THE ANNUAL UN climate talks are often compared to a circus or a battleground. This year’s summit, held at the Egyptian resort of Sharm el-Sheikh, was particularly shambolic and grumpy. Even the supply of food for delegates was fitful initially.
The talks had been due to finish on November 18th. By the wee hours of November 20th, they were still going. In the end, it was sleep deprivation and weariness, more than any grand political breakthrough, that forced a result.
The final text, as at previous summits, was inadequate to the challenge. But the talks—known in the jargon as COP-27—seem to have tipped the balance of debate on two important points. The first is that, after three decades of ignoring them, rich countries are beginning to give a more sympathetic hearing to demands from poorer ones for money to help them repair the damages wreaked by a warming world. The second is the idea that taking climate change seriously will require tinkering with the global financial system. Once a niche idea, it too is gathering momentum.
Start with the compensation claims. The idea of a “loss and damage” fund was first floated in 1991 when Vanuatu, a low-lying island nation in the Pacific, suggested the creation of an insurance scheme, under the auspices of the UN, to help pay for the consequences of rising sea levels. For thirty years such demands were rebuffed. Leaders of rich countries, and their lawyers, would not give any airtime to anything that might suggest liability for climate change.
But twelve months ago in Scotland, that country’s first minister promised £2m ($2.4m) to the cause. Against the scale of the problem, of course, that is a comically derisory sum. But it was a first hint that the tide might be turning. Earlier this year, unusually heavy monsoon rains caused more than $30bn of damage and financial losses in Pakistan, equivalent to nearly 9% of the country’s GDP. Natural climatic variations, notably an ocean-cooling phenomenon known as “La Niña,” were partly responsible. But the rains were also made heavier by the effects of greenhouse gases.
The floods were seized upon by delegates at COP27 as demonstrating the need for rich countries to loosen their purse-strings. A scattering of promises made by other European governments on the sidelines at Sharm el-Sheikh brought the total to a still-paltry €238m ($246m). Most of the money—€170m—was pledged by Germany. There was more to come from the main event. Bolstered by support from the European Union, the G77 group of developing nations obtained a promise from delegates to set up a new UN fund, the details of which will be agreed by November next year. In other words, the summit created a coffer, but it is not yet clear how much cash donors will cough up to fill it.
There was plenty of squabbling over who would benefit. The EU wants most of the money to go to “particularly vulnerable” countries rather than developing ones, which under the outdated definitions of the UN climate convention include such notably non-poor places as China and Singapore. (Singaporeans are more than twice as rich as citizens of the EU.) The question of who would pay also ruffled feathers. Again the EU needled China, now the world’s biggest emitter of greenhouse gases, as the bloc sought a donor base that extended beyond the usual group of rich nations. Decisions made now “must take into account the economic situation of countries in 2022 and not in 1992”, said Frans Timmermans, the EU’s chief negotiator.
To some extent, all this is immaterial. Few believe that a UN-sponsored “loss and damage” fund will ever transfer the hundreds of billions that would be needed to offset the damage done by climate change. That is tacitly acknowledged in the COP27 text itself, which drops several hints that money for loss and damage could be found in what Mr Timmermans called a “mosaic” of sources in existing global, regional and national financial institutions.
With that in mind, the conference seized on a set of proposals by the Barbadian president Mia Mottley. Known as the Bridgetown Initiative, after the capital city of the Caribbean nation, the idea is to overhaul the system of international financial institutions—chiefly the International Monetary Fund (IMF) and the World Bank. The proposal most likely to succeed is to expand the lending capacity of the World Bank, and other development banks, by allowing them to take greater financial risks. Advocates hope an additional $1trn could be unlocked without any shareholders (America is the largest for the World Bank) having to put in any more money. The extra financial risk is justified, advocates say, when set against the harm that climate change will cause.
Such ideas were starting to gain traction before they popped up in Sharm el-Sheikh. In July a report commissioned by the G20, a club of rich-ish countries, called for changes to the rules governing multilateral development banks, such as relying less on the opinions of credit-rating agencies when deciding whether to make a loan. American officials already seem frustrated at the World Bank’s lack of urgency over climate change. In October Janet Yellen, America’s Treasury secretary, said that the lender should find ways to “stretch” its balance sheet and asked the World Bank to come up with a way to do so by December.
More controversial is a proposal to set up a new Global Climate Mitigation Trust at the IMF, the international lender of last resort. Ms Mottley’s suggestion is that a $500bn issue of special drawing rights (SDRs), a kind of quasi-currency created by the fund, could be used to capitalise this new operation. That funding would then be combined with money raised from private investors. The trust would then lend at an attractive rate to projects in poor countries that reduce emissions. Again, this proposal would not require any further commitments from the IMF’s biggest shareholders depending, as it does, on creating new money.
It may still struggle. SDR issuance has been historically rare, reserved for moments of acute financial crisis rather than for chronic challenges like climate change. While a new round of SDRs would not need congressional support, it would require the approval of the US Treasury and Ms Yellen, in October, said now was not the time for further issuance. There is some scope for redirecting existing SDRs: during the pandemic rich countries pledged $100bn of SDRs issued to a Resilience and Sustainability Trust, but so far only about $80bn has arrived.
Even so, Mrs Mottley’s Initiative has won support from France’s president, Emmanuel Macron, who said in his address to COP27 that he had called on the IMF, World Bank and the OECD to propose new ways of channelling funding to poor countries by spring 2023. He suggested that the World Bank and IMF needed new rules to grapple with climate change, which could include forms of debt relief that would suspend payments in the event of a climate-related disaster.
The closing text adopted at COP27 called on multilateral development banks and other international financial institutions to “reform their practices and priorities” to channel money where it is most needed. It also encouraged such organisations to “define a new vision” with “channels and instruments that are fit for the purpose of adequately addressing the global climate emergency”. Though they were not mentioned specifically, this language nods towards some increasingly popular financial wheezes, such as “debt for nature swaps” that offer poor countries debt relief in exchange for committing to conservation.
The discord, as ever, was in the details. Poorer countries always ask for more money at climate summits. This year they sounded even angrier than usual. The rich world’s failure to disburse the annual $100bn of climate finance promised at the Copenhagen climate summit in 2009 amounted to an “egregious and unexplained default”, said William Ruto, Kenya’s president. (No more than $83bn has arrived in any single year.) Mr Ruto’s choice of words, casting the rich world as a recalcitrant debtor, was deliberate. Rich countries often chide poor-country governments for failing to pay their debts, and donors have often criticised Kenya’s ruling class for stealing money intended for noble purposes.
The tussle for money takes place as rich-country taxpayers are feeling squeezed, thanks to inflation and the after-effects of co-19. Yet the situation in poor countries is much worse: national debt burdens ballooned during the pandemic, and this will make it harder to tackle climate change.
Mitigation will require huge investments, not only in renewables but in building electricity grids and proing farmers with alternatives to chopping down rainforests. Adapting to a warmer planet will require vast sums for building flood defences and heat-proofing infrastructure. Making economies more resilient in this way will cost more than $200bn a year by 2030, by one estimate. This money must somehow be found even as a strong dollar and soaring bills for imported food and energy threaten to spark a new emerging-market debt crisis.
Loss and damage from climate-related disasters can drive poorer countries even deeper into debt, as Pakistan discovered this year. Without access to affordable insurance against such risks, Caribbean and Pacific island states have to borrow when a catastrophe hits and try to repay the money when times are good. By one estimate, countries that are at higher risk of natural disasters already have debt-to-national income ratios that are 11.2 percentage points higher than those which are less vulnerable. That will only rise as droughts, floods and storms become more common, severe or both.
Mitigation, adaptation and loss and damage are inextricably linked. Faster, more ambitious decarbonisation will reduce the bill for adaptation. Better mitigation and adaptation will mean that less money has to be spent rebuilding after disasters. But the negotiations that unfolded in Sharm el-Sheikh were proof that the world has not yet worked out how to tackle all three simultaneously.
After the final decision had been gavelled through, Alok Sharma—the British president of last year’s climate talks—hailed the creation of a loss and damage fund but regretted that more had not been accomplished: “Emissions peaking before 2025…Not in this text. Clear follow-through on the phase down of coal: not in this text. A clear commitment to phase out all fossil fuels: not in this text.” ■