The fight against climate change demands a war chest, and a hefty one at that. A new report by UNCTAD sounds the alarm: a staggering $4 trillion annually is needed to effectively combat climate change and achieve the UN’s Sustainable Development Goals (SDGs). This figure, mirroring the economic might of Germany in 2022, necessitates a radical overhaul of global financial flows. In essence, trillions of dollars currently financing activities that undermine these goals need to be redirected, said UNCTAD’s latest Trade and Development Report.
THE FUNDING GAP: A TRILLION-DOLLAR MISMATCH
While the estimated yearly funding needs represent a mere 1% of global financial assets (valued at over $470 trillion), reallocating resources isn’t a walk in the park. Anastasia Nesvetailova, head of UNCTAD’s macroeconomic and development policies branch, acknowledges the challenge: “Weaning economies off established and often profitable endeavours to invest in new, uncertain sustainable development projects is an uphill battle.”
The report offers a stark illustration: eight years after the Paris Agreement, fossil fuel companies continue to be showered with financial support, exceeding $1 trillion annually for new development projects. “This perpetuates longstanding climate and finance inequalities,” warns Ms. Nesvetailova. “Wealthy nations are the primary source of finance for fossil fuels, yet the poorest nations bear the brunt of climate change’s consequences and reap the least benefits from fossil fuel-based energy.”
STICKY SUBSIDIES: A $1.3 TRILLION HURDLE
Further complicating the issue are “sticky” subsidies for fossil fuel production and consumption, which reached an all-time high of $1.3 trillion in 2022. Production subsidies alone amounted to a significant $51 billion. “Phasing out these subsidies would be a double win,” explains UNCTAD economist Diana Barrowclough. “It would not only address the climate challenge but also free up scarce public resources for governments to invest in renewable energy and ensure a just transition away from fossil fuels.”
The report acknowledges the complexities of dismantling the status quo. Millions of people depend on fossil fuels for energy, and entire production and consumption systems are built around them. Banks, insurance companies, and pension funds are also heavily invested in the fossil fuel sector. An abrupt shift could trigger severe financial shocks across the entire economy. “Most importantly,” Ms. Barrowclough emphasizes, “many developing countries still lack basic energy access and haven’t diversified their economies or achieved development.”
TURNING DOWN THE TAPS RESPONSIBLY: A JUST TRANSITION
The report underscores the importance of a measured approach to “turning down the taps” on fossil fuel funding. The needs of developing countries and underprivileged communities must be considered to ensure a sustainable and equitable transition. “The process and speed of scaling down fossil fuel finance will likely vary across nations,” says Ms. Barrowclough. “This transition must be accompanied by a significant increase in investments in alternative solutions that generate income-generating jobs and support a future-oriented development path.”
The recent landmark decision at COP28 to phase out fossil fuel subsidies that don’t address energy poverty and to transition away from fossil fuels in a just, orderly, and equitable manner reinforces the report’s findings.
PUBLIC AND DEVELOPMENT BANKS: CATALYSTS FOR CHANGE
“Public and development banks are the primary source of capital with the long-term, concessional terms needed,” explains Ms. Nesvetailova. “They also traditionally play a catalytic role in sparking economic transformation.” However, the $230 billion loaned by major multilateral development banks in 2020 represents a mere fraction of the required $4 trillion. The report echoes UN Secretary-General António Guterres’ call for these institutions to significantly expand their lending capacities and broaden their policy space.
Central banks, as the apex of the financial system, can play a vital role by aligning their activities with climate and development goals through establishing rules and regulations for the entire financial system.
BEYOND MONEY: THE WILL TO CHANGE
UNCTAD identifies reforms that can aid this process, including dismantling the misconception of central bank operations being “market neutral.” These reforms also include mandating comprehensive climate disclosure for financial institutions and utilizing variable interest rates and reserve requirements for loans that are compatible with long-term fossil fuel phase-out and development policy objectives.
“The world has sufficient resources to combat climate change and support development,” concludes Ms. Nesvetailova. “The challenge lies not in a lack of funds, but in channelling them in the right direction.