Aid and our Changing Environment

What did we Learn?

24 June 2013

Tony Addison

The Stockholm ReCom results meeting at Sida on 4 June was a lively exchange on all aspects of foreign aid and climate change finance (including the role of private finance). Roger Williamson provides his perspective on the day, elsewhere in this issue of Angle. For myself, the following points grabbed my attention over the day. 

Information is power. Research clears the mind to focus on the priorities. It also helps us understand the costs and benefits of each action, as well as the inevitable trade-offs that societies must engage with. That power is the motor behind economic and social change which protects the environment, combats climate change, adapts societies, and supports a focus on the poor – who are the most affected by environmental degradation, and have the least ability to adapt to climate change.

Aid is becoming greener. Bilaterals are leading on this, but this is a two-edge sword. ‘The bilateralization’ of aid was a concern at the meeting. Is increased bilateral effort coming at the cost of more multilateral effort with all of its benefits? (That is: ability to scale up, co-ordinate action, and mobilize more private finance for adaption investments). Or are the bilaterals leading the way, demonstrating what the multilaterals can and must do? This is a question that remains on the table.

Aid has had successes in helping countries build environmental regulation and the institutions that go with it (something that very few developing countries had before) and investing in renewable energy (and helping mobilize more private capital for that task). This is to name just two areas where aid is working. Aid works best for the environment and for climate change adaption and mitigation when there is strong community involvement – especially important for poverty reduction – and government commitment (including public money).

There is a forest of financial instruments, but these are weakly rooted in multilateral soil. Finance presents a tangled picture for countries and their policymakers attempting to mobilize the necessary finance for climate change adaption and mitigation. It leads to duplication of effort, high transactions costs, and can frustrate the political commitment to taking action. Low-income countries (LICs) often do not have the capacity to make their way through this complex forest of aid and climate change instruments. It also inhibits the construction of effective public-private partnerships. Similarly, private-investors may be deterred by the many public financial instruments (as well as the sheer variety of institutions: each with their own procedures).

Green private investment can be very cost-effective, but LICs don't get enough. Certainly, public money – either from domestic tax revenue or foreign aid – can cover only a portion (perhaps a minor slice) of the many investments needed in adaption and mitigation. There is now more green private finance available in total BUT most LICs still get about the same level of private finance as they did a decade ago. Most of the private finance is accounted for by the larger emerging economies and the developed countries. While this is important to mitigation efforts and investments (since these countries account for the largest shares of greenhouse gas emissions), LICs need private finance as well – especially for adaption. Given that private flows to them seem to have stalled, they could be forgiven for believing that the many global promises of the last decade ring hollow. Aid cannot fill the entire gap in private finance, but it could do much more to mobilize private finance for LIC needs.

Reducing investment risk is the key to attracting more private finance, especially in renewable energy. Renewables have larger upfront investment costs than traditional energy production (coal-fired plants, for instance). Renewable energy investment is very sensitive to the cost of investment capital. Public money and foreign aid to reduce this risk is essential to accelerating private renewable investments.

Environmental aid and climate change finance must learn more from past successes and failures in aid as whole. This especially applies to REDD+, which is a payment by results scheme that in many ways faces the same problems that using aid in this way did in the past. The REDD+ mechanism is not as straightforward as many policymakers and aid donors believe.

Developing country agriculture is important for ALL of us. The next fifty years are crucial in efforts in to push crop yields up further. Otherwise, agricultural growth to meet the needs of rising populations and growing food demand in the emerging world will require expansion via increased acreage. This is in turn often associated with deforestation. This amplifies the need for more aid and other finance to be allocated to agricultural research, especially into LICs.

Green energy investments need more focus on the poor. Aid can help give this a push. They are often ‘off the grid’, being unconnected to electricity supplies, and therefore paying much more for their energy use per unit than middle-income and high-income families. The poor are also often off the grid politically – not connected to the centres of political power that determine who gets the infrastructure investments and the flow of benefits. More attention to this issue will reinforce the achievement of the MDGs and should be embedded in the post-2015 development agenda. In summary, the poor need to be on the ‘political grid’ not just the ‘energy grid’.

Open minds needed 

Aid can help spread environmental governance and a policy and investment focus on the environment from where it currently is – confined to environmental ministries – to where it belongs: spread right across government ministries and agencies, as well as civil society. Aid has helped build a concern for the environment over the last two decades, but now that concern needs to go across the whole of government.

Aid cannot be effective in assisting countries without more investment in global public goods and international environmental conventions. These provide the essential over-arching global frameworks to support national policies and investments. This includes more effort on carbon markets to provide a reliable stream of funding for global public goods as well as national programmes in the environment and climate change area.

One of our participants invoked the name of John Lennon during the day’s discussion. Lennon of course is famous for singing “power to the people” (back in 1971 when people were only just becoming dimly aware of the environmental costs of development). Forty years on, Lennon’s message means renewable energy and political power: connecting all citizens to the grid of political power as well as to the energy grids (as well as water, sanitation etc. that meet basic needs).

But Lennon also said: “living is easy when your eyes are closed”. He might have added “living is easy when your mind is closed”. Some of the world’s citizens want to close their minds to the realities of environmental destruction and global climate change. Economic development would then proceed on the ‘easy’ path of old; buying present prosperity at a heavy – and disastrous – future cost. At times, some of today’s development economics talk as if climate change is nothing to do with our profession; we can safely discuss how to get economic growth in the same way we did in the 1950s. ReCom is one effort to change that narrow mind set.

But research, including ReCom’s research, is about opening eyes and opening minds. We believe that events such as Stockholm’s ReCom results meeting has opened everyone’s eyes to the ways in which aid and climate change finance can contribute to a better integration between development and the environment in ways that ensure that our poverty reduction goals continue to be met – and indeed accelerate.

Tony Addison is chief economist/deputy director, UNU-WIDER. This article is based on his summary given at the end of the meeting. You can view a video of this and all the day’s presentations.

WIDERAngle newsletter
June-July 2013
ISSN 1238-9544