How to defuse the twin climate finance / post-2015 finance for development timebombs (updated)

Whether it’s at the climate summit currently underway in Warsaw (from where I’m writing this post) or at two key meetings happening in NYC next month on the post-2015 agenda, financing is one of the issues furrowing most brows.

Right now, progress in both places is stalled. Promises of $100 billion a year by 2020 under the Green Climate Fund are starting to look like a bad joke – especially to the least developed countries (LDCs) who most urgently need help to adapt to climate impacts.

Aid flows, meanwhile, have actually been declining for the last two yeas, rather than rising towards the 0.7% target. And they’re falling fastest for LDCs: while bilateral aid as a whole fell by 4% last year, it fell by 12.8% for them.

Nor does it look likely that rich countries are about to put big new pledges of cash on the table any time soon, what with weak growth, high unemployment, and fiscal pressures - despite the crucial 2015 deadlines on both climate and development. Yet if they fail to do so, it could toxify the dynamics on both issues – and contribute to an outcome where the climate and development ‘tribes’ perceive themselves to be fighting over the same pot of cash rather than working together on a shared agenda.

Is there any way to defuse this ticking timebomb? Well, there might be.

To see why, start with some context on how the finance for development landscape has changed since the MDGs were agreed back in 2000.

In the decade and a half or so since then, developing countries as a group have become able to access a far more diverse range of finance sources. Back in 2000, developing country tax revenue was $1.15 trillion; by 2011, it was $7 trillion. Remittances are projected to reach $540 billion a year by 2016, and proved “remarkably resilient” during the financial crisis and Great Recession, according to the World Bank. Foreign direct investment reached $514 billion  in 2010; last year, developing countries accounted for more than half of FDI for the first time. A further $295 billion went to developing countries from net debt flows in 2010, with another $130 billion via portfolio equity.

All of which makes global aid flows ($125.6 billion last year) look pretty puny in comparison - except for one key point. For while non-ODA flows have shot up to developing countries as a group, the beneficiaries of this change have disproportionately been middle income countries (MICs) – not low income countries (LICs). In MICs, aid now accounts for just 0.3% of GDP. In LICs, on the other hand, it’s 9.7%. LICs only receive 2.5% of the FDI that goes to developing countries, and 7% of the remittances.

You get the picture: while aid is less and less important to a lot of middle income countries, it remains a huge deal for LDCs. And a similar point can be made about climate finance. The vast majority of the climate mitigation challenge in MICs will be met through private sector flows and their own resources. Not so the LICs and LDCs – for whom international public finance will be absolutely essential in helping them adapt to the climate impacts to which they, of all countries, are most vulnerable.

But here’s the thing. Even if donor countries don’t put significant new resources on the table between now and 2015 (though heaven knows they should), what if they at least targeted their international public finance much more rigorously at LDCs?

Not many people know it, but as well as the 0.7% aid target and the $100 billion a year by 2020 Green Climate Fund target, there’s also a long-standing target that donor countries should give at least 0.15% of their gross national income to LDCs, and preferably more than 0.20%. Right now, by contrast, as this OECD table shows, they give just 0.10% of their GNI to LDCs, or about $45 billion per year (2011 data).

So what if donors announced some time in 2014 – perhaps in September, when the UN will host in New York back-to-back high level events on both climate and post-2015 – that they’d finally meet this target by the end of 2015, as a serious statement of intent on both post-2015 development, and climate adaptation?

Ideally, of course, they’d do so as part of a larger move to meet 0.7% and $100 billion a year for the GCF. But if that’s really off the table, then they could also make this commitment within what they spend right now. It would still represent a massive increase of financing for the countries that need it most – a doubling, in fact, of international public finance to LDCs, to about $90 billion a year.

Crucially, the fact that resources to LDCs would be increasing so substantially would also allow a huge amount of additional investment in climate adaptation to happen through increased ODA flows, rather than (as currently envisaged) through a wholly separate, standalone, climate architecture.

And setting up a whole separate set of arrangements for climate finance is, after all, something that only makes sense in the recondite world of UNFCCC negotiations. On the ground, by contrast, adaptation is obviously part and parcel of development more broadly. Climate is just one among a whole range of risks that need to be managed through, for example, social protection programs, or smart infrastructure design, or adaptable institutions, or – well, you get the point.

To be clear, this commitment wouldn’t be the last word on the subject – and it absolutely wouldn’t let donors off the hook for their other promises on financial resources. But as a confidence-building measure on both climate and post-2015, it could be a very big deal.

Update: Maya Forstater quite rightly picks me up on Twitter asking: where exactly does international finance for mitigation fit in to this narrative? Two thoughts on that – both of which are discussed more fully in the paper I’m currently finishing off on a post-2015 Global Partnership for sustainable development (which will be out in a couple of weeks).

One is that yes, we should spend international public finance on mitigation in MICs too – especially where there’s a clear case that doing so will leverage in private sector funds. The paper also calls for scaled up innovative finance for global public goods, including climate mitigation (e.g. through the ICAO market based mechanism – see my earlier post), as well as allocating up to 10% of ODA flows for GPGs too given how underfunded they are.

But my second point would be that the main issue here is about the need for a global carbon budget - and how we share out the valuable entitlements within it. One kind of carrot that can be offered to MICs is international public finance; another is a larger share of the carbon cake. I much prefer the latter option, as I’ve argued often before – see e.g. this post.