says.

This pressure on the global climate budget comes at a time when public finance will be a major focus at Egypt, as major developed countries have historically not done enough. Richard Folland, policy, and government affairs advisor at Carbon Tracker says there will be a lot of pressure on the Global North as governments are worried about budget cuts on climate financing.

He says, “The short term tough economic environment coupled with rising inflation in Europe and the UK, is pressuring governments to find new avenues of generating revenue. This ranges from windfall tax on oil companies, levy on exploration, among others.”

If Indian climate finance observers are to be believed, climate funding cuts are already happening. Harjeet Singh, head, global policy strategy for Climate Action Network International, says the crisis is an excuse. “Every year there is some crisis or the other, but when they want to mobilise money for say war, they do. It is more about political will and priority than money. The crisis is not hampering the rich countries' ability to pay,” Singh says.

He further says, if the developing nations are facing fund crunch, they can tax fossil fuel companies and give windfall tax to loss and damage or to people who are affected with the rise in food and energy prices. But Folland is of the view - this (windfall tax) is likely to go in fighting rising energy prices in the short-term, rather than convert into climate investment.

Development finance experts are now pushing for the Global North to adapt innovative ways to provide the necessary financial support to countries suffering the climate impacts. “Offsetting carbon debt of the Global South, debt for carbon swaps, technology transfer, increased private and multilateral investments could be explored,” says Folland.

At the end of the COP26 last year, the negotiating text for the outcome offered no further enhancement to the climate financing budget and only “urged” the developed world to meet the $100 billion per year climate fund target set in 2009. It also steered clear of mentioning a separate fund for loss and damage, something that the developing nations have been demanding.

The Indian government last year joined hands with 24 like-minded developing countries (LMDCs) to push for climate disaster funding from developed nations, on the “polluter pays” principle.

Singh says this year at least the fund should be established even if the money does not come immediately. “Countries should agree on establishment of a Loss and Damage Finance Facility (LDFF), followed by defining governing arrangements and delivery structure of LDFF. Last step would be the flow of finance to the developing countries,” says Singh.

Mitchell on the other hand bats for adaptation finance on the lines of development finance. He says adaptation finance should build on the UN model on aid where 0.7 per cent of the GNI is development aid. “But provision should be tied to carbon emissions of the Global North and they should pay it back as climate or development finance,” says Mitchell.

Folland also points out, the United State of America (USA) is currently in a better position to take up climate leadership as the inflation is not as bad as Europe and it has announced “politically confident” policies on climate.

“US Inflation Reduction Act which envisages exponential growth on renewable energy ought to have a positive knock off effect on clean energy technology globally. The US will become more competitive to China and with the cost of renewable and electric vehicles, as well. This could be beneficial for countries such as India which are looking for boosts for their ambitious green energy capacity addition plans,” says Folland.

In the past, both the UK and US have promised climate financing and clean energy technology transfer with India in bilateral talks. However, at the conclusion of the COP26 last year, India had expressed “deep disappointment” over allocation of resources by the developed world. Egypt would be the litmus test for climate promises versus geopolitical tussle.