Capital Flows, Policy and Regulation, UK

Aid body dubs UK climate accounting changes a ‘kick in the teeth’ for developing countries

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The ICAI wants government departments involved in international climate finance to publish an annual report to help track whether the UK is meeting its commitments (Photo: Harry Shum/Pexels)

The UK government has pledged £11.6bn in climate finance for emerging economies. But it is reclassifying existing overseas aid without adding new spending, says a report from the Independent Commission for Aid Impact

In November 2023, the government published a white paper on international aid in which it committed to increase developing nations’ access to climate finance and improve concessional public climate finance for the lowest-income countries. The white paper included a pledge to spend £11.6bn on climate finance in the five years to 2025-26.

Now, a report from the Independent Commission for Aid Impact, a public body, accuses the government of reclassifying other forms of existing overseas aid, rather than providing fresh climate finance, and says the government would find it challenging to meet its stated spending objective “in light of stretched resources”.

The report adds it is difficult to achieve an accurate analysis of the government’s position because of changes to the way it accounts for its contributions to multilateral development banks, its outlay on humanitarian programmes and its contributions to British International Investment, a government-backed development finance institution.

The government’s new approach is “making it hard to replicate the government’s calculations and hold the UK to account for its climate finance commitments”, says the ICAI.

“There is a sense – certainly from the people that we work with – that every time there is a feeling that the UK is doing smart accounting or in some ways reneging on its commitments, that is a kick in the teeth [for developing countries] for the problem that they’ve not caused,” Tom Mitchell, executive director of the non-profit International Institute for Environment and Development, told Sustainable Views, referencing the fact that generally, poorer countries are worst hit by climate change yet have contributed the least towards it.

The ICAI wants government departments involved in international climate finance to publish an annual report to help track whether the government is meeting its public commitments on climate finance. These departments should also issue a combined and detailed plan that sets out how the government’s remaining spending commitment will be allocated.

A government spokesperson said: “We acknowledge the commission’s recommendations and will respond in due course.”

Excessive cost of capital

The ICAI report also noted a government shift away from giving grants towards providing loans – with often onerous interest rates – to developing countries, many of which are already struggling with debt repayments.

Some of the world’s poorest countries are spending more on repaying debts than they receive in climate finance, according to a 2023 report from the non-profit International Institute for Environment and Development. In 2021, the cost of debt repayment for 59 nations was $33bn, outstripping the $20bn they received in climate finance. Nine of these countries paid out more than they received in total from foreign aid. 

High borrowing costs are widely viewed as an obstacle to channelling finance towards the climate transition of emerging economies. In 2023, Pavina Adunratanasee, then smart solutions manager at renewable energy provider Iberdrola Australia, told the World Climate Foundation’s Climate Investment Summit that for emerging markets, “cost of capital is obviously going to hamper the return on equity and debt on the project, and we’ve seen that the cost for developing utility-scale solar is three times as high in emerging markets versus developed markets”. 

The Institute for Energy Economics and Financial Analysis, a think-tank, has argued that sophisticated “blended finance” structures that pool public, private and concessional capital could help plug financing gaps for projects in emerging markets that cannot otherwise afford conventional funding from private sources.

The IIED’s Mitchell said in markets where there are uncertainties, there is a significant role for public climate finance de-risking the situation for private money to come in.

He added that “the UK could probably do a better job in connecting its work through the Foreign, Commonwealth & Development Office with British International Investment”, where it was important to have a more “joined-up game plan on how we’re using those two UK national instruments to work together to make climate finance more effective”.

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