We need to chart a more coherent climate finance policy agenda and determine how progress on climate will be measured.
This post was co-authored by Annaka Peterson, Senior Program Officer, Adaptation Finance Accountability Initiative
For men and women on the frontlines of the climate crisis the transition to a low-emission, climate resilient future must be swift and just. In order to realize that transition, we need to talk about money. Not just about raising money, but about fundamentally changing the policies and market incentives that shape where and how financial resources are invested around the world.
Last year, the world united behind the Paris Agreement, which laid out a comprehensive vision for shifting all financial flows to be consistent with low-emission, climate resilient development. So now is the time to take stock of where we are, chart a more coherent finance policy agenda, and determine how progress will be measured.
But what does this mean in practice?
At a rights-based organization like Oxfam, we care deeply about who bears the costs of this transition. Climate change is the ultimate injustice – those among us that have done least to contribute to climate change, bear the brunt of its negative impacts. We also have lessons from years of experience working on climate and other humanitarian and development challenges to inform our thinking on the transformational change needed to shift financial flows and build a climate resilient future for us all. Here are five:
- Invest and engage at the national level, where real transformation happens
One-off projects or technical solutions aren’t enough. International policies like the Paris Agreement help build momentum and consensus, but national systems and policies drive real and lasting change. A good example: national governments and domestic political processes are what delivered the most progress on the Millennium Development Goals (MDGs). Aid was most valuable when it complemented comprehensive national and community-level priorities.
Years of development experience has proven that leadership and action at the national level are key for two main reasons: First, domestic resources, both public and private, now dwarf international assistance. The same holds true for climate finance: CPI’s 2015 Landscape of Climate Finance report shows that three quarters of global climate finance and more than 90 percent of private investment in climate change is domestic. Second, the development effectiveness literature widely recognizes that country-owned development processes are most effective and sustainable.
- Give investors, consumers and citizens the information they need to make informed decisions and demand accountability
Governments and companies are similar in that they respond to public and investor pressure. Twenty years ago, companies didn’t see it as their obligation to address issues related to their business such as labor practices of their suppliers, ensuring fair prices for poor farmers’ produce, and recognizing the right to free, prior and informed consent. But propelled by public pressure around ideas like corporate social responsibility, the landscape has dramatically changed. This pressure has led to improved corporate policies and strengthened transparency practices that give the public a window into corporate actions and investments.
Public reporting can be voluntary or mandatory, and can be used in both the private and public sectors. For example, faced with new transparency laws in the oil, gas and mining sector mining giants Rio Tinto and BHP and oil companies such as Tullow have disclosed their payments to governments on a project-level basis – providing citizens with the details they need to hold companies and their governments accountable. Similarly, efforts in the public sector to improve budget transparency can enable citizens to access information, and monitor and influence government policies, programs and expenditures.
In the climate space, the work of the Task Force on Climate-related Financial Disclosures is one example of voluntary reporting aimed at helping financial markets put a value on climate risks. Those disclosures, which include companies’ efforts to report on their greenhouse gas footprint, have enabled Oxfam to push food and beverage companies to set science-based emission reduction targets across their operations and supply chains. In the public sector, efforts like those of the Adaptation Finance Accountability Initiative to make information about public investments in adaptation from domestic and international sources available help civil society to make sure these public investments are being used effectively and improve national policies.
- Make the most of (scarce) public finance and enable smart private finance
Making the most of public finance and international aid is a hotly debated topic and climate finance is no stranger to this discussion. To do this right we need a learning agenda that looks not just at project outputs, but also at project contributions to systemic change and lasting development impact. We also can’t forget about inequality and the injustice of climate change. Building everyone’s climate resilience means we will need to provide more support to the poorest and most vulnerable amongst us. And, in many instances, public investments are best suited to respond to the needs of these communities.
Because public finance is clearly limited, donors and governments have increasingly focused on how to use public finance to leverage private sector investments. However, while vibrant local economies depend on enabling environments where the private sector can thrive, several risks emerge with blending public and private finance.
- It isn’t always clear what the added-value of the concessional (public) finance is, because often times the projects may go ahead without the public finance contribution.
- There is a risk that the development or climate objectives of an investment will be sidelined by the private sector goals.
- It is difficult to assess the impact of aid flows when they are combined with private investments because they aren’t tracked in the same way as traditional aid. And measuring the amount of private finance leveraged doesn’t provide any evidence about the development or climate impact of that funding.
We still don’t know how to best deploy public finance in tandem with private investment to deliver the transformational, and equitable, change we need.
- End subsidies that cause climate change and exacerbate risk
There are a host of public policies that distort the market and incentivize activities that contribute to climate change and exacerbate its risks to development. Harmful fossil fuel subsidies are the most egregious example. Globally, governments provide $775 billion to $1 trillion in subsidies for oil, gas and coal each year. Estimates for the US alone are $37.5 billion a year according to Oil Change International (OCI). In May, G7 countries pledged to end fossil fuel subsidies by 2025. That was an important signal, but it must be translated into national policy – and the sooner these subsidies are phased out in a progressive way with safeguards in place to protect the poorest, the better. This commitment to phase out fossil fuel subsidies also needs to be extended beyond the G7 and taken on board by public financial institutions like the World Bank. OCI found that the World Bank Group, through both direct and indirect lending, lent $3.3 billion in fossil fuels during its last fiscal year alone.
In addition to fossil fuels, global and national agriculture policies can have significant impacts that distort the market through subsidies that give preference for use of certain seeds, fertilizers or irrigation systems that can increase climate risks; providing incentives to destroy natural resources that would help mitigate the risks posed by climate change. For example, policies that promote commercial prawn farming have contributed to the destruction of mangroves, which provide a buffer from storm surges and further protection from rising sea levels, ultimately reducing the risks that these communities face.
Fixing these perverse incentives requires a variety of context-specific policy tools and influencing tactics. There are many windows of opportunity to engage and we will be watching to make sure the poorest amongst us don’t bear all the costs of these transitions.
- Help the market value climate pollution and impacts equitably
Dealing with externalities, both positive and negative, is a classic economic challenge. Carbon pollution, for example, represents a negative externality of driving cars and many other modern activities. Carbon taxes and cap-and-trade approaches were designed to address this market failure and are being employed in many places around the world. Companies too are starting to adopt internal carbon pricing, and governments should think about taking it on as well. However, good policy formulation is essential as putting a price on emissions can result in equity concerns and put an unfair burden on low-income households that spend a higher share of their income on energy.
These equity concerns also apply to climate adaptation. While efforts like Standard & Poor’s work to incorporate climate risk into sovereign credit ratings is an important tool to help financial markets manage climate-related risks, it also raises important equity concerns. In many cases it is the most vulnerable countries that are facing climate risks that they didn’t cause and can do very little to control that are now potentially facing higher borrowing costs as a result. And this comes at a time when upfront investments in adaptation and resilience can reduce the risks and costs associated with climate change. Is it fair that they should have to pay more to take action to protect their citizens?
We need to make sure that equity considerations are front and center as pricing strategies are adopted at all levels.
There is a lot to do, and it isn’t going to be easy. But positive momentum is building, and this change is possible, and necessary. We’re looking forward to continuing the debate and most importantly, getting to work.