Financing for development: 8 things to know from Addis Ababa

A major conference this summer on financing for development in Addis Abbaba was touted as a critical milestone in the 2015 choreography of events leading up to COP21 in Paris this December. Yet the outcome was strangely muted, leaving a lot of unfinished business for negotiators at the climate talks.

Here’s what you need to know about what happened in Addis, and why it matters for December.

1. North/South divide.

For rich countries Addis was meant to define how to fund the Sustainable Development Goals, which will apply to all countries. Many low-income states, however, see financial commitments as a flow from developed nations and want to keep the Addis conference, the SDGs and the climate talks separate. They demand that climate finance comes in addition to development aid. This was not clarified in Addis and will have to be resolved in Paris. A report by the Overseas Development Institute says that in 2013 “climate finance comprised only 16% of total official development assistance” and that both climate finance and development assistance going to the poorest countries should be increased.

2. Climate and development go together.

Despite the politics, there is general agreement that the two issues cannot be separated. The link was made “more actively” in Addis compared to the previous financing conferences, according to Smita Nakhooda, Research Fellow at the Overseas Development Institute (ODI). “The emphasis could be stronger,” adds Michael Westphal, Senior Associate at the World Resources Institute (WRI). “All infrastructure and development projects should take climate risks into account and all climate finance should deliver development benefits,” he argues. So everyone agrees, but “the devil is in the details”.

3. Infrastructure and decarbonisation are intertwined.

Two new initiatives on extreme poverty were agreed in Addis. A social compact to provide essential public services for all – health, education, energy, water and sanitation, and the Global Infrastructure Forum to identify and address infrastructure gaps. “The infrastructure and the decarbonisation agendas hugely overlap,” says John McArthur, Senior Fellow at the Brookings Institution. “There was progress in understanding how they are interwoven and this is one of the biggest victories of the conference.” The annual infrastructure gap in developing countries is estimated at up to US$ 1.5 trillion.

4. Finance for fossil fuels?

On this controversial topic, the Addis document says that “inefficient fossil fuel subsidies” have to be “rationalised”. This mention is a first for a finance for development declaration, albeit with no urgency and “according to national circumstances”. “Fossil fuel subsidies in developing countries are supposed to give cheap fuels to poor people, but most of them don’t benefit the poorest,” says WRI’s Westphal. “There are more efficient ways to deal with energy poverty. Supporting fossil fuels only delays the adoption of renewable energy.” Data from the International Energy Agency (IEA) shows that fossil fuel subsidies totalled US$ 550 billion in 2013, more than four times those to renewable energy.

5. Renewables for all.

Delegates in Addis also agreed to “substantially increase the share of renewable energy and double the global rate of energy efficiency” to ensure sustainable energy for all by 2030. Access to cleantech features in the declaration too. “The energy sector has an essential role in sustainable development,” says Westphal. “The missing link here is how it should contribute to the economic transformation needed to keep global warming below 2 degrees”.

6. A pledge is not cash.

A promise by developed countries to mobilise US$ 100 billion per year by 2020 to help developing nations deal with climate change was confirmed in Addis. But it’s not clear where the money will come from – more unfinished business for Paris. And it’s not just about aid, but public policies and private investment. “Markets are self-organizing and companies make investment strategies on the basis of the predictability of the regulatory environment,” says McArthur. Paris will determine the long-term regulatory framework to address climate change.

7. A new tax initiative.

While developed countries may not be keen to add to existing commitments, the US, the Netherlands, the UK and Germany have promoted an initiative to help developing nations reform their tax systems as a way to increase the ability of nations to fund development goals.

But how to ensure that the difference goes to climate policies? “We already know that the majority of resources to avert the causes and consequences of climate change come from domestic public sources, but this link is not explicit in the Addis declaration,” says Nakhooda of ODI.

“One could argue that there is too much emphasis on domestic fiscal reforms and domestic resource mobilization and not enough on international tax evasion,” adds WRI”s Westphal.

8. A cost or an investment?

The Addis declaration does not put forward an amount to support the sustainability agenda the world is about to adopt. There’s a consensus that the outcome wasn’t intended to be a pledging document.  Yet, a common vision still has to emerge on whether funding discussed at these events is considered a cost to bear or an investment. “Historically the cost aspect has been amplified to keep countries accountable. However, there is increasing recognition that these are investments for the future,” explains Nakhooda. Her colleague Romilly Greenhill writes that the Addis declaration provides a “helpful framework for action”, but “will require more concrete commitments by donors.”

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