Ten Times Bigger? Why the Impact of Climate Finance May Be Greater Than We Think
June 30, 2023
Is it time to think afresh about the impact of climate finance? CGD colleagues have rightly pointed out that the quality of climate finance needs to improve, and that its benefits—in terms of reduced emissions—can be dwarfed by the effects of domestic policies. Both points are important and need to be addressed. But a focus on the direct benefits of climate finance investments ignores the indirect impact that climate finance may have had on making net zero targets more ambitious than they would otherwise have been.
In this blog I show that these indirect benefits could be at least three times larger for each year by which the net zero target date has been advanced—and perhaps ten times larger overall— than the direct benefits suggested by cost effectiveness data alone.
This matters.
The disappointing conclusions of the latest United Nations Framework Convention on Climate Change (UNFCCC) climate talks in Bonn—as well last week’s Paris climate finance summit, which delivered momentum but few results—have once again put climate finance in the spotlight.
Restoring trust between developed and developing countries is key to accelerating progress towards net zero. As negotiations proceed on the New Collective Quantified Goal that will succeed the current $100bn target, this analysis suggests that donors must do more to improve the credibility of climate finance, to deliver on past promises, and be bold with new ones.
Indirect impacts of climate finance on emissions may be significant
It is generally accepted that the promise of climate finance was essential to securing the Paris Agreement, and plausible therefore that it has led to more ambitious commitments on greenhouse gas (GHG) emissions. The issue is not about what climate finance buys in terms of investments in greener energy or infrastructure (emissions are immaterial in the poorest countries, where aid is significant, and climate finance probably makes little difference directly to aggregate investment decisions in countries where emissions matter). Rather it’s about helping to create a negotiating dynamic that encourages more ambitious commitments overall. Some countries wish to show leadership, which enables others in turn to follow suit as competitive concerns are alleviated, while others bow at least somewhat to peer pressure. Through this lens, adaptation finance will also therefore help to reduce emissions, in so far as it is part of the ”grand bargain” underpinning the Paris Agreement. These more ambitious commitments then of course require a set of investment and (as importantly) policy/regulatory choices to help achieve them. Even if not fully realized these commitments should result in greater action and lower emissions than would occur without them. The question is, how big?
I estimate that for every year that climate finance has advanced the net zero target, global GHG emissions could be reduced by over 20 billion tonnes, or c. 1.4 billion tonnes per year of promised finance—more than three times the direct benefit generated by climate mitigation finance in 2020. Calculations and assumptions are set out in this technical background note. It uses estimates of when net zero might be reached, the length of time by which this may have been brought forward by climate finance, current levels of emissions, the share of emissions that might be influenced by the promise of climate finance, the extent to which bolder targets might actually be met, and the number of years of promised climate finance that have led to such greater ambition. Even with more conservative assumptions the figure is twice as high, and could be over 6 times higher in a high case scenario (and more again depending on how mitigation finance is counted: see technical note).
By how much might net zero target dates have been advanced?
Assumptions can be challenged but this at least provides an order of magnitude. It also begs the question ‘by just how much might the net zero target date have been advanced thanks to the promise of climate finance’? This is inevitably subjective, and will be affected by the credibility of climate finance commitments, both in terms of whether delivered (donors only provided $83bn of the promised $100bn in 2020) and how counted (with unclear definitions and some dubious examples, with even the World Bank under fire). But analysis of differences in country NDCs (the ‘Nationally Determined Contributions’ documents in which countries set out their emissions reduction plans) between ‘conditional’ and ‘unconditional’ targets (with and without external support respectively) may shed some light.
As set out more fully in the background note, for those countries setting out both conditional and unconditional emissions targets in their NDCs, aggregate conditional GHG emissions in 2030 are at least 15 percent lower than their unconditional emissions. This figure of 15 percent could translate into a value of 12 years in our model if treated as a proxy for accelerated ambition, although the relationship between finance and ambition is unclear as few conditional NDCs are costed (reinforcing point that it’s not about what climate buys directly) and incentive effects will be muted by concerns over credibility of climate finance promises. But even if the net zero target has been brought forward by just 3 years, that would triple the ratios estimated above, with the baseline estimate being that the indirect effects of climate finance may be 10 times larger than the direct effect.
Direct effects could be larger than we think
We might also be more optimistic about the direct impacts of climate mitigation finance if costs per tonne of CO2 abatement are lower than the $120/tonne used in this analysis (and in the earlier comparison of the UK’s climate finance with its Energy Price Guarantee scheme). The original review (which drew heavily on studies of the effects of policy and regulatory reforms in developed countries) from which that estimate was derived emphasises that these are static, and that the dynamic costs—which take account of the spillovers those investments have for future costs of emissions reduction—could be lower. The majority of UK ICF programmes claim at least some evidence of likely transformational change, and a similar point was made recently with regards to the PEPFAR programme providing anti-retrovirals to combat HIV/AIDS in Africa. After all, if minimizing current $/tonne were the sole objective, then mitigation finance would be better spent on the cheapest (credible) offsets! Moreover, other analysis of project performance in developing countries reported median costs of abatement of $34/tonne for the Green Climate Fund and $53/tonne for Clean Technology Fund (CTF), albeit with wide variability. Finally, closer scrutiny of the original review suggests a median cost of nearer $100/tonne, although estimation is difficult because some individual study estimates have wide ranges and there is no easy way of weighting results. Halving the average cost/tonne for this analysis would double the direct benefits and halve the above estimates of the number of times by which indirect effects exceed the direct effects of climate finance.
Conclusions and policy implications
Even in a conservative scenario, the indirect effects of climate finance on emissions via accelerated net zero ambition could be many times larger than the direct effects of the project investments themselves. Indeed, in the higher case scenario, indirect effects could still exceed the direct effects even if climate finance has only advanced country targets for achieving net zero by just a few weeks.
None of this detracts from the key points that we need to improve the quality of climate finance (which itself may help accelerate net zero ambitions) and our efforts to evaluate it; or that more focus is needed on developed country policies and emissions (where historical and per capita emissions are far higher than in most developing countries, certainly the poorest). The heavy lifting on emissions must indeed be done at home.
But as climate finance once again threatens to be the stumbling block that derails the climate negotiations, it does highlight the importance of donors delivering on their existing climate finance commitments, improving the integrity and credibility of climate finance scoring, and of being bold and generous in their future promises. And, of course, for pressing for such support to be genuinely additional to their commitments on Official Development Assistance (ODA). This analysis suggests that climate finance goals that achieve these aims and incentivise action, could deliver global benefits that are many times the direct impact of the spend. This is the key message of this blog as the New Collective Quantified Goal negotiations proceed.
With many thanks to Ranil Dissanayake, Ian Mitchell and Josceline Wheatley for helpful comments.
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