Will “debt for climate swap” work?
Two months away from the Conference of the Parties (COP) global climate summit on Africa’s continent and at a time when the world prepares to convene in Tunis for COP27, slated for early November, the Horn of Africa region is skipping rain for the fifth consecutive season, culminating in the worst climate crisis. Humanitarian organizations continue to struggle to meet the needs of 30 million people who require assistance.
On September 15, 2022, ambassador Yosef Kasaye, Ethiopia’s deputy permanent representative to UNHCR echoed the appalling fact at the UNCHR meeting. “The horn region is facing the worst drought induced by climate change in history. This region is also hosting 67percent of Africa’s refugees and 20 percent of global refugee. Climate induced drought also displaced millions in the regions. But at the meantime, funds are dropping.”
In Ethiopia, where the number of people in need of humanitarian assistance due to drought reached 20 million, cereal rationing shrunk from 15 to 10 kilos per head per month due to lack of funds, according to a UNOCHA report released in early September.
Despite contributing only 3.8 percent of the emission of Green House Gas (GHG), Africa continues to be the most affected victim of the increasingly complex climate crisis.
Nonetheless, the effects of climate change cost African economies anywhere between two percent and 10 percent of their GDP annually, according to research presented by Olufunso Somorin (PhD), African Development Bank (AfDB) regional principal officer in charge of climate change and green growth for the eastern Africa region.
A high-level technical conference ahead of COP27 was held from September 13-14, 2022 at the Hyatt Regency in Addis Ababa. The South African Institute of International Affairs (SAIIA), Konrad-Adenauer-Stiftung (KAS) Ethiopia office and African Union, and Energy Security and Climate Change Sub-Saharan Africa program of KAS, organized the two-day high-level technical conference to formulate takeaways for the COP27 summit.
Africa spends seven percent of its GDP, on average, to handle the impacts of climate change, according to the study. This means climate change is costing Africa around USD 70 billion annually.
Niger, Somalia, Sudan, Liberia, and Mali are among the most affected countries. For instance, Zambia’s economic growth is slashed by 3.4 percent due to climate change annually, while Ghana loses USD four billion to high-flood damage on its roads.
When it comes to financing climate change, the resource gap in Africa remains wide. Only three percent of USD 632 billion annual global climate finance flows to Africa, according to Olufunso. African governments’ decision to channel USD 100 billion to climate change investments annually, a pledge made 13 years ago in 2009, also remains a pledge.
In Africa, about USD 30 billion is invested annually on adaptation by governments, development partners and the private sector, among others.
“Now Africa needs hundreds of billions of dollars every year,” Olufunso said.
East Asia and the Pacific is the leading region in terms of channeling more finance to climate change, at USD 292 billion annually on average, of which 270 billion is domestic finance. Western Europe ranks second with USD 105 billion, while the US and Canada rank third with USD 83 billion.
Sub-Saharan Africa is among the least financed regions, with just USD 20 billion annually, of which 18 billion come from domestic resources. Most of this finance goes to mitigation. When it comes to climate adaptability financing, sub-Saharan Africa channels only USD 7.3 billion annually, all of which is sourced from international funds.
The basic problem of climate finance in Africa is not only a lack of resources and a widening supply-demand gap in funding. In addition to the lack of climate financing, the misallocation of finance is also a major deterrent.
“Climate finance is different from climate funds. First, there is no sufficient climate finance. Secondly, even the available resources are largely being allocated for mitigation, instead of adaptation,” Benno Muchlr, KAS/AU Ethiopia director, said.
Over 90 percent of African climate funds are dedicated to mitigation. The remaining 10 percent goes to adaptation. Mitigation is fighting after the damage has already been incurred. This means most of the climate finance in Africa goes to humanitarian assistance to fight the impacts of drought, flood, IDPs, loss of harvest, and others.
On the contrary, adaptation means investing in development projects that can avert the impacts of climate change before they happen. This includes, for instance, irrigation projects, green development projects that reduce emissions, re-afforestation, river restoration, and other ecosystem-based adaptations.
Mitigation is considered short-sighted and cyclic, while adaptation aims at providing a lasting solution. Ethiopia is among the most severely hit countries, spending substantially on delivering direct humanitarian assistance every year.
“We have to reverse the climate financing vehicle. Unless 90 percent of the climate finance goes to adaptation and the rest to mitigation, there cannot be a lasting breakthrough solution to the climate crisis unfolding in Africa,” Olufonso said.
Many agree that the priority of COP27 also should be reframing the climate resolution approach towards adaptation financing.
Adaptation finance should be the main focus of COP27, says Alex Benkenstein, program head at SAIIA.
Global climate finance demand is predicted to reach USD 3.8 trillion each year by 2050, under a 1.5 Celsius scenario. While the demand stands at 1.6 trillion currently, the supply is around USD 632 billion annually on average.
The private sector contributed 56 percent of the USD 632 billion, while the public sector contributed 44 percent. From the private sector, corporations contributed 32 percent, financial institutions 13 percent, and households 10 percent, with the remainder covered by institutional investors and infrastructure funds.
From the public sector, development finance institutions (national) covered 23 percent, while multilateral DFIs, government budgets, bilateral DFIs, and climate funds accounted for 10 percent, six percent, four percent, and one percent, respectively.
Country-wise, Japan is the top climate financer, leading with USD 7.2 billion, followed by Germany at 6.7 billion and France at USD 4.3 billion.
The World Bank is the largest multilateral DFI climate funder, with USD 10.5 billion, followed by EU institutions and Asian DB with USD 5.5 billion and USD 4.6 billion, respectively.
AfDB holds the ninth position, contributing USD 1.3 billion. The Green Climate Fund, the Global Environment Facility, GEF general, and the other top ten climate fund organizations contribute a total of USD five billion.
The Horn of Africa, one of the victims of climate change, also channels most of its resources to fight the impacts of drought. Kenya, for example, allocates USD 2.4 billion for climate change, with 79.8 percent going to mitigation and only 11.7 percent going to adaptation.
Public funds account for 59.4 percent of total expenditure, with the remainder coming from private sources. The climate fund is under-reported in countries such as Ethiopia, where a large portion of resources are directed toward combating the prolonged drought, food insecurity, water and power fluctuations, floods, soil acidity, and poor harvests.
COP27 is highly expected to make progress on COP26 decisions, calling on developed countries to at least double their adaptation finance from 2019 levels by 2025.
“Pledges for adaptation finance are not enough to meet the needs and priorities for enhancing resilience in Africa. Given its complexity and the difficulty of measuring it, the global goal on adaptation will also be an important focus area at COP 27, as this goal has received limited attention to date,” Olufunso said.
Benno stresses that the procedures and conditions for accessing climate funds from developed countries are usually discouraging for African countries. “Even if there are available funds around the world, the procedures are not predictable and easy.”
So far, the climate adaptability fund is only USD five per person, which is forecasted to reach USD 50 per head by 2050. If left without timely intervention, the global climate fund demand is also estimated to climb to USD four trillion by 2050, up from USD 1.6 trillion now (of which less than half is met).
Currently, AfDB, KAS/AU, and SAIIA have adopted the National Adaptation Finance Framework (NAFF), a new idea that is expected to be approved at the COP27 summit. The framework aims to address existing barriers to accessing finance, specific to the country and regions.
It will explore the implementation of innovative and long-term financing mechanisms for adaptation beyond concessional loans and grants. New financial instruments such as equities, guarantees, resilience bonds, debt-for-climate swaps and other risk-sharing facilities are also proposed.
In particular, the “debt for climate swap” is a concept gaining momentum, as many African countries are struggling with long-overdue external debts, unable to pay them, especially since the devastating blows of the COVID-19 pandemic and the Ukraine war.
Ethiopia is also among LDCs with a higher external debt to GDP ratio. Ethiopia, Chad, and Zambia are currently awaiting debt restructuring from the G20 creditors, as the IMF and the creditors committee delay the restructuring.
Olufunso hopes the “debt for climate swap” will be an ideal solution to kill two birds with one stone.
“Developed countries can allow African countries to use a certain portion of their debt stock for climate adaptability finance. So basically, instead of paying the external debts back, you are allowed to use the money to do projects and investments that sustain the environment. We can do that as well,” Olufunso concluded.
