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Is $500 Billion In Foreign Aid Possible? (Maybe...)

This week, National Journal is hosting a useful series of Copenhagen-related roundtable debates that are worth checking out. In this one, Rep. Ed Markey asks how wealthier countries should help poorer ones tackle global warming.

It's a timely question, since this is perhaps the biggest quagmire in the climate talks right now. A recent U.N. report estimated that developing countries would need $500 billion to $600 billion per year to get on a path of low-carbon growth, as well as to adapt to a hotter world. (On that latter point, there was a great New York Times story today on how Bolivia's already struggling to cope with receding glaciers and dwindling water supplies.) Right now, industrialized countries are aiming for at least $10 billion in a "kick-start" fund for the next three years, but it's not clear they'll get close to the aid levels ($100-$200 billion per year or more) that developing countries are asking for under any post-Kyoto treaty.

So is there a way to bridge the gap? Well, maybe. As Harvard economist Robert Stavins points out, with the right policy incentives, the private sector could easily supply much of the funding. Most cap-and-trade systems for carbon emissions, after all, provide room for international offsets—in which companies would pay for relatively cheap mitigation projects in the developing world (preventing deforestation in Brazil, say, or financing cleaner household stoves in Africa) in lieu of making their own cuts.

The problem here is that the mechanism under the Kyoto Protocol for these sorts of projects, namely the Clean Development Mechanism, has been flawed. An old Stanford study by Michael Wara and David Victor estimated that up to two-thirds of the projects financed under the CDM weren't actually reducing emissions. (In one notorious example, the CDM gave credit for destroying HFCs, a powerful greenhouse gas released during the production of some refrigerants and Teflon; in many countries, manufacturers gamed the system by creating more HFCs so that they could then get paid to destroy them. Fortunately that loophole is being addressed.) But the CDM is improving and Stavins thinks these problems are ultimately fixable:

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential. ... Therefore, what is needed is for the key emerging economies—China, India, Brazil, Korea, South Korea, South Africa, and Mexico—to take on meaningful emission targets themselves (even if equivalent to business as usual in the short term), and then participate directly in international cap-and-trade, not government-government trading as envisioned in Article 17 of the Kyoto Protocol, but firm-firm trading through linked national and multi-national cap-and-trade systems.

Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes. So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance. This should be the focus of the discussion here in Copenhagen.

That hardly erases the need for government aid, especially when it comes to adaptation (as Michael Levi points out, the United States, for one, could afford to step up developmental assistance even if the Earth weren't heating up—there are still a host of poverty-related problems in the world that overlap quite a bit with climate-related problems). But Stavins is right that the bulk of financing needs to come from private investment. So how realistic is it that the CDM—or whatever replaces it—can be made to work? Here's one optimistic take by Elizabeth Zelljadt of Point Carbon on that subject. I'll try to see if there are others.

(Flickr photo credit: JettGirl)