Rich countries can and should provide US$100 billion a year to support action on climate change in developing countries

Rich countries can and should fulfil their commitment, despite the current economic crisis, to provide US$100 billion a year by the end of the decade to support action against climate change in developing countries, according to a new report published today (9 December 2011) by the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy at the London School of Economics and Political Science.

The report, published today to coincide with the climax of the United Nations climate change summit in Durban, South Africa, identifies a range of public and private sources through which rich countries could raise US$100 billion a year, as agreed at last year’s summit in Cancùn, Mexico, to support actions by developing countries to make the transition to low-carbon growth and to adapt to those impacts of climate change that cannot now be avoided.

The report estimates that between US$50 and 80 billion in public funding in rich countries could be raised from a mix of auctioning permits for greenhouse gas emissions, introducing carbon taxes and other measures. New taxes on international shipping and air travel could raise about US$10 billion, and the removal of rich country government subsidies for oil, coal and gas could add a further $10 billion.

Contributions from international financial institutions, such as the World Bank, could generate US$30 to 40 billion of leveraged gross public lending for every US$10 billion of public money invested.

About US$200 to 300 billion could be generated by the private sector from carbon markets and investment if the funding from international financial institutions and public sources help to share and reduce investment risks and the right incentives are in place.

The report by Dr Mattia Romani, visiting research fellow at the Grantham Research Institute, and Professor Lord Nicholas Stern, the chair of the Institute, states: “Funding is crucial to a global agreement, and a global agreement of some kind is crucial for controlling climate change. There is unlikely to be a global agreement without a clear commitment on funding. This is why it is imperative not to kick the debate about sources of finance into the long grass.”

It adds: “The debate must recognize the difficult global context that will exist for the next few years, in terms of the diversion of the attention of senior leaders due to financial crises, pressures to reduce their public spending, and macroeconomic imbalances. On the latter, taking action on climate and using public finance to foster the rechannelling of global investment towards low-carbon infrastructure could be part of the necessary transition to refocusing world savings on productive investments that make our economies stronger.

“The current economic crisis risks making us short-sighted: climate action should accelerate now. Building revenue takes time in the best of circumstances and crises do not last forever. We should take a 10-year view of the political conditions and the general economic environment. These considerations should affect our view of when carbon financing sources would be available.”

The report outlines a set of six principles that should be applied when assessing the technical feasibility and political acceptability of any public or private sources of funding:

  •  Sources should not only raise money, but should also provide incentives to reduce greenhouse gas emissions and foster the transition to low-carbon economic growth.
  •  Sources should be new and innovative, giving greater confidence that the funding is additional to existing aid and other support from rich countries.
  • The impact of the taxes used to mobilise funds should be limited to rich countries, and developing countries should be compensated if they are negatively affected.
  • Public sources should promote funding and financial flows from the private sector.
  • Combining a number of funding sources will increase the reliability of the overall financial flows, and will reduce their vulnerability to changing circumstances. It will also enable an increase in the scale of funding as needs and opportunities grow.
  • Funding should be structured in ways that mean it can also provide substantial sums for national treasuries in rich countries.

The report’s recommendations assume the willingness by rich countries to meet the commitments made at Cancùn in December 2010, and thus assume a willingness to put in place incentives for carbon reduction both domestically and internationally. And thus they also assume the willingness to price or tax for the pollution and costs imposed on others by greenhouse gas emissions. Similarly, the recommendations also assume the willingness to remove fossil fuel subsidies that distort investment in economies and to use the resources freed for climate finance.

The report’s authors acknowledge that these assumptions may appear strong, but argue that they essentially assume the sincerity of the commitment made by rich countries at the Cancùn summit. The authors also note that while the mechanisms for a “carbon-based system” are being built over the next few years, other ways may need to be found to initiate funding now.

The report concludes: “Both the finances and the investment will take time to emerge: they cannot be rushed. Thus we must ‘get on with it now’, using the recovery from this economic crisis to lay the foundations for the next decade of low-carbon growth, and recognizing that during this vital decade it will be necessary to generate flows from existing sources of finance. We cannot postpone the planning and taking of action until the current crisis is over.”

Notes for Editors

  1. The Centre for Climate Change Economics and Policy was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council and Munich Re.
  2. The Grantham Research Institute on Climate Change and the Environment was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment, which also supports the Grantham Institute for Climate Change at Imperial College London.