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Climate crisis and debt trap: Paris summit seeks reforms

June 21, 2023

Foreign debt cripples countries vulnerable to extreme weather events, hindering climate change resilience. Reforming financial systems could help them combat climate change.

Two men buildings solar arrays
Private sector investment in developing countries is indispensable for the global energy transitionImage: Schalk van Zuydam/AP Photo/picture alliance

Heads of state and high-ranking government officials from industrialized and developing countries are meeting in Paris for two days this week to discuss financing for climate protection.

Limiting global temperature rise and preparing humanity for the inevitable dangerous consequences of climate change is going to take cash and lots of it. But countries and businesses are investing too little in climate protection globally.

French President Emannuel Macron announced the "Summit for a New Global Financing Pact" at last year's COP27 climate summit in Egypt. The goal is to find a "new consensus" on decarbonizing the economy, fighting the climate crisis and protecting nature.

European Commission President Ursula von der Leyen, German Chancellor Olaf Scholz and Mia Mottley, Prime Minister of Barbados and a key voice for developing countries in international climate negotiations, will attend the conference.

Developing countries need more money

"Climate change is accelerating and is accelerating the needs of finance for a lot of developing countries," said Lola Vallejo, director of the Institute for Sustainable Development and International Relations (IDDRI), a non-profit research center in Paris.

Group picture of heads of state from the African Union
Suspending interest on developing nations' debt would help them to invest in the climate transitionImage: Amanuel Sileshi/AFP

Some 43 out of 59 developing countries hit hardest by climate change are at high risk of sliding into a financial crisis as a result of the climate emergency, according to the International Monetary Fund (IMF).

But global lending institutions like the IMF and World Bank are not prepared for a world in the climate crisis, said Vallejo, adding they were set up in the wake of World War II when "half of the countries that we have today didn't exist."

Debt relief to allow for climate adaptation in poorer countries?

Weak economies and enormous debt severely limit the ability of developing countries to invest in adapting to extreme weather linked to rising global temperatures, as well in reconstruction after climate disasters.

Many low-income countries now need more money to pay back loans than they would for sustainable development and climate change adaptation programs, said Vallejo.

"If they could stop servicing their debt, they would have enough actually to invest in those plans that they established," added Vajello.

Debt relief and the suspension of interest payments will be one of the main points of discussion at the summit, as well as easier access for low-income countries to emergency IMF funds. Developed countries are entitled to more money from the IMF because they hold a larger share of the institution, but they often don't call it up, said Vajello.

People in rural Pakistan still suffer from last year's floods
People in rural Pakistan are still suffering from last year's floods. Lower income countries lack the capacity to rebuild after disasterImage: Ali Kaifee/DW

Barbados Prime Minister Mia Mottley united many developing countries last year under the "Bridgetown Initiative." One of the initiative's demands is making unused cash from the fund available to low-income countries hit hard by the climate crisis.

The summit could be a "historic opportunity" in a fragmented global financial system struggling with a loss of trust, said Friederike Röder, vice president of global advocacy at Global Citizen, an NGO focused on ending poverty.

"The question is whether this opportunity will translate into some kind of progress or will be a missed opportunity," Röder told DW.

Poorest countries most at risk want more support

The main point of contention in the global talks boils down to one issue. Developing countries hit hardest by climate change want more financial support for adaptation from industrialized nations, which are responsible for most historical planet-warming greenhouse gas emissions.

Rich nations have long resisted those calls, but after some tough wrangling at the COP27 in Egypt, they agreed to set up a fund to cover climate loss and damage for particularly hard-hit countries.

The Bridgetown Initiative wants $100 billion a year for the fund. But lots of details remain unclear, such as who will pay and how much, as well as the criteria for allocating money.

Industrialized countries have so far failed to "mobilize" $100 billion annually from public and private sources for climate protection in developing nations by 2020 — a promise made 14 years ago. In May, however, Germany's foreign minister Annalena Baerbock said they could be on track to finally hit that target.

A photo of Emmanuel Macron
France's president Emmanuel Macron wants to build a 'new consensus' for global finance architecture Image: Ludovic Marin/AFP/Getty Images

Still, it's clear that the promised sum is not nearly enough. The IMF estimates that trillions of dollars a year will be needed for climate protection and adaptation to a hotter planet by mid-century. African countries alone will require at least $3 trillion by 2030. Currently, the world is investing around $600 billion annually.

More businesses must invest in developing countries

Leaders will also discuss how to encourage private-sector investment at the summit.

"We know that the public purse of rich countries is not going to be enough to tackle the problem," said Vallejo.

Private sustainable investments in developing countries recently rose to $250 billion per year, according to the IMF. But that figure will need to at least double annually by 2030.

Major hurdles stand in the way. Investing in developing countries can cost around seven times more than in industrialized countries because of political risks, currency fluctuations and a lack of expertise, Vallejo told DW. Around 90% of investment in renewable energy still flows to industrialized countries and China.

Lowering interest rates on loans and having the public sector hedge investor risk could help address the problem, said Vallejo. This could "trigger a wave of private investment" in developing countries.

Alternative financing models on the agenda

World leaders will also discuss alternative financing models during the summit. These include "polluter pays" principles such as taxes on financial transactions, extracting crude oil and flight emissions.

France, for instance, is pushing for a global tax on container ships following pressure from the Pacific Island nations and environmental activists. A carbon price on heavy oil consumption in the shipping industry could raise as much as $60 billion for climate action, estimates the World Bank.

It remains unclear whether backers of the idea will be able to build a broad coalition, said Global Citizen's Friederike Röder. Negotiations will focus on whether the tax proceeds should go to developing countries or the shipping industry so it can invest in climate-friendly tech.

Chances for a global CO2 tax on fossil fuels?

Support for a tax on CO2 emissions caused by burning fossil fuels is growing, according to Vallejo.

Still, the global community has been arguing for years about whether and how carbon dioxide could be priced, with even Vallejo is acknowledging it has been a "utopian idea" for some time. And it seems unlikely that those meeting in Paris will suddenly make a breakthrough.

Funding the fight against climate change

The World Bank recently announced that it would change its own guidelines for sustainable lending and provide up to $50 billion over the next 10 years. Last week, it also called for trillions of dollars of climate-wrecking subsidies in coal, oil and gas, agriculture and fisheries to be redirected to climate protection measures that do not harm people or the planet.

"The right solutions are on the table. It's up to government leaders to decide whether to form coalitions. It really is a moment of truth," Röder said, adding that clear timelines and procedures must be agreed upon quickly.

This article was originally published in German.