Climate Finance Policy | The journalist

Will the “debt-for-climate swap” work?

Two months away from the Conference of the Parties (COP) global climate summit on the African continent and as the world prepares to gather in Tunis for COP27, scheduled for early November, the Horn of Africa skips rain for the fifth consecutive season, resulting in the worst climate crisis. Humanitarian organizations continue to struggle to meet the needs of 30 million people in need of assistance.

On September 15, 2022, Ambassador Yosef Kasaye, Deputy Permanent Representative of Ethiopia to UNHCR, echoed this appalling fact during the UNHCR meeting. “The Horn region is facing the worst climate change induced drought in history. This region also hosts 67% of African refugees and 20% of global refugees. The climate-induced drought has also displaced millions of people in the regions. But in the meantime, the funds are dwindling.

In Ethiopia, where the number of people in need of humanitarian assistance due to drought has reached 20 million, grain rationing has fallen from 15 to 10 kilos per head per month due to lack of funds, according to a report by the ‘UNOCHA published in early September.

Despite contributing only 3.8% of greenhouse gas (GHG) emissions, Africa continues to be the hardest hit victim of the increasingly complex climate crisis.

Nevertheless, the effects of climate change are costing African economies between 2 and 10% of their GDP per year, according to a study presented by Olufunso Somorin (PhD), regional officer of the African Development Bank (AfDB) in charge of climate change and green growth. for the East Africa region.

A high-level technical conference ahead of COP27 was held on September 13-14, 2022 at the Hyatt Regency in Addis Ababa. The South African Institute of International Affairs (SAIIA), the Ethiopian office of the Konrad-Adenauer-Stiftung (KAS) and the African Union, and the KAS Energy Security and Climate Change Program in Sub-Saharan Africa, organized the two-day high-level technical conference to formulate takeaways for the COP27 summit.

Africa spends an average of seven percent of its GDP to deal with the impacts of climate change, according to the study. This means that climate change is costing Africa around $70 billion a year.

Niger, Somalia, Sudan, Liberia and Mali are among the most affected countries. For example, Zambia’s economic growth is reduced by 3.4% each year due to climate change, while Ghana loses four billion dollars due to flood damage to its roads.

In terms of climate change financing, the resource gap in Africa remains significant. According to Olufunso, only three percent of the $632 billion in annual global climate finance goes to Africa. The decision by African governments to earmark $100 billion annually for climate change investments, a commitment made 13 years ago in 2009, also remains a commitment.

In Africa, approximately $30 billion is invested annually in adaptation by governments, development partners and the private sector, among others.

“Now Africa needs hundreds of billions of dollars every year,” Olufunso said.

East Asia and the Pacific is the first region to channel more finance into climate change, with $292 billion a year on average, including $270 billion in domestic financing. Western Europe ranks second with $105 billion, while the United States and Canada rank third with $83 billion.

Sub-Saharan Africa is among the least funded regions, with only $20 billion a year, $18 billion of which comes from domestic resources. Most of this funding goes to mitigation. When it comes to funding for climate adaptability, sub-Saharan Africa only channels $7.3 billion a year, all of which comes from international funds.

The fundamental problem with climate finance in Africa is not just a lack of resources and a growing gap between supply and demand for finance. In addition to the lack of climate finance, the misallocation of finance is also a major disincentive.

“Climate finance is different from climate funds. First, there is not enough climate finance. Secondly, even the available resources are largely allocated to mitigation, instead of adaptation,” said Benno Muchlr, Director of KAS/AU Ethiopia.

More than 90% of African climate funds are dedicated to mitigation. The remaining 10% goes to adaptation. Mitigation fights after damage has already been taken. This means that most climate finance in Africa goes to humanitarian aid to address the impacts of drought, floods, displaced people, crop failures, etc.

On the contrary, adaptation means investing in development projects that can avoid the impacts of climate change before they occur. This includes, for example, irrigation projects, green development projects that reduce emissions, reforestation, river restoration and other ecosystem-based adaptations.

Mitigation is seen as short-sighted and cyclical, while adaptation aims to provide a lasting solution. Ethiopia is one of the hardest hit countries, spending huge sums of money each year to provide direct humanitarian aid.

“We need to reverse the climate finance vehicle. Unless 90% of climate finance goes to adaptation and the rest to mitigation, there can be no lasting breakthrough solution to the unfolding climate crisis in Africa,” Olufonso said.

Many agree that the priority for COP27 should also be to reframe the approach from climate resolution to financing for adaptation.

Financing adaptation should be the main focus of COP27, says Alex Benkenstein, program manager at SAIIA.

Global demand for climate finance is projected to reach $3.8 trillion annually by 2050, under a 1.5 Celsius scenario. While demand currently stands at $1.6 trillion, supply is around $632 billion per year on average.

The private sector contributed 56% of the $632 billion, while the public sector contributed 44%. Of the private sector, companies contributed 32%, financial institutions 13% and households 10%, with the rest covered by institutional investors and infrastructure funds.

Of the public sector, (domestic) development finance institutions covered 23%, while multilateral DFIs, government budgets, bilateral DFIs and climate funds accounted for 10%, 6%, 4% and 1% respectively.

At the national level, Japan is the leading climate funder, leading with 7.2 billion USD, followed by Germany with 6.7 billion and France with 4.3 billion USD.

The World Bank is the largest DFI multilateral climate funder, with USD 10.5 billion, followed by EU institutions and the Asian DB with USD 5.5 billion and USD 4.6 billion, respectively .

The AfDB occupies the ninth position, with a contribution of 1.3 billion dollars. The Green Climate Fund, the Global Environment Facility, the general GEF and the ten other major climate fund organizations are contributing a total of five billion dollars.

The Horn of Africa, one of the victims of climate change, is also channeling the bulk of its resources to combat the impacts of drought. Kenya, for example, allocates $2.4 billion to climate change, of which 79.8% is for mitigation and only 11.7% for adaptation.

Public funds represent 59.4% of total expenditure, with the rest coming from private sources. The climate fund is underreported in countries like Ethiopia, where much of the resources are devoted to addressing prolonged drought, food insecurity, fluctuating water and electricity, flooding, soil acidity and crop failure.

COP27 is expected to make progress on COP26 decisions, calling on developed countries to at least double their funding for adaptation from 2019 levels by 2025.

“Adaptation finance pledges are not enough to meet the needs and priorities to build resilience in Africa. Given its complexity and the difficulty of measuring it, the global goal on adaptation will also be an important focus area at COP 27, as this goal has received limited attention to date,” said Olufunso.

Benno points out that the procedures and conditions for accessing climate funds from developed countries are generally daunting for African countries. “Even though there are funds available worldwide, the procedures are neither predictable nor easy.”

So far, the climate adaptation fund is only $5 per person, which is expected to reach $50 per capita by 2050. Without rapid action, global demand for climate funds is also expected to soar. to 4 trillion USD by 2050, rising. of 1,600 billion dollars today (of which less than half is satisfied).

Currently, AfDB, KAS/AU and SAIIA have adopted the National Adaptation Finance Framework (NAFF), a new idea that is expected to be endorsed at the COP27 summit. The framework aims to remove existing barriers to accessing finance, specific to countries and regions.

It will explore the implementation of innovative and long-term financing mechanisms for adaptation beyond concessional loans and grants. New financial instruments such as equities, guarantees, resilience bonds, debt-climate swaps and other risk-sharing mechanisms are also offered.

In particular, “debt-for-climate swap” is a concept that is gaining momentum as many African countries grapple with long-overdue external debts, unable to pay them, especially since the devastating blows of the pandemic. of COVID-19 and the war in Ukraine.

Ethiopia is also among the LDCs with the highest external debt to GDP ratio. Ethiopia, Chad and Zambia are currently awaiting debt restructuring from G20 creditors, with the IMF and the creditors’ committee delaying the restructuring.

Olufunso hopes that “debt for climate change” will be an ideal solution to kill two birds with one stone.

“Developed countries can authorize African countries to use a certain part of their stock of debt for the financing of adaptation to climate change. So basically, instead of repaying external debts, you are allowed to use the money to carry out projects and investments that preserve the environment. We can do it too,” concluded Olufunso.

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