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Prior to the COVID-19 pandemic, the gap between countries' climate finance needs and the amount they received was already growing wider. To ensure global warming stays below the Paris Agreement goal of 1.5 degrees C (2.7 degrees F), between $1.6 to $3.8 trillion is needed in annual energy investments alone — but some sources estimate that we are currently spending less than half that much in total, in all sectors.

There’s more. Recent research shows that most developed countries have been falling short on their contributions to the $100 billion per year goal — a commitment designed to help developing countries tackle the effects of climate change — increasing the gap between needs and climate finance availability.

But the pandemic has made things worse. New WRI research covering 17 developing countries shows that some nations experienced a decrease in their climate budgets or delays in climate-related project implementation, as a result of having to respond to the high socio-economic and health costs of the pandemic.

In other words, climate finance is not immune to the impacts of global crises. At COP26 and related fora, negotiators need to address the fragility of climate finance, envisioning ways that developed countries’ financial commitments as well as developing country climate budgets can be made more resilient.

In 2020, three major forces converged to undermine developing countries’ ability to finance climate action — showing that, going forward, donors must raise the quality and quantity of climate finance.

The 17 countries in our sample text include:

Bangladesh, Cabo Verde, Cambodia, Colombia, Fiji, Ghana, Guatemala, Honduras, Indonesia, Kenya, Mexico, Nepal, Nicaragua, Pakistan, Peru, Philippines, South Africa

COVID-19 Diminished Capacity for Climate Action

The economic fallout from COVID-19 for many developing countries was swift and severe. This was especially true in countries with large segments of their workforce in the informal economy — whose work was shut down as infections rose — or with economies reliant on the tourism that plummeted as borders closed and planes were grounded. These developments disrupted key revenue sources for developing countries who had to turn to debt finance to respond to the dual health and economic crises.

In many of these countries, there are limits on the amount of debt that can be incurred to ensure budget stability. Unfortunately, that meant that new loans taken out to deal with COVID-19's immediate impacts effectively crowded out longer-term, loan-funded climate projects, which were put on hold.

For example, in Honduras, loans for health and social sectors were prioritized over a loan that helped fund a climate resilience-related project with the Green Climate Fund and Inter-American Development bank.

Natural Disasters Further Strained Domestic Budgets

Extreme weather events, made worse by climate change, are regular occurrences — but budgets haven’t yet adjusted to this new normal. The year 2020 tied with 2016 for the warmest global average surface temperature. An increase in the atmosphere temperature exacerbates the risk of extreme weather disasters, and in the last 30 years, climate-related disasters have tripled.

While governments have been grappling with the impacts of the COVID-19 pandemic, climate-fueled natural disasters including floods, hurricanes and droughts continued to impact public domestic finance available in developing countries. Many developing country governments have relatively little recourse to pay for investments in preparation for disasters or build back without international assistance when they do occur. Between 2019-2020, worldwide natural disaster losses increased by 9%, to a global total of  $268 billion.

Significant 2020 natural disasters in 17 case study countries

In November 2020, Nicaragua was hit by two hurricanes, Eta and Iota, causing $738.6 million in damage. The environmental sector, after the infrastructure and social sectors, was the worst affected: UN agencies in Nicaragua estimated the losses at $141 million, which impacted over 7 million acres of  forest, 44 natural reserves, and 6,409 acres of contaminated water.

The Philippines has also been consistently impacted by natural disasters. According to the Climate Risk Index, the Philippines was the fourth most affected country between 2000-2019 with 316 natural disaster events causing losses of $3.2 billion. Last year, the Philippines was hit by its strongest typhoon since 2013, Typhoon Goni. At the same time the typhoon hit, the Philippines had the second-highest COVID-19 rate of infections and deaths in Southeast Asia. A response strategy estimated that the humanitarian needs would total $45.5 million, without taking into consideration additional environmental impacts that will need to be addressed.

The upshot is that, as with the coronavirus pandemic, budgets that could be used to invest in climate action are redirected to deal with other pressing emergencies.  

Budget Reductions Hit Agencies Key to Climate Plans

We know that both COVID-19 and natural disasters are having an effect on capacity to deliver climate action. During the crises — natural disasters and the pandemic — two-thirds of the 17 countries reviewed in our research reduced their climate spending.

In these countries, resources either decreased across sectors or were reallocated to increase liquidity and strengthen health infrastructure. Cuts were often concentrated in the ministries tasked with providing funding for climate — including transportation and energy ministries for mitigation measures or ministries of environment for adaptation.

Climate budgets decreased in some developing countries

For example, in South Africa the Ministry of Agriculture’s food security program experienced a 46% reduction in expenditure contributing to a significant loss in adaptation spending. Meanwhile in Kenya the Energy, Infrastructure and Information-Communication-Technology Department had a 23% reduction in allocations. This contributed to a reduction in finance available for mitigation actions critical to their NDC implementation.

Further development of climate finance budget-tagging tools can support greater transparency and accountability. We found that for the few countries where climate finance increased, in some cases it was partly due to the inclusion of non-climate-related activities in their domestic climate finance tracking. For example, Mexico’s climate finance increased between 2019-2021 mainly because natural gas was included in their climate finance report. The budget for building and maintaining natural gas infrastructure has consistently increased in recent years, and by 40% between 2020-2021.

Increased share of Mexican climate finance goes to natural gas
Mexico's climate finance 2018 - 2021


Climate Finance Resilience Needs Urgent Attention at COP26

COVID-19 is compounding with previously existing economic, social and environmental crises, stressing  the availability of domestic resources to address climate action in developing countries.

In other words, developing countries need the financial support promised in the Paris Agreement more than ever. COP26 negotiations should strengthen the quality of climate finance and enhance developing countries’ ability to access it. In particular, they need concessional international climate finance, in forms like grants, low-interest loans and debt-for-climate swaps to prevent climate spending being reallocated away when future shocks occur, as they inevitably will.