Finance & economics | Development v climate

The choice between a poorer today and a hotter tomorrow

Without billions of extra dollars, policymakers face a terrible decision

| Accra and Paris

Suppose, for a minute, that you are a finance minister in the developing world. At the end of a year in which your tax take has disappointed, you are just about out of money. You could plough what little remains into your health-care system: dollars spent by clinics help control infectious diseases, and there is not much that development experts believe to be a better use of cash. But you could also spend the money constructing an electrical grid that is able to handle a switch to clean energy. In the long run this will mean less pollution, more productive farmland and fewer floods. Which is a wiser use of the marginal dollar: alleviating acute poverty straight away or doing your country’s bit to stop baking the planet?

The thought experiment is a simplified version of a dilemma facing global institutions and developing countries. On June 22nd politicians descended on Paris for a summit to design “a new global financial pact”. The aim was to work out how to spread the cost of climate change. Leaders from poor countries turned up in droves; aside from Emmanuel Macron, France’s president, no Western head of state made it. Little surprise, then, that the jamboree ended without rich countries coughing up a single extra dollar. Instead, attendees tinkered with the World Bank and the imf, the biggest of the multilateral agencies that seek to reduce poverty. The lack of action means painful trade-offs lie ahead.

After all, a huge amount of money is needed to help poor countries go green. In 2000 the developing world excluding China accounted for less than 30% of annual carbon emissions. By 2030 they will account for the majority. The Grantham Institute, a think-tank at the London School of Economics, estimates that at this point poor countries will need to spend $2.8trn a year in order to reduce emissions and protect their economies. Regardless of changes to the climate, the institute thinks these countries will also need to spend $3trn a year on things like health care and education to keep up poverty-alleviation efforts. This figure could rise. Since covid-19 struck, gains in development indicators, ranging from hiv deaths to the number of people in absolute poverty, have stalled.

The world is spending nowhere near such amounts. In 2019, the latest year for which reliable data are available, just $2.4trn went on climate and development combined. According to the Grantham Institute, rich countries and development banks will have to stump up at least $1trn of the annual shortfall (the rest should come direct from the private sector, and from developing countries themselves). In 2009 rich countries agreed to provide $100bn in fresh finance a year by 2020. They have missed the target every year since then, reaching just $83bn in 2020—with much of the money coming from development banks. Excluding climate finance and spending on internal refugees, aid from oecd countries has been flat over the past decade.

In a recent article, world leaders including Joe Biden of America, William Ruto of Kenya and Muhammad bin Zayed of the United Arab Emirates wrote that they were convinced “poverty reduction and protection of the planet are converging objectives”. Some policies do indeed provide useful fixes for both. Sustainable agriculture cuts emissions, climate-proofs the food supply and reduces the risk of famine. Mangrove preservation sequesters carbon, stops storm surges and helps provide fishermen with a living. Across the board, damage from climate change makes development more expensive—and halting climate change makes it more affordable.

But although alignment is possible, it is also rare. Spending to cut emissions will inevitably be aimed at middle-income countries, which pollute more; spending to cut poverty will be aimed at low-income places, where poor people live. Researchers at the imf, who analysed data from 72 developing countries since 1990, find that there is an unfortunate pattern: a 1% rise in annual gdp is on average followed by a 0.7% rise in emissions.

The reasons for this are simple. Growing industries require lots of power. Big, mechanised agriculture requires lots of space; its growth is the main reason for deforestation. The African Development Bank (afdb) reckons that Africa needs 160 gigawatts (gw) of extra capacity by 2025. The continent now generates just 30gw or so of renewable energy. At the African Exim Bank’s recent annual meeting in Accra, the talk was about how to mine metals for the green transition, with little concern about the pollution this would involve.

In theory, the next generation of industrialising countries could power their growth using renewable grids, rather than ones that run on oil and gas. Africa has more solar potential than anywhere in the world, as well as plenty of minerals that could be used for batteries. Yet although green growth is possible, it is not happening—replacing old grids and installing new technology is just too expensive for developing countries. To reach net-zero emissions by 2050, the International Energy Agency, an official forecaster, reckons developing countries would have to spend at least $300bn on renewable grids until 2030, five times their current outgoings.

Green dreams

Thus there is no way around the missing finance. And as the meagre progress in Paris demonstrates, an enormous increase in aid spending is unlikely. After the conference, donor countries and the World Bank now plan to suspend more repayments in the event of extreme-weather disasters, and have recycled from rich countries a modest amount of special drawing rights, a financial instrument the imf allocates to the balance-sheet of every country’s central bank. Where some of the promised finance will come from is yet to be revealed, as are the mechanics of spending it.

More ambitious proposals came from African politicians, and included ideas for global taxes and a new international financial institution, as Mr Ruto put it, “not hostage to its shareholders”. They were treated as outlandish. “Taxed by whom? And for whom?” demanded Mr Macron. Even a worldwide tax on shipping, which Mr Macron supports, faces years of political wrangling. “We will forget all about it in a few months,” sighed a finance minister. “There is a clash between the global good and the national interest,” Mr Ruto said. “And the national interest always wins.”