Is a credit crisis curbing climate action by poor countries?

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Climate change is already set to hit some of the world's poorest countries hardest, as changing weather patterns and rising sea levels take hold. But research suggests those nations most vulnerable to climate impacts are already paying the cost for their exposure to the climate threat.

new study (PDF) released by Imperial College Business School has found developing nations exposed to the highest risks from climate change are being forced to pay more to borrow cash than their more resilient neighbors.

Some 20 countries including Ghana, Tanzania, Kenya, Bangladesh and Vietnam — collectively known as the V20 — already have paid $40 billion in extra interest payments on their government's debt over the last decade due to their climate vulnerability, the study found. The price increases amount to an even larger bill of $62 billion for debt on the external private market. The additional interest payments represent enough money to reforest more than 1.2 million kilometers square of trees, or dig almost 10,000 kilometers of dikes for coastal protection, the researchers say.

Over the next 10 years, the magnitude of the interest burden is set to at least double, according to the study, which estimates climate-vulnerable nations will pay a further $168 billion in additional costs to borrow cash. In essence, those countries set to be hardest hit by climate change will face the most expensive borrowing costs to tackle it.

"Our work demonstrates that climate change is not only imposing economic and social costs on developing countries, but it is also amplifying existing risks that are already priced in fixed income markets," said Charles Donovan, director of the Center for Climate Finance and Investment at Imperial College Business School.

"These impacts will grow," he warned.

The study, commissioned by U.N. Environment, is the first of its kind to attempt to systematically quantify the relationship between climate change and the cost of capital for sovereign nations. Although ratings agencies do not often explicitly reference climate vulnerabilities in their assessments, climate-related vulnerabilities such as increased drought or flooding risk feeds through into their ratings, it finds.

But according to Donovan, borrowing costs can be brought down by driving increased investment in climate adaptation and mitigation efforts — moves which also can help to improve a country's overall fiscal health. "The good news is that investments in climate adaptation can not only reduce social, ecological and economic harm, but can buffer against fiscal impairments. But to be effective, these investments need to be made now," he said.

The report recommends that national governments develop programs to preserve their physical and economic resilience to climate change, including by investing in social preparedness measures, tackling inequality and bolstering IT infrastructure, education and innovation. International cooperation on measuring and monitoring climate risks also will play a helpful role, it added.  

Selwin Hart, Barbados' ambassador to the United States, warned inaction will increase the cost and difficulty of addressing the climate challenge. "This breakthrough study illuminates the need to deal with the increased cost of capital to the world's most climate vulnerable countries resulting from our success in getting financial markets to take climate risk into account," he said. "Without dealing with this unintended consequence, it just got harder for us to invest in climate adaptation and sustainable development."

The need to bring down the commercial cost of borrowing for climate vulnerable countries has been exacerbated by the rapid shifts in the political climate following the election of President Donald Trump in 2016.

Following his election, the U.S. pledged to slash its contribution to the Global Environment Facility (GEF) by almost half, from $546.25 million in 2014 to $273.2 million. This has been the driving force behind a budget cut from the GEF from $4.4 billion to $4.1 billion for the four-year budget from 2018, which negotiators agreed to last week.

Since its inception in 1992, the GEF has given $17.9 billion to support projects to tackle climate change, protect wildlife and restore polluted land and oceans. But the recent funding cuts will mean a reduction in the number of projects the GEF can fund, and an increase to the co-financing threshold developing countries must meet to gain access to GEF grants, to five times the value of the grant. Larger developing countries, such as China, India and Brazil, have to raise nine times the original grant.

Against this backdrop, boosting the ability of the poorest nations to attract the finance they need to deliver low carbon, climate resilient infrastructure becomes an increasingly urgent challenge. It seems clear that vulnerable nations — with the support of international allies — should invest in climate resilience now to cut the cost of further action. But even in the wake of the Paris Agreement, mobilizing the investment required is proving easier said than done.

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