Bridges Trade BioRes Review • Volume 3 • Number 3 • December 2009

Bridging climate change financing and trade-related assistance: Relevant issues for vulnerable developing countries

by Ana Maria Kleymeyer and Gloria Carrión

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Financing climate adaptation and mitigation in developing countries poses a daunting challenge to the world, making an effective and equitable agreement in this area a top priority of the Conference of the Parties in Copenhagen this December. Development and climate change are considered by some to be the two greatest challenges of our era. They are also closely related in their goals and approaches. Addressing both - especially in Least Developed Countries, Small Island Developing States and Small and Vulnerable Economies - requires dedicated resources, capacity building, institutional strengthening, and coordination across a broad spectrum of stakeholders and initiatives.

The current gap between existing financing and what is needed, as well as the institutional arrangement to manage climate financing, pose two of the greatest challenges to the negotiations. As countries discuss the sources and governance of finance, re-enforcing synergies with existing programmes under the trade regime could bolster funding effectiveness. Aid for Trade is a development assistance approach that focuses on enhancing the trade opportunities of the most vulnerable countries, thus improving their economic resilience.

The two predominant issues in Copenhagen will be mitigation and financing. These topics are fundamentally related. Increased and immediate mitigation efforts will avert climate impacts and reduce the costs of adaptation. At the same time, an immediate upscaling in financing is critical to support these measures as well as address adaptation needs in developing countries.

Climate finance - Great needs and great expectations

Securing new and effective financing for climate change adaptation and mitigation is critical to the Copenhagen agreement, as is ensuring an equitable and effective delivery of each element of that agreement over the long term. Addressing the global challenges that climate change poses will require strong political commitment in Copenhagen, but also enormous and costly structural changes for every country. These changes, which would be difficult and costly for any country to undertake, pose particular challenges to developing countries.

Because climate change is caused by emissions from a broad spectrum of economic activities, mitigation of those emissions will impact the way goods and services are produced and traded around the globe. Furthermore, the inevitable impacts of a changing climate implies vast social, environmental and economic challenges, especially in the most vulnerable areas of the world, such as in Least Developed Countries (LDCs), Small Islands Developing States (SIDS) and Small and Vulnerable Economies (SVEs - an important category in the trade context, which partly overlaps the two categories mentioned above). For these countries, effective and predictable sources of funding are fundamental to ensuring their economies can transition to low-carbon development while adapting to the impacts of climate change or, in the worst of cases, respond to disasters.

Mitigation: Enabling developing countries to implement mitigation measures required to avoid the global warming of more than 2°C - the scientifically determined level at which the would can avoid catastrophic impacts - will cost between US$140 billion and US$175 billion annually over the next twenty years (World Development Report 2010). Financial studies estimate that an extra US$ 563 billion above and beyond business-as-usual investments will be needed to jump-start the process, yet note that these figures are within the capacity of the global financial markets (McKinsey 2009).

Adaptation: Investments necessary to assist developing countries in meeting the costs of equipping their countries for the inevitable could average between US$30 to $100 billion, above and beyond the current development assistance of US$100 billion. Nevertheless, the allocation of adaptation funding in 2007 was a mere US$279 million.[1]

The relationship between the sources and objectives of development and climate finance is distinct, yet inseparable. For example, even slight rise in mortality rates in developing countries due to droughts or food shortages can result in increased costs to the development of those countries, slowing efforts for poverty reduction and setting counties back in terms of their development paths. At the same time, slow economic development increases the vulnerability of these countries to eventual climate impacts. Thus, sufficient and coordinated support for both adaptation and development is key.

Current financing for both mitigation and adaptation falls far short, amounting to less than five percent of estimated requirements. The financing chasm is evident on both sides of the climate change equation, yet political promises from developed countries indicate that there may be a change in tides. In addition to G8 and G20 statements earlier this year, political leaders have individually indicated their understanding that financing can make or break the deal in Copenhagen and have signaled readiness to come to the table with concrete proposals.

Tapping the public and private wells for financial support

Identifying new and additional sources of financing has been one focus of the climate negotiations. There is a general acceptance that developed countries will need to scale up financial resources, yet there is little agreement on the levels and reliability of support over the long term. Many developing countries assert that financing for climate change - and especially for adaptation - should come primarily from the public sector. But most rich countries counter that public monies should only be used to leverage the much greater levels of financing that are available through the private sector.

Countries also continue to debate whether climate financing should be bundled into overseas development assistance (ODA) or kept strictly separate. Proponents of the former stress the efficiency of using existing institutions and the clear overlap of objectives and activities. Opponents assert that the intermingling of ODA and climate funds will result in less per-country financing for each objective, that current institutions already struggle to deliver finance effectively, and that ODA decision-making is an inherently unbalanced process.

According to the OECD, the total volume of private investment flows that aim to mitigate greenhouse gas emissions is between six and ten times larger than the amount of public money devoted to the same cause. At the same time, OECD member countries currently give around 0.3 percent of the GDP in ODA; if they devoted 0.7 percent, as they have promised to do by 2015, there would be an extra USS$150-200 billion of public financing available a year.

Further exploration of how to catalyze foreign direct investment (FDI) to help finance the climate fight is critical. According to the OECD, FDI in developing countries amounted to US$259 billion between 2003 and 2005. However, over half of that financing did not involve emissions mitigation-related activities. Likewise, less than a quarter of bilateral ODA between 2003 and 2007 included mitigation-relevant activities.

UNFCCC - Proposals for additional financing currently under consideration by Parties:

a uniform global levy on CO₂ emissions (LDCs would be exempted);
levies on international aviation and maritime transport, except for journeys from or to LDCs;
extending share of proceeds from the Clean Development Mechanism to Joint Implementation and emissions trading;
external debt swap/relief for sustainable development in developing countries.

Additional sources of financing: Exploring the Aid for Trade Agenda

Discussions on additional sources of international financial support for climate change under the Un Framework Convention on Climate Change (UNFCCC) address the fundamental issues of principles, sources, and governance of future funds. Developing countries place much importance on principles of equity, transparency, direct access, sufficiency, among others. Notably, these principles are echoed in the Paris Declaration on Aid Effectiveness of 2005, set out by global development agencies and developing countries, indicating that countries could ally on these issues. Nevertheless, a continued tendency from developed countries to steer financing through traditional financial institutions and a lack of support for proposals from the Group of 77 and China developing country negotiation block has cast a shadow over potential consensus on these issues at the global level.

An unexplored option for leveraging additional financial support to developing countries in a way that is coherent with development policies and that respects developing country guiding principles is through “Aid for Trade” and its supporting Enhanced Integrated Framework for Trade-Related Technical Assistance (EIF). Aid for Trade is a development assistance mechanism established during the 2005 WTO Hong Kong Ministerial. Its main aim is to help developing countries build the supply-side capacity they require to link to the world economy on better terms and strengthen their ability to assess and represent their interests in trade negotiations. Aid for Trade focuses on and channels financial resources mainly into four areas: 1) trade-related technical assistance and capacity building (e.g. training trade officials and helping governments implement trade agreements); 2) trade-related infrastructure; 3) building productive capacity; and 4) trade-related adjustment programmes.

The Integrated Framework, which provides additional support to LDCs and dates from 1997, was enhanced at the Hong Kong Ministerial to work coherently with the Aid for Trade programme. The Enhanced Integrated Framework supports LDCs through capacity building and mainstreaming trade issues into national development plans. It also facilitates the disbursement of funds based on LDCs’ own assessment of their productive capacities and identified priorities for trade-related assistance. Ultimately, both Aid for Trade and the EIF projects intend to foster economic resilience in developing countries, and in particular the least developed and vulnerable ones.

Aid for Trade and climate change financing address many common objectives. If conceived and implemented in a coherent and supportive manner, Aid for Trade and EIF could be crucial to establish and strengthen the economic resilience that developing countries, and in particular LDCs and SIDS, need in order to address both climate change challenges and promote their effective trade performance in world markets.

Two major Aid for Trade categories in which climate change adaptation objectives could be targeted are economic infrastructure and building productive capacity. In the case of economic infrastructure, strengthening transport and storage (road transport, rail transport, water transport, storage) and building effective energy supply and generation capacities (power generation/renewable resources and hydro-electric power plants) through Aid for Trade projects can clearly support both mitigation and adaptation objectives in developing countries. Moreover, in terms of building productive capacity, key sectors such as agriculture, fisheries, and industry could be bolstered from the perspective of economic resilience and climate change.

In the case of agriculture - a sector of strategic importance for many LDCs, particularly in Africa - adaptation measures such as soil rehabilitation, water conversation, and land terracing and fertilization could be furthered through Aid for Trade. Targeted projects could effectively foster agricultural diversification - including improvements in the mix of livestock breed, fish species, and crop mix - by helping build national and/or regional agricultural research and development centres, fostering education and training capacities, and strengthening the links between and improving the bargaining power of agricultural cooperatives and associations vis-a-vis large national and transnational agricultural companies.

Another synergistic opportunity involves linking National Adaptation Plans of Action (NAPAs under the UNFCCC are plans that assist developing countries to identify their adaptation needs and integrate them into national planning) and Aid for Trade. NAPAs could be cross referenced with trade-related technical assistance projects and funds aimed at integrating trade into national development strategies in order to build economic resilience, explore economic diversification, and identify the most viable options for adaptation (as well as mitigation). Notably, financial support to implement NAPAs is insufficient. Well targeted and additional EIF and Aid for Trade funds could be used to supplement existing NAPA development and implementation funds, while strengthening the supply-side capacity of LDCs and SIDS in a reinforcing manner.

Overcoming capacity restraints and claiming ownership

For LDCs, SIDS, and SVEs, ownership - in the sense of exercising control over the determination and implementation of strategies - of Aid for Trade projects and resources represents a fundamental challenge. Due in part to technical capacity and institutional challenges, most of these countries end up having little say over project conception and delivery, leaving donors to prescribe or impose Aid for Trade projects. In this sense, integration with NAPAs might offer a more equitable and inclusive approach. Although they only reflect countries’ specific short-term priorities in terms of climate change, they are crafted on the basis of national consultation processes with stakeholders.

Constructing and strengthening the absorptive capacities in SIDS, LDCs and SVEs will be fundamental to addressing pressing climate change challenges and concurrently foster sustainable development. Many LDCs face significant institutional challenges in terms of human resources and effective national financial mechanisms. These can be addressed through a range of programmes involving among other: capacity building, transfer of know-how, establishment of collaborative research centres, and strengthening information systems. As many of the same challenges impair both dealing with climate change and strengthening trade capacity, they may be concurrently addressed through collaborative approaches.

The potential sustainable development gains of climate change projects in SIDS, LDCs and SVEs are the touchstone of effectiveness for building both economic and climate resilience. In order to maximise the mutual supportiveness of climate financing and existing development instruments, such as Aid for Trade, it is critical to evaluate, and where possible align, the needs, development priorities, and implementation strategies of developing countries. Alternatively, lack of coordination can lead to lost opportunities, higher costs, and impaired effectiveness in terms of climate readiness and poverty reduction - a lose-lose equation for all involved. Ultimately, a collaborative spirit and careful planning can exponentially improve results of all objectives in developing countries, and especially the most vulnerable ones, and increase chances of achieving the win-win solutions the whole world needs.

Ana Maria Kleymeyer is Senior Advisor on Climate Change Negotiations and Gloria Carrión is Development Programme Officer at ICTSD

[1] United Nations Development Program (2007), p 25.