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EM climate funding plan takes center stage at COP27

Emerging economies' concerns were dominant in this week's COP27 meetings, with the costs and consequences of funding gaps taking center stake. After repeated failures to meet spending commitments, developing countries face large shortfalls in the estimated $1 trillion needed in external climate finance per year, according to the UN. Current support is far from these levels, with developed nations providing only $83bn of the promised $100bn.

Additionally, most of the money provided was in loans which makes climate finance risky for the half of developing countries that are in or at high risk of debt distress. Emerging economies then face the unenviable choice between a climate-resilient economy and sustainable debt levels.

This lack of capacity to do both comes with real consequences for such economies, too, with climate risk pushing up borrowing costs. The campaigning group Debt Justice found that EMs spend five times more on debt payments than on climate change. This reduced fiscal space lowers the capacity to spend on climate resilience, leading to a vicious cycle of higher climate risk premia and lower climate spending, according to the FT’s Jessica Rawnsley.

Recognizing the economic and environmental instability of this situation, COP 27 saw previously unthinkable policies tabled to funnel money to EMs. First, developing countries succeeded in proposing the contentious "loss and damage" fund, where rich countries would pay for the costs of climate-related devastation. Members of the "Vulnerable 20," a bloc of 20 countries among the most vulnerable to climate change, offered a more radical idea to generate fiscal space: halting debt payments on the $500bn owed between them over the next four years.

For its part, the German government offered a more tame debt-for-adaptation swap proposal where creditors would forgo debt repayments so that the funds could instead be spent locally on adaptation. However, it was the Barbadian Prime Minister's "Bridgetown Initiative" that stole the show. The proposal argues for a one-time $650 billion request from the IMF to help development banks issue $1 trillion in low-interest loans for climate spending in developing countries.

While developed governments have largely avoided the more aggressive among these, the existential pressure faced by EMs raises the chances of substantial realignments across debt, spending, and international relations.

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