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The costs of climate change gobble up the money to avoid it

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There are three words likely to be heard again and again at the UN climate conference COP27 in the Egyptian resort of Sharm El Sheikh next week: loss and damage.

The concept – direct compensation for the economic destruction that will result from climate change – is a relative newcomer to the jargon that surrounds climate diplomacy. Egypt and the countries of the Global South who see this year’s conference in Africa as a chance to seize the initiative after last year’s Glasgow meeting, would like to see it take its place as the third pillar of financing climatic. This would place it alongside mitigation (technologies such as solar and wind farms that prevent emissions) and adaptation (making infrastructure resilient to the effects of warming).

The need for such assistance is obvious. Poor nations that have contributed the least to historic carbon dioxide emissions will likely bear the brunt of the weather disasters they cause over the coming decades. This year alone, drought in Brazil and East Africa cost $6 billion and floods in South Asia cost more than $8 billion, insurer Aon Plc wrote in a report last month. . The wealthy countries that can afford the services of Aon and its peers are not those most in need of support: of the $1.5 trillion in economic losses from disasters over the past five years, only $561 billion was covered by insurance.

Tackling this situation, however, presents a pernicious dilemma. The money for mitigation, adaptation, and now loss and damage, comes from the same group of wealthy donor countries – and although their funding pool rarely grows much faster than their own economies, the costs of running floods, heat waves and drought are increasing at a rate determined by global warming itself. The money that is spent to repair the effects of a disordered atmosphere risks cannibalizing the funds that we should be spending to prevent its cause.

An influential 2015 study on the problem found that in a world that warmed by 2.7 degrees Celsius by the end of the century, damage to developing countries would fall from $426 billion in 2030 to 1.55 trillion dollars in 2050. This represents an annual rate of about 6.7%, well above the 1.7% growth rate of rich economies over the past decade.

We have already seen this pattern play out in conventional aid flows. Traditionally, this support has come in two forms: humanitarian aid, given unconditionally to cover the cost of disaster recovery; and official development assistance, more term grants and low-interest loans to build infrastructure and contribute to economic growth.

Although humanitarian aid is never commensurate with the sums needed, there are few restrictions on its rate of growth. When a disaster strikes, a need arises and funds are raised. In the decade to 2021, spending has grown by about 13.4% per year, close to its rate of 15% in the previous decade. ODA is not growing at such a dramatic pace, with the 10-year annualized growth rate falling to 2% in the most recent period from a 9.4% pace in the previous 10 years. In 2021, humanitarian aid had increased to represent 11.9% of the overall assistance budget, compared to 4.1% in 2011.

From the perspective of a donor country’s finance ministry, this is hardly surprising. Humanitarian aid and development aid are both money the government collects from local taxes and sends overseas to people who don’t vote for them. When urgent disaster relief needs arise, it is often development funds that are squeezed instead.

The problem may get worse before it gets better. With budgets in rich countries constrained by the costs of the pandemic, soaring energy costs and rising interest rates, every penny spent overseas is under scrutiny. The UK has cut its aid budget from the long-standing international target of 0.7% of gross national income to 0.5% in 2021, saying it was a temporary measure to make dealing with the impact of Covid-19. Norway and Sweden, two of the most generous aid donors, have offered similar cuts in recent months.

What can be done to solve this problem? A first objective would be that the rich countries, after five decades, finally respect their commitments vis-à-vis this objective of 0.7% of GNI, against the 0.33% they currently spend. This would instantly more than double the money available to avoid the effects of climate change.

More innovative structures to encourage investment in developing economies could also bring in trillions in much-needed private funding, freeing up public funds to spend on disaster relief. The $70.2 billion in public, multilateral, and export credit climate finance in 2020 leveraged only $13.1 billion in private finance, a rate of less than 20 cents on the dollar. Reducing the cost of capital for renewable energy projects in emerging countries by 2% would reduce the cost of reaching net zero in these countries by $15 trillion by 2050, the International Energy Agency wrote. energy last week.

These are valid ideas, but they are not new, and so far none have compensated for the insufficient flow of climate funds from north to south.

If there’s a silver lining to the clouds currently gathering over the geopolitical landscape, maybe that’s it, then. Foreign aid is a creation of the Cold War, when the American and Soviet blocs sought to buy the allegiance of countries in the South by funding their development goals. A return to strategic competition between democratic and authoritarian governments could have terrible effects. If it encourages the rich world to treat poorer nations as allies to be courted, rather than debtors to be overlooked, however, it could be the spur the global climate needs.

More from Bloomberg Opinion:

• Where will the trillions needed to go green come from: Liam Denning

• The clean energy rich-poor gap is widening: Clara Ferreira Marques

• To fight climate change, put markets to work: Michael Bloomberg and Mark Carney

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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