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Small island nations suffer under broken and cruel’ climate finance system

At COP26, leaders of developing countries seek a way out of the vicious circle of debt and storm damage. Will rich countries and major players listen?
By Jeff St. John

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Asesela Sadola Fong (blue shirt) and his family visit the location where their house stood before Category 5 Tropical Cyclone Winston made landfall on Fiji on February 20, 2016. (Feroz Khalil/Mai Life Magazine/Getty Images)

Satyendra Prasad, Fiji’s ambassador to the United Nations, has a word for how the international climate finance system treats countries like his on the forefront of climate-change-driven destruction: cruelty.”

There’s a certain cruelty, he says, to a system that forces island nations such as Fiji to borrow at punishing interest rates” to repair the massive destruction caused by storms like Cyclone Winston, which hit the country in 2016 and caused $1.4 billion in damages — roughly one-third of Fiji’s gross domestic product.

That cruelty is compounded by repeated and intensifying storms that cause flooding and erosion that tears down these repairs over and over, forcing countries like Fiji into cycles of indebtedness that rob them of the ability to make more productive public investments.

In Fiji, we long ago moved to a tipping point where we spend more on repairing schools than on building new schools,” he said in an interview. To recover is to stand still. It is to go nowhere.”

Nations like his, which have played almost no role in causing the climate change now threatening them, are also forced to jump through bureaucratic hoops and wait years to fund critical infrastructure projects, he said.

Now, with world leaders gathering in Scotland for the United Nations COP26 climate talks, Prasad and other island nation representatives are demanding relief from the cycle of damages, debt and delay they say has characterized the past decade of climate finance policy.

Smaller states need to be supported to overcome the punishing cruelty that climate finance is today,” Prasad said.

What is climate finance? 

There will be a lot of talk about climate finance during the COP26 meeting, but there is no simple, clear definition of what it is.

Broadly speaking, it’s money to help developing countries deal with climate change. This can involve funding for things like climate mitigation (phasing out dirty power, ramping up renewables, planting or protecting vegetation that sequesters carbon), climate adaptation (preparing for ongoing changes and future disasters), and recovery from climate disasters that have already hit. The money can come from many different sources and in many different forms.

Climate finance can include funding from wealthy individual countries as well as the United Nations and multilateral development institutions such as the World Bank, International Monetary Fund and European Bank for Reconstruction and Development. Private-sector finance is also a part of it, as are joint public-private initiatives.

It can be offered in the form of grants or loans, but more often than not, it’s the latter. Three-quarters of the funding provided to developing countries in 2019 consisted of loans, while only one-quarter were grants, according to Laetitia De Marez, director of the Climate Finance Access Network.

For developing island nations such as Fiji, where climate change is already a harsh everyday reality, climate finance has a particularly broad meaning. Every penny that we spend has now become climate finance,” said Prasad.

How much money are we talking about?

Rich nations made a pledge a decade ago to provide $100 billion per year in climate finance to developing countries, but they have never delivered. The latest expectations are that the target won’t be met until 2023.

Even this target is far below what’s actually needed. Studies indicate that much greater financing must be forthcoming, particularly to meet the needs of the least developed countries. The Center for Global Development, for instance, estimates that the world’s wealthiest countries have caused $15.2 trillion worth of climate damage since 1979, which means they should be providing $190 billion per year in climate finance through 2021 — and its researchers say their figures are conservative.

Funding for the 46 least developed countries has grown over the past four years, but amounted to just $15.4 billion in 2019, according to the most recently available data from the Organization for Economic Co-operation and Development (OECD).

For the small island developing states that face existential threats from rising sea levels and intensifying storms, the picture is even worse. Total financing for these 52 countries actually fell between 2018 and 2019, from $2.1 billion to $1.5 billion, according to OECD data, as shown in the chart below. While 2020 figures aren’t yet available, the Covid-19 pandemic has likely driven them even lower.

Wealthy nations and development banks fall far short of their climate-finance promises to small island developing states and least developed countries. (CFAN)

A painfully slow system

Even the money that’s being pledged is not being put to work quickly enough to meet the urgency of the need. It doesn’t matter if it’s $100 billion or $200 billion if countries cannot access it,” De Marez said in an interview. The current model for climate finance cannot deliver at scale.”

Of the $29.5 billion pledged from multilateral climate funds between 2003 and 2017, only $5.6 billion had been disbursed at the end of that time period, according to Climate Funds Update. A 2019 report from the Stockholm Environment Institute found average disbursement rates of 62 percent for international climate finance, with some entities, such as the World Bank’s Climate Investment Funds, well below that level. The U.N.’s flagship Green Climate Fund has disbursed only $2.1 billion of the $10 billion committed, according to the latest data.

At a September press conference hosted by nonprofit research organization RMI, Selwin Charles Hart, special adviser to the U.N. secretary general on climate action, laid out a litany of problems that are leading to stagnating or decreasing levels of climate finance reaching island nations like his home of Barbados. (Canary Media is an independent affiliate of RMI.)

Access issues for these countries are endemic, they’re persistent and they have not been dealt with,” he said. But fixing the problems is not rocket science.” 

Climate finance organizations need to significantly reduce the red tape” and revise the speed and efficiency” of processes that bar many worthwhile climate projects from winning approval, he said. OECD must make more countries eligible for grants or concessionary” loans at lower interest rates, and multilateral development banks must create special categories for island nations and their unique needs, he said.

As things stand, island nations face interminable barriers as they seek finance for projects such as installing solar PV and water heating systems or nurturing coastal mangrove forests, which protect shorelines from hurricanes and flooding, said Diann Black-Layne, director of Antigua and Barbuda’s Department of Environment and the country’s ambassador for climate change.

Mangrove forests like this one in Bali sequester carbon, protect coral reefs and shield coastlines from extreme weather events. (Lawrence Hislop/GRID-Arendal)

If we wanted to get access to $100 million, we can say ready, set, go today — I’ll see you in five years,” she said. And I have to find $10 million to find all kinds of proof [and] evidence to go and access those funds.”

Black-Layne drew a direct contrast between these climate finance challenges and the easy terms offered to fossil fuel companies. If you want to borrow $100 million to destroy the environment, you can process that in about six months and get a tax refund for it,” she said. The World Bank has approved more than $12 billion in fossil fuel development since the 2015 Paris climate agreement.

Both the pace and scale of climate financing are completely out of sync” with the urgency of climate change, De Marez agreed. Grant applications for island nations to the U.N. Green Climate Fund take an average of four years to move from concept to disbursement of funds, she said.

Mitigation or adaptation?

Another problem is that funding remains more heavily slanted toward mitigation, which is the term used to describe projects that reduce carbon emissions. But developing countries most desperately need investments in what’s called adaptation” — that is, projects that can protect them from climate change — because they face much greater climate risks than rich countries.

We need a breakthrough on adaptation and resilience,” U.N. Secretary General Antonio Guterres said late last year, particularly for small island developing states which face an existential threat.”

The U.N. Environment Programme reported in January that developing countries currently need $70 billion per year for adaptation — but by 2030 they will need as much as $300 billion a year in adaptation funding.

Prasad emphasized that investments in climate adaptation are crucial for protecting countries such as Fiji against future damages, with every dollar spent on adaptation saving roughly five dollars in subsequent disaster-response needs over a three-year period. Given the clear cost-effectiveness of spending to prepare for disasters as opposed to spending to recover from them, delays and barriers to making these adaptation investments are not just cruel but wasteful, he said.

A cycle of debt and destruction

The fact that most climate finance comes in the form of loans is also a huge problem. Loans are increasingly untenable for many island nations struggling with rising levels of debt and high borrowing costs.

Of the $700 million that Fiji spent on recovering from Cyclone Winston, only about $100 million was provided by grants, Prasad said. And while the country’s debt-to-GDP ratio is not that very different from the U.K.,” Fiji’s interest rates for borrowing from the private sector are roughly 6 to 8 percentage points higher, he said.

On top of the climate disaster, this is a disaster of private capital,” he said.

Major credit ratings agencies Moody’s Investors Service, S&P Global and Fitch Ratings have come under scrutiny for their apparent unwillingness to examine the climate risks faced by big government borrowers. But they have been more ready to downgrade the credit ratings of island nations like Jamaica and other Caribbean countries after weather disasters. The IMF reported in February that developing economies faced far greater increases in borrowing costs linked to growing climate-related vulnerability than richer nations.

Small island states, including some Caribbean countries, are already facing accumulated debt service that can equal up to a fifth of total government revenue, plus they’re struggling to manage Covid-19 recovery costs. These countries are unwilling, and rightly so, to borrow money for their critical adaptation and mitigation needs,” De Marez said. Others, like Jamaica, are barred from borrowing by IMF debt restructuring deals, she said.

Loans are particularly problematic when the projects they fund face the risk of destruction from storms, Black-Layne said. She cited the example of the Caribbean island nation of Dominica.

They got a loan for a climate finance project, and then they got hit by a storm — not a hurricane, just a storm,” she said. It wiped out the woods” that the finance project was meant to protect, so the country was forced to take out additional loans from the Caribbean Development Bank to cover payments on its original loan for the now-destroyed project — a new burden on top of the estimated $1.3 billion in damages the island absorbed from Hurricane Maria in 2017.

Similar threats face clean energy projects, like the 1-megawatt solar installation on Barbuda that was destroyed by Category 5 Hurricane Irma in 2017. All in all, the hurricane caused more than $220 million in damages in the nation of Antigua and Barbuda, amounting to more than a quarter of its 2017 tax revenue.

The money that’s supposed to help you to prepare for hurricanes has unintended consequences that drag you deeper into debt,” Black-Layne said. All the lending room you have to help your people is being channeled to meet the requirements of climate finance.”

Debt-for-climate swaps have arisen as a way to flip these dynamics by allowing debt forgiveness in exchange for commitments to invest in climate mitigation and adaptation, De Marez said. But such swaps are still very rare, and they’re not simple to implement. Each deal is different,” she said, adding that the terms can be quite complex.

The burdens of bureaucracy

Working through the tangled bureaucracy of U.N. and multilateral development bank programs is a major barrier in and of itself, island nation representatives say.

To obtain climate finance, nations must compete with each other to propose projects and navigate the bureaucratic process for winning approval, according to De Marez. But countries struggle with the data,” she said. Project development is a very data-driven process. You need scientific projections; you need socioeconomic data.” Yet in many countries, that data doesn’t exist or hasn’t been digitized.”

The U.N. commited a decade ago to assist countries with the data collection and verification processes needed to make compensation claims for climate-change-induced loss and damage. In 2019, the U.N. created a program to meet that commitment, the Santiago Network for Loss and Damage, but it’s little more than a website today.

Also, many island nations are technically classified as middle-income countries, despite their exposure to climate risks, which can bar them from access to certain U.N. and multilateral development bank funding streams, De Marez added. Given their status of being the most vulnerable countries, there should be some money that is earmarked for them,” she said.

All these barriers mean that countries can’t count on receiving climate finance. Rather, they face what Prasad described as a lottery process.” This disrupts nations’ abilities to do comprehensive planning for climate mitigation and adaptation. If you had a predictable amount” of funding, if the projects are bankable and credible, then we can begin to plan to adapt and to respond to disasters,” he said, but that’s far from the case today.

A man named Ikavatu from the village of Namena in the Tailevu province of Fiji gestures toward his damaged house after Cyclone Winston swept through the area in February 2016. (Steven Saphore/AFP via Getty Images)

UnaMay Gordon, Jamaica’s principal director for climate change, expressed similar frustrations at September’s press conference. She also noted the difficulties brought about by funding requirements shifting mid-process. Each time you have these reporting structures, they can change in the middle of you implementing a project,” she said. It’s as if we’re playing Russian roulette.”

Even efforts to streamline the process, such as the U.N. Green Climate Fund’s Simplified Approval Process Pilot Scheme, can cause disruptions. Gordon said her colleagues have described that pilot as a stressful reporting and application process” — and they called it much worse names in private.

Even if a country has clear goals and targets, the climate finance process is still a nightmare to navigate, Gordon said. Jamaica has finalized its nationally determined contribution, the action pledge that it’s bringing to COP26. No one can say we don’t know what to do.” But the money to do it remains out of reach.

What can be achieved at COP26 and beyond?

It’s unclear how much change to the current system may emerge from negotiations at COP26. At COP, you can’t decide what the IMF or World Bank does,” Prasad said. You can’t decide on what the European Investment Bank does or what private-sector pension funds do.”

Still, the big global gathering gives governments a chance to set the tone” for dealing with climate finance problems with increased urgency, he said.

At the same time, the work of groups like the Climate Finance Access Network can help boost the productivity of the systems now in place, De Marez said. CFAN was conceived by RMI in 2019 as a network of specialists who can help build expertise within countries and move climate finance projects over hurdles that might prevent them from being funded. The network was officially launched last year after the Canadian government provided a grant totaling 9.5 million Canadian dollars (USD $7.7 million).

In August, CFAN announced the first eight nations in its cohort: the Pacific island countries of Fiji, Kiribati, Papua New Guinea, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu. By the end of next year, it plans to have 30 advisers in countries across the Pacific, Africa and the Caribbean.

What we want to do with CFAN is to grow the local expertise” to win funding for already-defined projects, De Marez said. A joint report on the U.N.’s climate finance goals, released last week by the Canadian and German governments, names CFAN as one of several initiatives that could help build in-country capacity to access climate finance,” alongside efforts by developed countries and development banks to develop concrete measures to accelerate the speed and efficiency of their processes.”

If CFAN can hit its target of two projects per year per target country, it expects to unlock $750 million in finance over the next two years, or nearly half the total amount disbursed to small island developing states in 2019.

The system is not working and needs to change,” De Marez said. But it is not going to happen overnight, and we do not have the luxury of time.”

Jeff St. John is director of news and special projects at Canary Media. He covers innovative grid technologies, rooftop solar and batteries, clean hydrogen, EV charging and more.