- This climate finance deficit presents a pressing challenge to Africa, as it directly affects the continent’s capacity to address critical climate-related issues.
- African governments must adopt innovative financing opportunities that blend public and private partnerships.
- Leaders from Africa, the Republic of Korea, and the Global Green Growth Institute (GGGI) have jointly called for more collaboration and cooperation to bridge the climate finance gap
Climate finance
The climate finance gap has been a persistent topic of climate change discussions for the longest time. Despite a financing need exceeding $3 trillion by 2030, the continent receives merely about a 10th of its climate finance need, representing less than 5.5 per cent of the total global climate finance. This gap is felt especially keenly in countries like Uganda, which, despite being one of the many African countries committed to Nationally Determined Contributions (NDCs), experiences a distinct lack of climate funding.
According to the Center for Africa-Europe Relations, there is a concerning scarcity of climate finance directed toward Africa. This lack of financial support allocated explicitly for climate-related initiatives leaves a significant shortfall on the continent, estimated to range between $200 billion to $400 billion annually by 2030.
This climate finance deficit presents a pressing challenge to Africa, as it directly affects the continent’s capacity to address critical climate-related issues. The shortage of funds hampers Africa’s ability to adapt to changing climatic conditions, mitigate the impact of climate change, and construct resilience against its adverse effects.
Despite Africa contributing only about 3 per cent to global carbon emissions, the increasing severity of climate change disproportionately affects African economies and societies. Studies indicate that extreme weather events lead to significant gross domestic product (GDP) losses and force many countries to divert up to 9per cent of their budgets towards unplanned responses.
Read Also: Why Africa wants US$1.3 trillion in climate financing
How Financial Institutions Can Help Mitigate Climate Risks
Industrialisation, access to clean cooking, and closing energy gaps are pressing needs for Africa. Organisations like the International Energy Agency (IEA) and the African Development Bank (AfDB) have urged international collaboration and financial support from governments, development banks, climate funds, Non-government Organisations (NGOs), and the private sector to address Africa’s energy access problem. Additionally, they stress the importance of effectively deploying resources on the ground to drive action.
Climate financiers such as the Commercial International Bank (CIB) Group see working with farmers on the continent as a crucial entry point because Africa relies heavily on smallholder farmers for food production. When climate change endangers farmers’ activities, Africa’s precarious food security suffers a severe blow.
A Reuters report indicates that between 2015 and 2020, about $11.5 billion was loaned from wealthy nations to combat climate change in the region. Those figures have risen since then, but challenges persist in ensuring the funds reach individuals who can make the most of them. This is where the private sector and government engagement come in.
Opportunities and prospects in climate financing
Private sector financing
Over the last two decades, Africa’s rapid economic boom has been fuelled by private sector growth. The International Monetary Fund (IMF)- induced Sreuctual Induced Programs (SAPs) were widely blamed for widening poverty gaps in the late 1980s. Still, one essential contribution was reigniting the private sector’s contribution to GDP. Throughout the decades post-independence, African governments embarked on economic policies that closed the market to a few state-run corporations that were poorly managed and riddled with cronyism.
Today, the private sector is the backbone of the continent’s economy and the largest employer. It also has significant potential to address climate finance needs. Currently, most internal climate financing in Africa is from public actors (87 per cent, $20 billion), with limited contributions from private actors.
An improved regulatory and investment environment is needed for that to change. Governments must alter their laws to allow the private sector to invest in renewable energy, solid waste management, and water harvesting projects. These functions are currently under the purview of state authorities in most nations, and a constant push to open these sectors may spur rapid investment.
Innovative climate financing
African governments must adopt innovative financing opportunities that blend public and private partnerships. They can raise green bonds and blended finance. Crucially, a laid-out model is already a resounding success story.
In 2018, Seychelles launched the world’s first sovereign green bond, raising $15 million. This demonstrated the potential for countries to adopt capital markets for financing their climate mitigation goals. The World Bank played an advisory role, while three private investors—Calvert Impact Capital, Nuveen, and the U.S.-based Prudential Financial—spearheaded the financing.
According to Moody’s, the issuance of green bonds worldwide reached $254 million in the first quarter of 2023, up 36 per cent from the fourth quarter of 2022. However, Africa accounted for less than 1 per cent of global issuances. To make headway in this direction, nations must create a repo market to stimulate demand for green bonds, as advocated by the United Nations Economic Commission for Africa (UNECA).
Swapping debt for climate finance
The debt-climate swap is another internal mechanism that can be activated to raise climate financing. It allows a country’s debt to be reduced or forgiven in exchange for commitments to green investments. The model is particularly vital since a growing percentage of external climate finance for Africa was in concessional loans that pose even more significant harm to vulnerable countries with high public debt.
Restructuring existing debt would create fiscal space for green investment projects in African countries. More African countries need to co-opt this strategy quickly.
Read Also: Debt-for-nature-swaps: a solution for Africa’s debt crisis
Carbon markets
Despite the rapid deforestation, Africa still holds some of the most oversized carbon sinks in the world, such as the Congo basin, which is viewed as the second largest sink globally after the Amazon. However, African nations need to market these facts aggressively while building domestic capacity to assess the scale of these carbon sinks better.
Forest conservation efforts, mainly targeting coastal mangroves, would need to kick off so that governments engage in high-level carbon trading with private companies worldwide that rank as the largest emitters.
The Future of Climate Finance in Africa
Leaders from Africa, the Republic of Korea, and the Global Green Growth Institute (GGGI) have jointly called for more collaboration and cooperation to bridge the climate finance gap and tackle the challenges of plastic pollution that the continent—and the world—faces to ensure a better, greener future for all.
Speaking at the High-level Forum on Accelerating Access to Green and Climate Finance for Africa and High-level Forum on Enhancing Sustainability and Global Collaboration on Plastics, African and Korean leaders and green growth champions called for more collaboration to tackle the world’s two vital daunting challenges:
“Success in achieving ambitious emissions reduction targets depends on the availability of significant climate or green finance, the current levels of which are grossly inadequate for a just transition in Africa. The continent needs access to sustained financial and
resources from different sources, public and private, bilateral and multilateral, including alternative innovative sources. We need to step up climate finance in Africa through various initiatives, including promoting innovative financial instruments and business models that can mobilise large-scale private-sector finance,” said H.E. Amb. Josefa Sacko, Commissioner for Agriculture, Rural Development, Blue Economy and Sustainable Development at the African Union.
“The severe consequences of climate crisis across communities in Africa are readily evident. Recent extreme weather impacts, such as the devastating droughts in Malawi and the widespread floods across Kenya and Tanzania, highlight the urgent necessity for enhanced action and investments to address the existential threat we face throughout the world. Accelerating green and climate finance will require us to be innovative and work together with all partners and stakeholders across sectors and industries, national borders and political lines, and generations and genders,” said H.E. Ban Ki-Moon, President of the Assembly and Chair of the Council, GGGI.
