Who pays for climate change?

If there is one issue that has taken centre stage at this year’s United Nations Climate Change Conference (COP27), it is money. Delegates, climate activists, and the rapidly increasing number of private-sector attendees are discussing who should pay for climate change, and how. 
The focus on money is past due. While the annual climate talks are ultimately about cutting greenhouse-gas pollution, the transition to a net-zero economy requires massive financing, as will adapting to a world of rising average temperatures and sea levels, increasingly frequent and severe extreme weather, and all the other costly effects of burning fossil fuels.
 
Ever since COP15 in Copenhagen in 2009, a key figure in this debate has been “$100 billion.” That is how much the world’s advanced economies promised to provide to developing countries every year by 2020. But it was never clear whether this target referred only to public money, or whether it could include a mix of public and private flows. While most of the Global South interpreted it as a commitment of public funds, most of the Global North preferred the broader definition.  
And yet, 13 years on from the 2009 pledge, few would make the mistake of mixing public and private funding, while everyone recognises that the global energy transition will require not billions but trillions of dollars per year.  
Ahead of the COP26 talks in Glasgow last year, Mark Carney, the UN’s special envoy for climate action and finance, concluded that at least $100 trillion of external finance would be “needed for the sustainable energy drive over the next three decades if it is to be effective.”  

But that doesn’t let governments off the hook. Public funds are the lever for rechannelling private money at the necessary pace and scale. The Inflation Reduction Act, Bipartisan Infrastructure Law, and CHIPS and Science Act that the United States has recently enacted are good examples of this lever in action. The idea is that some $500b in government investments will encourage many hundreds of billions more in private flows. Yet while those sums (and similar policies elsewhere) could jump-start a global clean-energy race, all the public investments and most of the private ones will be spent domestically. That leaves the Global South still wanting. 
Thus, John Kerry, the US climate envoy, came to COP27 with a proposal to use carbon credits to fill at least some of the financing gap. Under this approach, rich countries and companies would get some credit not just for cutting their own pollution, but for paying others to do so. 

The idea is not new. The US proposed a similar system ahead of COP3 in Kyoto in 1997. At the time, much of the rest of the world, including the European Union, opposed the plan. Yet, ironically, the EU now has the world’s largest carbon market, while the US, aside from California and a dozen north-eastern states, does not. 
The US and other rich, large polluters still have a responsibility to pony up direct aid on a much larger scale than they are currently doing. That goes both for unconditional aid to help the poor weather climate change, and for funding to help them cut their own pollution. Germany and Austria deserve credit for leading the charge with promises of $175m and €50m, respectively, in aid for the most vulnerable countries. 

There is clearly something to the idea of hitching billions in much-needed aid flows to private financial flows in the trillions. The first order of business is for governments to help guide trillions in private investments toward the Global South. “Creative” solutions should focus on making loans and investments less risky for private investors, with rich governments and multilateral funds providing loan guarantees and other assurances to help reduce sovereign credit and other risks. 
        -- Project Syndicate

The author, Gernot Wagner is a climate economist at Columbia Business School