Loans or grants for climate finance?


Confusion reigns over the right format of money to combat climate impacts. Solve this quickly or the UN-backed Green Climate Fund will falter

A family uses solar energy to generate electricity in Mongolia. Climate finance finances own projects in developing countries (credit: UN photo)

Through Saleemul Huq

As the Paris climate summit nears in December, the topic of climate finance becomes increasingly pressing.

It was a major subject of the recent IMF meeting in Lima, Peru and will require the participation of ministers of finance rather than the environment to make decisions.

The good news is that a political commitment of $ 100 billion a year from 2020 has already been pledged by rich countries.

This will help support climate change actions in the poorest countries and the Green Climate Fund (GCF) was created to be a channel for the funds. The next GCF Board meeting in November is expected to approve the first round of funded projects.

However, the devil, as always, lies in the details of how the funds are to be channeled.

Who is going to have it? What will be the relative proportion of mitigation and adaptation?

Will the funds be given in the form of loans or grants? How will private sector finance be mobilized and accounted for?

Fundamental confusion

One of the key issues is the allocation of grants versus loans and the level of funding for mitigation versus adaptation.

The $ 100 billion is intended to support mitigation and adaptation.

The GCF board has already adopted a decision to allocate its funds equally between the two and prioritize the most vulnerable countries, such as least developed countries (LDCs) and small island states in development (SIDS) for financing adaptation.

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While these are indeed laudable decisions when it comes to providing adaptation finance to LDCs and SIDS, the GCF secretariat would offer low interest loans rather than grants.

This is due to a fundamental confusion between a development bank (where the heads of the GCF secretariat come from) and a fund.

Bankers deal with granting loans that need to be repaid (even if interest is low) while LDCs and SIDS expect climate change finance from rich countries (which are primarily responsible for emissions). historical) allows them to adapt to the negative impacts of human-induced climate change (for which they have everything to do) must be provided in the form of grants.

If this confusion between adaptation loans and grants is not resolved quickly, it is unlikely that the GCF will be able to effectively deliver adaptation finance to the most vulnerable countries.

Billions inactive

For LDCs, there is an additional paradox in that while the GCF sits on billions of dollars and has not disbursed anything yet, there are over thirty ready-to-go adaptation projects approved by the Fund. for LDCs requiring around $ 250 million, but there is no money in the Fund.

Rich countries seem to have forgotten their commitment to the LDC Fund and instead put all their adaptation funds in the GCF where it is inactive at the moment.

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If rich countries are serious about supporting immediate adaptation actions in the most vulnerable countries, then they should seriously consider allocating their next installments of climate adaptation finance to the LDC Fund where they can be provided under form of grants, rather than through the GCF which offers as loans rather than grants.

This would be a more effective way to support adaptation in the most vulnerable countries, at least for the next several years, as the GCF mobilizes to support adaptation in the most vulnerable countries.


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