Lessons from the London Climate Action Week
Image Source: London Climate Action Week
The just concluded London Climate Action Week featured over 300 events on a range of topics. Throughout the six events, Enzi Ijayo Africa Initiative attended throughout the week, recurring themes were the year of democracy and the role of politics, geopolitics, and climate finance. The following are four key takeaways from the London Climate Action Week and their implications for African countries.
Defining Climate Finance
Despite its importance, there is no agreement on how climate finance should be defined. During the event, Climate Finance: a credibility gap, it was mentioned that at the recent negotiations in Bonn, Germany on what the New Collective Quantified Goal for Climate Finance (NCQG) is, what climate finance is not was agreed upon. Speakers at this event noted that whilst the share of project funding termed as climate finance is much higher today than in the previous decade, the changes and inconsistencies in reporting on the usage of the term climate finance means that it is not clear how much climate finance has actually increased in real terms.
According to Development Initiatives' latest report, Climate Finance, earning trust through consistent reporting, developed countries submitted to the UNFCCC Standing Committee on Finance that a common definition is not needed. However, Euan Ritchie, author of the report, contends that the lack of a clear definition of climate finance has led to uncertainty about how much finance has been raised and undermined the trust between the developing and developed countries that are party to the UNFCCC. Ritchie notes that consistent reporting standards are especially needed since the NCQG is being agreed to this year to replace the US$100 billion goal set in 2009. Consistent reporting is needed to gauge progress towards the NCQG. The purpose of the report was to set out recommendations to standardise the definition of climate finance. Some of the recommendations include adding three new requirements to the UNFCCC transparency requirements, making measuring climate finance more granular, and the use of natural language processing models by countries to highlight dubiously labeled “climate” projects. It would be in African countries' best interest to, at future negotiations on the NCQG and the enhanced transparency framework at COP29, table suggestions for a common agreed-upon definition of climate finance and standards for gauging and tracking it.
Financing Mitigation and Adaptation
Selwin Hart, Special Adviser to the Secretary-General of the UN on Climate Action and Just Transition gave a keynote address at the State of Climate Politics Forum titled “Transforming International Finance: Building Trust and Resilience for Effective Climate Action.” The key takeaway from his keynote address was that renewable energy in the Global South requires more investment. He noted that whilst investment in green energy solutions was at a record high last year, double what was being invested in 2015, in 2023, only 15% of new clean energy investment was made in developing and emerging economies outside of China, despite these countries having ⅔ of the world’s population. He also noted that there is enough global manufacturing capacity to meet the goal set at COP28 of tripling renewable energy production. Furthermore, despite Africa’s renewable energy potential and resources, including having 60% of the best solar resources in the world, it had less than 1% of the installed solar PV capacity last year.
Enterprises, especially those focused on clean energy solutions, are still well-positioned to pitch for greater investment. One notable area is solar energy which, as has just been shown, there is much potential and demand for on the continent but not enough investment being made into. Producing more renewable energy not only is essential to mitigating climate change but is also profitable. However, Jonathan Maxwell in his book “The Edge” noted that resource efficiency is a crucial part of the energy transition and mitigating climate change. Not only producing renewable energy but also reducing demand for energy and using it more efficiently is better for the environment and, Maxwell contends, will reduce the risk of conflict. In his research, he found that often international conflicts, be it in the Middle East, Africa, or Europe, are fuelled by competition for energy resources. It remains to be seen how the need to increase energy efficiency and therefore reduce quantitative demand for energy will interact with the need for greater investment in renewable energy in Africa which in part relies on high demand for renewable energy.
At the “Climate finance: a credibility gap” and “Scaling innovative climate adaptation solutions in emerging economies” events, it was emphasised that whilst investments into mitigation are important more money needs to be mobilised for adaptation and resilience efforts. Mitigation currently accounts for 80% of climate finance. Approximately 6% of adaptation finance is given as grants and more than 93% is given in the form of loans, according to a speaker in the “Climate finance: a credibility gap” event. Speakers from this event also criticised the relabelling of existing development aid and loans as climate finance and highlighted that more needs to be allocated to the loss and damage fund, the landmark agreement of COP 28 last year. As Selwin Hart said in his address, it would be unjust to leave the most vulnerable to deal with the consequences of a climate crisis they did not create. The injustice of insufficiently financing developing countries to address the climate crisis was explained well in this article.
In her keynote address, Jennifer Morgan, Special Envoy for International Climate Action, Germany, contended that commercial green finance has its limits and that more concessional finance needs to be made available for adaptation and loss and damage. Indeed this is evidenced by the disproportionately low funding allocated to adaptation relative to mitigation. One speaker noted that traditional finance can go to mitigation since it is more likely to produce returns. Instead, more climate finance should go into adaptation and loss and damage which is harder to produce a return on. As such, there is cause for African countries to negotiate at COP29 for not only more financing but also to specify that more of it is needed as grants for adaptation measures.
The Cost of Borrowing
According to the International Energy Agency, the main factor limiting investment into Africa’s energy resources is the perception of the continent being high risk which leads to African countries having greater borrowing costs than countries in the Global North. During his keynote address, Selwin Hart emphasised that affordable public and private finance is needed. However, he noted that the cost of capital is 3-4 times higher for developing and emerging economies than for advanced economies. As Nyasha Munodawafa, policy consultant at Enzi Ijayo put it, having different interest rates for different countries can be compared to a man walking into a shop and asking to buy bread but the price he’s asked to pay for bread is contingent on how hungry he is. It seems odd, exploitative, and predatory to sell bread to someone who is hungry at a higher price than to one who is not. Similarly, whilst risk is an integral part of how interest rates are determined, charging developing countries significantly higher interest rates is arguably predatory. This is especially when the perception of risk, not necessarily the risk itself, contributes to the increased interest rates. Selwin Hart noted that reform of Multilateral Development Bank systems (MDBs) and adopting innovative financial instruments are needed to address the risks and the perception of risk in developing countries which makes borrowing that much more expensive.
Paul Bodnar, Director of Sustainable Finance, Industry & Diplomacy at the Bezos Earth Fund, in a panel titled ‘Walking the finance tightrope: financial risk management in a global climate crisis’, contended that instead of trying to fix the ‘3000 mile long screwdriver between London and Nairobi and Latin America’ and centering Northern institutions in green finance, developing countries ought to develop their own national capacity to finance their transition. As was highlighted by Adama Mariko, Secretary General of Finance in Common, local solutions are needed to address the climate crisis. Therefore projects forming part of the transition should be locally led. However, as was put by Selwin Hart, it would be unjust to expect countries by themselves to fix a problem that they did not create. Indeed in Article 9 of the Paris Agreement countries in the Global North agreed to provide financial resources to developing countries to help both their mitigation and adaptation efforts. This recognises the responsibility Western countries have to fund climate action, including both mitigation and adaptation efforts. Nonetheless, there is a role to be played by African financiers in funding both mitigation and adaptation measures. The extent to which local and international financial institutions and investors should be responsible for funding the transition is yet to be precisely determined, however.
Additionally, the debt burden on developing countries also makes it difficult for them to invest in climate action. Selwin Hart noted that there is a precedent for capping debt payments of developing countries. Following WW2, to support Germany’s reconstruction and rebuilding it was agreed that their repayments of sovereign debt would be capped at 5%. However, at present, the Least Developing Countries and Low to Middle-Income Countries spend approximately 23% and 13% of their export revenues on repaying their sovereign debt. Similar to Germany’s need to reconstruct after WW2 and adapt to the changing world, developing countries must adapt quickly to prevent the worst effects of climate change. The recent floods in Nairobi, Berlin, and Bangladesh amongst other extreme weather events show that the consequences of climate change are already being felt across the world.
In the panel, ‘Geopolitics of the oil transition’, the cost of the shift away from oil was discussed. Many developing countries in the Gulf and Africa, including Nigeria and Equatorial Guinea rely heavily on oil for a significant portion of their government revenues. There is the risk of higher food prices if revenues from oil drop. These countries depend on exporting raw materials, like oil, to pay back their debt but they also face increasing divestment from their oil production projects. In addition, there is not enough money being made available to these countries to invest in renewables for their industrial needs. To minimise the damage resulting from the shift away from oil production, support from organisations bringing together governments and businesses, like Beyond Oil & Gas Alliance, are needed.
Elections and Geopolitics
Jenifer Morgan in her keynote address mentioned that a climate strategy that does not include BRICS, the moral authority of the small Island states, the influence of fossil fuel states, and the geopolitical competition for alliances with African states is not fit for use. Glada Lahn, Senior Research Fellow at Chatham House in the Geopolitics of oil transition panel, noted that the competition between the East and the West provides African countries with the opportunity to pursue non-alignment policies in order to achieve the best deals they can and also rebalance the global power asymmetries. One opportunity for African countries to do this is by negotiating better terms of their investment treaties with countries like the UK who have recently pulled out of the Energy Charter Treaty and so are now focusing more of their attention on various bilateral investment treaties. The various elections happening in Europe and the US could mean that the countries in the Global North take more seriously their commitment in Article 9 of the Paris Agreement to provide financial resources to developing countries to help both their mitigation and adaptation efforts. Alternatively, they could lead to governments that are reluctant to meet this agreement and even withdraw from the Paris Agreement entirely. Nonetheless, given the immense potential Africa has to produce renewable energy and the acute needs of the continent, it must adopt a non-alignment policy.
Conclusion
All countries, but particularly developing countries, ought to push for an agreed-upon definition of climate finance and standards for gauging it to ensure that they are not shortchanged when receiving it. African countries need to be able to adapt to the worst effects of climate change, however, adaptation projects are not as profitable. Therefore negotiating for grants and concessional finance and more funds to be allocated to loss and damage is essential to ensuring African countries are sufficiently equipped to deal with climate change. On the other hand, as the majority of climate finance is allocated to mitigation and renewable energy projects are profitable, there is a good business case to be made for investing in them. Nonetheless, a barrier to investment on the continent is the fact that capital costs roughly 3-4 times more for developing economies than other nations. One of the reasons for this is the perception of the risk of investing in the continent, a perception which needs to be changed. Despite it being more expensive for developing economies to access capital than developed ones, it remains that countries in the Global North bear the greatest responsibility for financing both the mitigation and adaptation efforts of the countries in the Global South. After all, it would not make sense to expect one to fix, on their own, a problem that they did not create. The wave of elections happening this year could either propel or stifle global climate action. Nonetheless, the current geopolitical context provides African countries with the opportunity to adopt non-alignment policies. In the words of Kwame Nkrumah, facing neither East nor West, but forward.
Subscribe to our newsletter below and stay informed on the latest updates, engagements, and news!