2024-01-14 16:25:02
The observation made during COP28 in Dubai is clear: Latin America and the Caribbean are facing a significant lack of financing for climate action. To remedy the effects of climate change, financing should indeed multiply compared to their 2020 levels.
This requires further developing the innovative financing instruments put in place in recent years and catalyzing climate financing from key international actors. This is the purpose of the Global Coalition for Strengthening Means of Action created at COP28.
A particularly vulnerable region
The number of natural disasters in Latin America and the Caribbean almost doubled between the 1980s and 2010s, making this region the most affected geographic area over the past decade. Since 2000, three out of ten people have been affected by a natural disaster. In 2023, 91% of citizens in thirteen Latin American countries say that climate change impacts their daily lives. These natural disasters can cause high economic costs. For example, following Hurricane Maria in 2017, the Dominican Republic suffered damage estimated at 226% of its gross domestic product : destruction of infrastructure (roads, bridges and electricity networks), destruction of physical capital and degradation of human capital.
Faced with this economic damage, it is necessary to improve the resilience of the area by implementing policies to mitigate and adapt to climate change. The first aims to reduce greenhouse gas emissions, before the effects of climate change are irreversible. This involves, for example, installing solar panels on buildings in order to improve their energy efficiency.
Erika Santelices/AFP
Adaptation policies, for their part, aim to minimize the consequences of climate change already underway. The establishment of dikes and flood protection walls follows this logic. Adequate adaptation and mitigation policies can be very costly: over the period 2023-2030, the cumulative investment needs associated with the implementation of these policies are quantified between 215 and 284 billion dollars per year for Latin America and the Caribbean.
Financing adaptation and mitigation
Faced with this colossal financing need, the States of Latin America and the Caribbean receive multilateral financing, from regional and international institutions, specially designed to support the implementation of mitigation and adaptation policies. Between 2016 and 2021, climate funding granted to states in the region more than tripled, from $2.7 billion to $8.6 billion (Graph 1). Although this is a significant increase, the amount reached in 2021 only corresponds to 4% of the region’s investment needs.
Five multilateral actors provide most of the financing of climate action in the region: these are three regional institutions (the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CBIE) and the Development Bank of Latin America and the Caribbean (BDALC)), the World Bank (WB) and the European Investment Bank (EIB). In 2021, 64% of funding is allocated by regional institutions (Chart 2) and two thirds of all funding goes to mitigation measures (Chart 3).
New financial instruments
To meet the strong financing needs for climate action, multilateral institutions have relied on innovative instruments.
First issued by the EIB in 2007, green bonds are debt securities intended to raise capital for the financing of “green” projects. In 2022, 30% of the EIB’s financing program was thus made up of the issuance of climate awareness bonds. As part of the European Union’s Global Gateway Initiative, in 2023 the EIB granted Argentina, Brazil and Chile “green” loans amounting to 800 million euros.
The EIB is not the only multilateral institution to use this financial instrument. Thanks to these green bonds, the BDALC has raised $1.2 billion between 2018 and 2021 to finance projects aimed at improving energy efficiency, increasing the production of renewable energies and greening the transport system of the city. region. The IDB for its part, also thanks to the issuance of green bonds, for example granted in 2023 a loan of 400 million dollars to Chile to help with development of green hydrogen industry.
Institutions also resort to issuing blue bonds. These are debt instruments issued by governments, development banks or other entities to finance marine and ocean projects with positive impacts on the environment, the economy and the climate. Thus, the IDB carried out the first blue bond issuance in Latin America and the Caribbean in 2021 for an amount of 50 million Australian dollars.
[Plus de 85 000 lecteurs font confiance aux newsletters de The Conversation pour mieux comprendre les grands enjeux du monde. Abonnez-vous aujourd’hui]
Faced with the increasing frequency and intensity of natural disasters, international institutions are also using financial risk management instruments such as catastrophe bonds.
Their principle is simple. The organization that issues the bond pays a premium to investors. If no natural disasters occur during the term of the bond, investors receive their principal and interest at the end of the period. On the other hand, if a natural disaster occurs, the organization receives part or all of the capital associated with the bond from investors.
In order to improve the financial resilience of States once morest the risk of natural disasters, the World Bank is issuing disaster bonds on behalf of States. For example, in 2020 it issued such bonds on behalf of Mexico for an amount of 485 million dollarsprotecting it for 4 years from losses due to earthquakes and cyclones.
A new role for the IMF
While the previous institutions mainly intervene from before, the International Monetary Fund (IMF) plays a crucial role following a country is hit by a natural disaster that can lead to a balance of payments crisis. In addition to conventional loans granted to member countries, in 2015 the IMF created the Disaster Assistance and Response Trust Fund which provides grants and debt relief to the poorest countries hit by a natural disaster.
Bruno Sanchez-Andrade Nuño/Flickr, CC BY-SA
In May 2022, a new fund was created: the IMF Resilience and Sustainability Trust Fund, which aims to help poor countries face long-term difficulties, such as climate change. In December 2022, Barbados was the first country to benefit from this new fund: $189 million in aid has been released.
Faced with the climate challenges facing Latin American and Caribbean countries, efficient use of resources to finance climate policies is essential. This is one of the objectives set by the Global Coalition for Strengthening Action, the creation of which was announced at COP28 in December 2023. This coalition brings together the main international actors in climate financing (UN , WB, various multilateral development banks, IMF, etc.) and aims to strengthen the capacities in climate financing and the effectiveness of technical assistance programs of domestic and international financial institutions.
COP29, which will be held in 2024 in Azerbaijan, will be an opportunity to assess the first results of this coalition, in particular its capacity to catalyze climate financing that meets the needs of the region.
1705260340
#finance #climate #policies #Latin #America #Caribbean
