World’s wealthiest nation sends climate bill to poor countries
In a few weeks, the world’s nations will meet in Dubai to discuss common solutions to the existential threat facing us all - the climate crisis. One of the most important factors in negotiating common solutions is trust. This trust is now under threat as rich nations are sending the bill for the energy transition to low and middle-income countries.
In the climate negotiations, the polluter pays principle is an important focal point for civil society and vulnerable countries since economic activity in industrialized countries in the global North has overwhelmingly contributed to the processes of global warming. For this reason, the demand for grant-based ODA from wealthy countries is strong. An important principle from the Paris agreement was that climate financing must be new and additional to existing ODA. Yet rich countries in the global North are deflecting this responsibility. Instead of financing a green energy transition in low and middle-income countries with new grant money, these countries are increasingly passing the bill along by offering loans and guarantees to mobilize private finance, rather than providing grants. Financing for mitigation projects - a global public good - is also largely crowding out resources for adaptation and loss and damage, sorely needed by vulnerable countries.
This general tendency over time has now manifested in the changing of OECD DAC rules for the reporting of official development assistance: Guarantees can now be reported to the OECD DAC as official development assistance. The OECD DAC is also considering the inclusion of bond investments in this broadened definition of ODA.
One of the countries looking to profit from this shift from grant-based ODA in favour of guarantees is also the world’s wealthiest country. With its roughly USD 1.4 trillion sovereign wealth fund - the world’s largest - Norway should be able to find the means to finance its fair share of the climate transition as well as official development assistance more broadly. However, Norway is now, in line with other Western donor countries, moving towards a more investment-based definition of ODA and climate finance.
This year, the Norwegian government announced a new guarantee scheme for investments in green infrastructure projects in the global South. This new guarantee tool is instrumental to the government’s stated commitment to doubling climate financing towards the annual USD 100 billion goal under the UNFCCC. The money set aside for covering possible future losses from the scheme is to be allocated from the ODA budget. But the proposed ODA budget for 2024 not only does not meet Norway’s historical 1 per cent of GNI target; it includes the aforementioned assets for covering possible guarantee losses. Up until last year, Norway was one of the few countries reporting only grant climate financing, or grant equivalent. Now, the Norwegian government is preparing the ground for the option to report guarantee loss provision, and the covering of possible future losses surpassing the amount set aside in the guarantee pool, as official development assistance. The budget proposal specifies that possible future losses that might surpass the allocated loss provision will also be covered by the general ODA budget.
The Norwegian government has stated a clear ambition to scale up this guarantee scheme over the coming years, in line with a similar guarantee scheme in Sweden. The proposed scheme starts out with a NOK 5 billion guarantee frame, as did the Swedish, which has now reached SEK 26 billion - around USD 2.4 billion. There is, however, an important difference between the Norwegian and Swedish guarantee schemes: whereas the loss provision in Norway’s mechanism will be financed from the ODA budget, possible future losses from Sweden’s scheme will be covered by the Swedish National Debt Office, which manages the country’s sovereign debt.
The Norwegian government has expressed the ambition of recruiting other donors to contribute to a common guarantee pool. As Norway champions this new private model of financing, there are grounds for grave concern about the broader implications. If the world’s wealthiest nation will not prioritize the financing of its fair share of a just energy transition with grant money it is hard to imagine which countries should be in a better position to do so. To date, 71 per cent of climate financing reported towards the USD 100 billion goal comes in the form of loans.
Financing official development assistance and climate efforts through loans and guarantees is not just morally questionable. At a time when 54 countries, are in need of immediate debt relief to avert a development crisis and over half of low-income countries and one in five low and middle-income countries, are at high risk of, or have already, defaulted on existing debt obligations, one might well say that this strategy is also unfeasible.
The international community must secure adequate fiscal space for necessary investments to avert climate catastrophe. This will entail a combination of alleviating existing debt obligations, as well as tax reform and grant-based official development assistance and climate financing. Piling more debt and contingent debt obligations on top of unsustainable sovereign debt levels is simply not going to cut it. Norway needs to step up and finance its official development assistance and climate financing through hard cash, instead of deflecting its historical responsibility by passing the bill to less fortunate countries.