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Trillions Needed For Climate Action in Developing World – Report

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Climate Change

Trillions Needed For Climate Action in Developing World – Report

The world needs a breakthrough and a new roadmap on climate finance that can mobilise the $1 trillion

Annual investments in emerging markets and developing countries other than China, to cut emissions, boost resilience and deal with the loss and damage caused by climate change impacts, and restore nature and land, should exceed $2 trillion by 2030, according to a new report published today (Tuesday 8 November 2022), which was jointly commissioned by the governments of Egypt and the UK.

Emerging market and developing countries should work with investors, developed countries and multilateral institutions to unlock $1 trillion annually in external finance for these three areas of climate action, from private and public sources by 2030, with the rest of the finance coming from their own private and public domestic sources.

The total annual investment needs for emerging market and developing countries other than China are estimated to be $1 trillion in 2025 and $2.4 trillion by 2030.

The report also calls for grants and low-interest loans from the governments of developed countries to double from $30 billion annually today to $60 billion by 2025. These sources of finance are critical for emerging market and developing countries to support action on restoring land and nature and for protecting against and responding to the loss and damage due to climate change impacts.

The report’s authors highlight that these investments will not only help ensure that all nations avoid dangerous levels of climate change, but will also drive sustainable, resilient and inclusive economic development and growth across the world.

The report on ‘Finance for climate action: scaling up investment for climate and development’ was prepared by the Independent High-Level Expert Group on Climate Finance, co-chaired by Dr Vera Songwe and Professor Lord Nicholas Stern, at the request of the Egyptian Presidency of COP27 and the UK Presidency of COP26.

The report states: “The world needs a breakthrough and a new roadmap on climate finance that can mobilise the $1 trillion in external finance that will be needed by 2030 for emerging markets and developing countries (EMDCs) other than China.”

It adds: “There is a significant role for public policy and government action to foster investment, and complementary roles for the private sector, MDBs [multilateral development banks], international financial institutions (IFIs), and concessional finance of various forms. Powerful multipliers can emerge from the complementary strengths of all sources of finance.”

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The report identifies several key requirements to unlock the necessary level of investment:

  • Accelerating investment: Rapid delivery of investment projects, at scale.
  • Mobilising private finance at scale: The private sector making the largest increase in financing, both foreign and domestic.
  • Revamping the role of the MDBs: Stepped up engagement and tripling of the annual flows from the MDBs and other development finance institutions in the next five years.
  • Delivering on and expanding the scope of concessional finance: A doubling of concessional finance from developed countries by 2025 from 2019 levels, together with strong expansion of the envelope of low-cost finance through innovative ways (including Special Drawing Rights, voluntary carbon markets, philanthropy, and guarantees similar to those of the International Financing Facility for Education).
  • Tackling indebtedness: Resolving the debt and liquidity issues facing many countries.

It states: “The scale of the investments needed in EMDCs over the next five years and beyond will require a debt and financing strategy that tackles festering debt difficulties, especially those of poor and vulnerable countries, and that leads to a major expansion of both domestic and international finance, public and private, concessional and non-concessional.

“Emerging markets and developing countries other than China will need to spend around $1 trillion per year by 2025 (4.1% of GDP compared with 2.2% in 2019) and around $2.4 trillion per year from 2030 (6.5% of GDP)”. Current investments in EMDCs other than China total about $500 billion.

Dr Songwe said: “Unlocking substantial climate finance is the key to solving today’s development challenges. This means countries must have access to affordable, sustainable low-cost financing from the multilateral development banks to help crowd in investments from the private sector and philanthropy to support the energy transformation, build resilience and protect natural capital. Financing alone is not enough and must be coupled with the right instruments and good policies to accelerate and scale up impact.”

The report notes: “Around half of the required financing can be reasonably expected to come from local sources, from strengthening domestic public finance and domestic capital markets, including tapping into large pools of local finance that national development banks are able to mobilise. Strengthening tax collections and reducing fossil-fuel-linked subsidies will be important, partly for the fiscal space freed up and partly for the improvement in incentives for private investment that is created when instruments like a carbon tax are applied.”

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But it also emphasises that “around $1 trillion per year of external finance will be required annually by 2030 to meet the scale of the investment needs”.

Professor Lord Stern said: “Rich countries should recognise that it is in their vital self-interest, as well as a matter of justice given the severe impacts caused by their high levels of current and past emissions, to invest in climate action in emerging market and developing countries. Most of the growth in energy infrastructure and consumption projected to occur over the next decade will be in emerging market and developing countries, and if they lock in dependence on fossil fuels and emissions, the world will not be able to avoid dangerous climate change, damaging and destroying billions of lives and livelihoods in both rich and poor countries.”

The Executive Secretary to the Independent High-Level Group on Climate Finance is Amar Bhattacharya of the Brookings Institution and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science.

Professor Bhattacharya said: “Discussions about climate finance should focus on its purpose, namely the investments necessary for the implementation of the landmark Paris Agreement. This report identifies the different sources of external finance for the different investments required in emerging market and developing countries. It is crucial that there is a scaling up of finance from all these sources, both private and public.”

The report warns that the $1 trillion figure for external finance should not be compared with the target of $100 billion per year which rich countries pledged to mobilise from public and private sources by 2020.

It states: “The $1 trillion per year is a very different concept – it is a requirement based on an analysis of the investment and actions necessary and the domestic finance potentially available, for an internationally agreed and vital purpose. The $1 trillion is not the new $100 billion. The latter was negotiated, not deduced from analyses of what is necessary for a purpose.”

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Lord Stern said: “Given the pressure on public budgets in all countries, the role of the multilateral development banks, including the World Bank, will be critical in increasing the scale of external finance for emerging market and developing countries, and bringing down the cost of capital for investors. The flow of finance from these institutions should triple from about $60 billion a year today to around $180 billion a year within the next five years. This requires a strong sense of direction and support from the country shareholders, and real leadership from the top of these institutions.”

The report is published today by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and the Brookings Institution, both of which, together with the United Nations Economic Commission for Africa, support the work of the Independent High-Level Expert Group on Climate Finance.

Notes to Editors:

1. The Co-Chairs of the Independent High-Level Expert Group on Climate Finance received a letter of authorisation from the COP26 Presidency and incoming COP27 Presidency on 19 July 2022. The letter, including the Group’s terms of reference, is available here.

2. The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London.

3. The Brookings Institution is a nonprofit organisation devoted to independent research and policy solutions. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public.

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