Climate Finance in Africa - Policy Brief - Africa Policy Research Institute (APRI)

Key Messages

Africa has contributed the least to global climate change – the region is not a significant source of greenhouse gases (GHGs) – although it stands to bear the severest negative consequences of it.
Climate finance inflows into the region have been far short of what is needed and mostly in the form of concessional facilities (loans). Conservative estimates indicate that Africa needs US$2.5 trillion (74% of the continent’s GDP of US$3.4 trillion in 2021) or US$250 billion annually in conditional and unconditional financing between 2020 and 2030 to implement their nationally determined contributions (NDCs) under the Paris Climate Agreement. However, current reported annual climate finance inflows to the continent amounted to US$30 billion (equivalent to only 12% of conservative annual required flows).
Constraints to securing such financing at the national and sub-national levels encompass governance and regulation, infrastructure/technical, and financial risks. The arduous funding approval process is also driving the limited capacity to access climate funds.
African countries are calling for an equitable transition and are already closely scrutinising volumes of climate finance flows this year, given the inadequacy of funds and that significant proportions are loans offered at commercial rather than concessional rates.
In Ghana, the largest share of climate financing has been received from bilateral channels. The main barriers to climate finance include the inadequate capacity to develop bankable projects and nascent and weak institutional capacity for undertaking climate investments.
In South Africa, private finance in clean energy plays the biggest role in the country’s climate finance flows. South African climate finance composition stands out, compared to other African countries, with its predominant focus on mitigation. South Africa’s US$8.5 billion Just Energy Transition Partnership (JET-P) provides an interesting template for replicating new African-oriented multilateral partnerships to strengthen the country and regional approaches to attract much-needed climate finance.
Finally, in Zambia, the preparation of a green growth strategy has commenced and most climate finance have been channelled to the energy, agriculture, forestry and water sectors. Further, stakeholders observed that the private sector held the best opportunities for Zambia to mobilise climate finance, including pension funds. However, as in Ghana, the main barriers to climate finance in Zambia include the inadequate capacity to develop bankable projects and the nascent and weak institutional capacity for undertaking climate investments.

Context and Policy Issue

Finance in support of technological and societal changes to meet a climate-resilient future is a contested political battleground globally. Climate finance is a delicate policy issue and even its definition is contested.

While there is no broad global consensus on the definition of climate finance, the closest is provided by the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC defines climate finance as “local, national or trans-national financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change”.^[1] Another definition provided by the UNFCCC Standing Committee on Finance (SCF, 2014) is as follows: climate finance is financing “that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing [the] vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”. ^[2]

However, distributional conflicts are determined by what financial flows can be counted as climate finance. But also, in terms of the procedural and recognitional legitimation: Which country and region gets what? Who qualifies to unlock funds classified as climate finance, and how?

Accessing such financing is even more pertinent for Africa, which is one of the world’s most vulnerable regions to climate change. The Glasgow Climate Pact agreement at COP26 in November 2021 resulted in global governments pledging to phase down fossil fuels and increase financing for climate change adaptation. Likewise, developed economies pledged to double their support from 2009 levels by 2025. At COP15 in Copenhagen in 2009, industrialised countries committed to collectively contributing US$100 billion annually until 2020 to support developing countries in their climate change needs. Despite expected increases in adaptation costs, estimated to reach US$140 billion to US$300 billion in 2030,^[3] the climate finance support pledged by the world’s wealthiest economies has failed to materialise.

In 2020, only US$83 billion^[4] of the US$100 billion per annum commitment was met, while an average of US$75 billion was delivered between 2016 to 2019. Only around US$20 billion (27%) of this latter amount was provided to Africa between 2016 and 2019.^[5] Additionally, indicative assessment from the African Development Bank (AfDB) show Africa’s loss and damage needs due to climate change in the range of US$289.2 billion to US$440.5 billion.^[6] Thus, the current reported climate finance annual inflows of US$30 billion (equivalent to only 12% of conservative annual required flows) to Africa are woefully inadequate to address the continent’s needs as per the NDCs.

However, Africa remains highly dependent on external financing to implement its NDCs and meet net-zero goals under the 2015 Paris Agreement. The achieving of the net-zero goals is confounded by the limited fiscal space available to governments in the sub-region to implement their NDCs and the challenging external environment of the aftershocks of the ongoing Russia-Ukraine war.

It is within the above context that APRI undertook this study to understand the actors, coalitions and contestations associated with attracting climate finance to implement Africa’s NDCs. We focused on the status, practical experiences and perceptions of state and non-state actors in Africa in securing climate financing to implement the NDCs.

The report focuses on two areas. First, using qualitative, quantitative and political economy analysis. Here, we examined global narratives on climate change and climate finance and their application to Africa. We analysed how global climate financing categorisations (for example, adaptation versus mitigation, and loss and damage) feed into how stakeholders conceptualise these issues at the African country level. These global norms are further tested against country-level developmental objectives such as the twin issues of energy poverty and affordability and the pursuit of low-carbon industrialisation.

Second, we conducted deep dives in three country case studies: Ghana, South Africa and Zambia. These countries allowed us to provide a nuanced picture of which factors are driving both flows into and demand for climate finance in some archetypal countries and what valuable lessons could be learned to shape continental climate financing policy.

Country perspectives

In Ghana, we found that the government has outlined several key policies that set targets, action plans and financing strategies for climate action, of which mitigation actions such as increasing RE penetration are paramount. Ghana’s updated NDC includes 19 policy actions, classified under eight socio-economic outcomes, which translate to 47 programmes of action (of which 13 are adaptation and 34 are mitigation actions). Seven of the 13 adaptation actions are unconditional, requiring financial mobilisation from the government of Ghana. Nine of the 34 mitigation actions are unconditional.

Estimated financial needs to support Ghana’s programme of actions range between US$9.3 billion and US$15 billion. However, Ghana’s Fourth National Communication Report to the UNFCCC (2020) estimated the total financial inflows for climate action between 2011 to 2019 at about US$1.3 billion. About 87% of that amount was allocated towards mitigation activities. In comparison, adaptation efforts received about 4% of the inflows while the 9% remaining was earmarked to support means of implementation activities, especially for capacity development of the receiving institutions.

Also, in South Africa, we found that private finance in clean energy plays the biggest role in the country’s climate finance flows. According to recent studies, two-thirds of the tracked private investments were raised as debt and a quarter in equity. Three local banks, the International Finance Corporation and the African Development Bank, count as the main financing institutions for renewable energy and are involved in parts of the negotiations around the Just Energy Transitions Partnership (JET-P). Other local studies and interviews with stakeholders confirmed an alarming underfinancing of adaptation funding in comparison to mitigation funding. There is a high risk that adaptation finance will be overlooked as reducing the coal dominance of the electricity sector is determining funding. Overall, climate finance in South Africa is defined in broader sustainable and green finance terms. A green finance taxonomy is currently under development to make green and climate-related investments more transparent.

In Zambia, we found that the country has commenced the preparation of a green growth strategy. It is envisaged that executing the strategy will contribute to the efficient use of natural and other resources, reduce GHGs, enhance coping with climate change and sustainably drive economic growth. The flow of climate finance in Zambia increased from less than US$20 million per annum in 2010 to more than US$50 million per annum in 2021. This increase has been attributed to institutional strengthening, such as the establishment of the Ministry of Green Economy and Environment, which has consolidated all environmental sustainability functions and enhanced coordination, including climate finance. However, a lot still needs to be undertaken to reach an optimal level of climate finance and enhance the execution of mitigation and resilience-building actions to reverse the adverse impacts of climate change.

Stakeholders indicated that most climate finances had been channelled to the energy, agriculture, forestry and water sectors. It was also observed that the allocation and channelling of climate finance to the highlighted sectors were consistent with the prioritised sectors in Zambia’s national policy documents, such as the eight national development plans, the NDC and the National Policy on Climate Change. Further, stakeholders observed that the private sector held the best opportunities for Zambia to mobilise climate finance. It was also indicated that institutional investors such as pension funds had the potential to invest in green infrastructure projects. However, stakeholders emphasised the need for enhanced engagement of the private sector through capacity building and awareness-raising meetings on climate finance.

Across all three countries, we found that the main barriers to climate finance include the inadequate capacity to develop bankable projects and nascent and weak institutional capacity for undertaking climate investments. Additionally, a lack of public knowledge about climate finance means there is no clear understanding of the available climate finance opportunities available to the private sector via accredited institutions. Stakeholders indicated that some projects had suffered project funding rejections due to weak documentation.

Furthermore, climate financing by local commercial banks is still nascent, mainly because the banks have traditionally prioritised yield. There is also a need to build the business case, particularly for adaptation, to ensure that the private sector participates in climate finance. Lastly, stakeholders emphasised the need for enhanced engagement of the private sector through capacity building and awareness-raising meetings on climate finance.

Recommendations

Two classes of recommendations are provided: firstly, for the global financing community and secondly, for African governments.

For the global climate financing community

Honour past pledges: Developed countries must redeem their pledge of providing adequate finance to support African climate action. During the high-level consultations at COP26, developing countries criticised developed countries for failing on their US$100 billion annual pledge to support climate action in developing countries. While developed countries promised to scale up financial contributions to support climate schemes, according to some estimates, this funding has fallen short and is unlikely to be attained until 2025. Africa cannot meet its climate obligations without a major increase in international financing. Therefore, international institutions and developed countries must go beyond the promises to fulfil their pledges, including previous commitments towards providing adequate financing for climate action. This action is relevant in ensuring that such established funds are continuously replenished and disbursed adequately to meet the needs of developing countries such as those in Africa.
Establish clear accounting rules and common reporting standards to account for climate finance: Internationally agreed accounting rules that would allow more transparency on the disclosure of climate financing at the global level, including to African countries, are needed. The UNFCCC working definition of climate finance does not provide clear rules on what can be counted as “local, national or trans-national financing” or “public, private and alternative sources of financing”. Without the constituent breakdown of what these taxonomies mean, international organisations such as the OECD^[7] have sought to provide operational definitions of what can be counted and the underlying financing instruments. It is that operational basis that is currently used in various reporting protocols. However, as the UNFCCC (2020: p.6) rightly noted, “operational definitions for climate finance in use generally reflect a common understanding of what is considered mitigation or adaptation finance but differ when it comes to details of sector-specific activities, certain financial instruments and approaches to public and private finance flows”.^[8] Furthermore, developing countries such as India have refuted claims by wealthy nations on their actual contributions to the US$100 billion annual pledge to support climate action in developing countries. Critiques have ranged from these figures being ‘‘overstated’’ as well as the methodological basis being ‘‘deeply flawed’’.^[9] An EU Court of Auditors report recently indicated that the European Union had not met its climate spending targets. Reported spending of €216 billion on climate action in the EU’s 2014-2020 budget was more likely to be around 13% of the EU budget rather than the reported 20% and thus “not as high as reported”.^[10] Oxfam also reported in 2020 that “bilateral climate finance could be about 30% lower due to over-reporting of climate relevance”.^[11] The African Group of Negotiators has also called for a clear operational definition of climate finance that allows “tracking and assessing the fulfilment of obligations and the effective functioning of the financial mechanism of the UNFCCC”.^[12] Thus, the UNFCCC reporting architecture needs to provide further granular operational definitions; otherwise, the current practice of each developed country deciding on what it reports as ‘climate finance’ is likely to persist.
More concessional public and private funding from the international community must go towards mitigation and adaptation efforts to drive low-carbon and climate-resilient development in Africa. Justice and equity require that climate finance be provided to African countries at no to low cost, given their small contribution to global emissions. However, the grant funding ratio is dwindling, and the cost of finance is high for African countries. Sovereign guarantees and other types of risk sharing that governments are required to assume when agreeing to finance are unsustainable. The provision of mitigation-oriented just transition and adaptation-related finance on terms that are costly to the recipient/borrower nations, such as those in Africa, is infeasible in the first place and not fit for purpose. As previously highlighted in our findings, most of Africa’s GHG emissions at a sectoral level come from land-use change and forestry (LUCF: 36%). To that extent, climate financing coming to and from the continent should not only prioritise low-carbon energy generation sources (mitigation) but must equally prioritise LUCF reductions (in this case, more dual mitigation and adaptation finance such as for financing forest conservation, protection and restoration).
There is a need to look at how to combine adaptation-focused public funds with private funds in new and innovative ways, including at the community level. Gabon, one of the world’s most forested nations, has demonstrated this potential by planning^[13] to sell 90 million carbon credits via its sovereign wealth fund to corporations and individuals that wish to offset their carbon emissions using the voluntary carbon offset market under the UNFCCC’s REDD+ mechanism. At a reported US$20 to US$30 per credit, this could fetch Gabon at least US$1.8 billion (11.5% of the country’s 2020 GDP).
In an environment of the limited fiscal space available to African countries due to the COVID-19 pandemic and the ongoing Russia-Ukraine war, and with declining official development assistance or aid, developed countries and multilateral institutions must offer debt relief (debt swaps) to African countries in return for the countries undertaking to use the funds for climate actions judiciously. This relief would encompass both adaptation and mitigation funding. Interventions in the past, such as the Highly Indebted Poor Countries (HIPC) initiative, had conditionalities tied to countries channelling debt relief to the attainment of the Millennium Development Goals. Debt for climate swaps^[14] can be tied to attaining climate goals defined in the respective NDCs and aligned to sustainable development goals (SDGs). Also, while multilateral institutions such as the International Monetary Fund (IMF) have commendably committed to placing climate change at the heart of their work, rechannelling of the IMF’s Special Drawing Rights to fight climate change under the Fund’s proposed US$50 billion.^[15] Resilience and Sustainability Trust (RST) must be fast-tracked. It is encouraging to hear that African countries such as Rwanda will be among the first beneficiaries of the RST.^[16]

For African governments

National and sectoral adaptation plans: Public funding in adaptation efforts must be increased as it is not attracting enough private funding. Adaption finance is already being overlooked, as reducing the fossil dominance of the electricity sector dominates the African narrative on climate financing. To overcome this oversight, the preparation of sector-specific national adaptation plans (NAPs), particularly for climate-sensitive sectors such as agriculture, water and energy, must be undertaken. This preparation must identify climate risks and adaptation measures and set out the roadmaps for implementing the NAPs. Sector-specific NAPs and associated investment plans can act as vehicles for resource mobilisation for addressing the climate risks that are sector specific. This specificity would allow a delineation of what the bankable projects might be and draw in private-sector investment for adaptation.
Improved technical capacity: To bridge the climate finance information asymmetry gap, there is a need for continuous professional development to thoroughly build the technical capacity of all stakeholders, especially state agencies and private sector agents. African countries must ensure that private and public-sector entities have the relevant documentation that enhances their eligibility to receive funds. As we found, climate funds such as the Green Climate Fund (GCF) are provided competitively, and adequate documentation is required to access these funding sources. However, limited capacity in project prioritisation and proposal preparation by state agencies and private-sector agents often affects a country’s ability to access funds. Stakeholder interactions also revealed that some agencies do not have specific project appraisal procedures guiding project evaluation in line with the requirements of external entities. Ongoing technical capacity training by organisations such as the AfDB, GCF and others, with the overall objective of getting more agencies and the private sector to access international financing, must be scaled up. The stakeholders contacted specified that the training must include (1) preparation of project appraisal templates and procedures to aid project prioritisation and proposal preparation and (2) accessing financial assistance (grants) to collect baseline scientific data to support project justification.
Institutional coordination structures: The appropriate environment for investment attraction in green businesses must be created: a deliberate attempt to ensure a well-regulated environment that allows value creation among green companies needs to be nurtured. Again, there are opportunities for government institutions and businesses to take advantage of the opportunities for trading in the carbon market, which is available to private and public-sector players, to raise the needed capital for green projects in Africa. To do this, firstly, respective African nation states must curate available data into a single portal (database) to point the private sector to the available financing options with respect to climate change and how to access them. While recognising that technical capacity is weak at all levels, it is even weaker at the sub-national level and needs to be prioritised. Secondly, regional integration has the potential to create larger climate financing markets that attract private investments. There is a need to accelerate regional integration to decarbonise some aspects of Africa’s power pools (mitigation financing). For example, such possibilities exist within the South African power pool as it has greater opportunities to decarbonise from largely coal-based generation. Thirdly, African governments must use public funds (catalytic public finance) to create access for those organisations and projects that do not have the financial muscle to reach financial closure or to get their projects to the bankability stage. Examples are renewable energy independent power projects procured through municipalities and communities.

Concluding remarks

Harmonising the disparate international climate financing landscape

During the high-level consultations at COP26, developing countries criticised developed countries for failing to pledge to commit about US$100 billion annually to support climate action in developing countries. International institutions and developed countries must go beyond the promises and fulfil their pledges towards providing adequate financing for climate action to developing countries.

To do this, the widely used UNFCCC definition of climate finance needs to be amended to clear rules on what can be counted as “local, national or trans-national financing” or “public, private and alternative sources of financing” as developed countries have different operational definitions and interpretations of climate finance. Several developing countries (such as India) have in the past refuted claims by wealthy nations on their contributions to the delivering US$100 billion annual budget to support climate action in developing countries. Critiques have ranged from these figures being ‘‘overstated’’ to the methodological basis being ‘‘deeply flawed’’.^[17] Recently, an EU Court of Auditors report^[18] indicated that the European Union had not met its climate spending targets. A reported spending of €216 billion on climate action in the EU’s 2014-2020 budget was more likely to be around 13% of the EU budget rather than the reported 20% and thus “not as high as reported”.

Lastly, more public and private funding from the international community needs to go towards adaptation efforts in support of a just transition, especially in Africa. As previously highlighted in our findings, most of Africa’s GHG emissions at a sectoral level come from land-use change and forestry (LUCF: 36%) and the energy sector (35%). To that extent, climate financing coming to and from the continent should not only prioritise low-carbon energy generation sources (mitigation) but must equally prioritise LUCF reductions (in this case, more adaptation-related financing). There is thus a need to look at how to combine the use of adaptation public funds with private funds in new and innovative ways, including at the community level.

Addressing the barriers to climate financing in Africa

Given the heavy reliance but significantly low donor climate finance inflows, Africa must look at alternative sources of financing to implement its NDCs and contribute to mitigating climate change while creating sustainable jobs in the process. Unlocking the massive investment opportunities ultimately comes down to understanding the barriers to such investments at both the national and sub-national levels, and at the global level within the donor institutions themselves. For example, even when funding (either from public or private sources) is not a constraint, sub-national (local) governments in Africa are usually ill-equipped to facilitate successful access to and management of these funds, or design and prepare ‘bankable’ projects. This inability is due to the lack of efficient regulatory frameworks, technical competencies and systems for project preparation as well as to insufficient monitoring and evaluation, among others.

https://unfccc.int/topics/introduction-to-climate-finance
https://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/2014_biennial_assessment_and_overview_of_climate_finance_flows_report_web.pdf, at p.5
Timperly, J. (2021). The broken $100-billion promise of climate finance—And how to fix it. Nature, 598, 400-402.
https://www.oecd.org/climate-change/finance-usd-100-billion-goal/
https://www.brookings.edu/blog/africa-in-focus/2022/02/08/the-criticality-of-climate-finance-for-africa/
https://climatelegal.co.za/publications/LossandDamage_TheRoadtoCOP27_anAfricanPerspective.pdf
See https://www.oecd-ilibrary.org/docserver/d28f963c-en.pdf?expires=1665787080&id=id&accname=guest&checksum=FB1873B7A16CB30E4C00FB27E1A5A2FF
UNFCCC Standing Committee on Finance. Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows. See https://unfccc.int/sites/default/files/resource/Fourth_BA_2020_technical_report-V21.pdf#page=67
Roberts, J. T., Weikmans, R., Robinson, S. A., Ciplet, D., Khan, M., & Falzon, D. (2021). Rebooting a failed promise of climate finance. Nature Climate Change, 11(3), 180-182. https://doi.org/10.1038/s41558-021-00990-2; Roberts, J. T., & Weikmans, R. (2017). Postface: fragmentation, failing trust and enduring tensions over what counts as climate finance. International Environmental Agreements: Politics, Law and Economics, 17(1), 129-137.
See https://www.eca.europa.eu/Lists/ECADocuments/SR22_09/SR_Climate-mainstreaming_EN.pdf
Climate Finance Shadow Report 2020: Assessing Progress Towards the $100 Billion Commitment (Oxfam, 2020). https://oxfamilibrary.openrepository.com/bitstream/handle/10546/621066/bp-climate-finance-shadow-report-2020-201020-en.pdf
https://unfccc.int/sites/default/files/resource/AGN%20submission%20on%20the%20New%20Goal.pdf, at para 34
See https://www.bloomberg.com/news/articles/2022-10-14/gabon-carbon-credits-seen-fetching-as-much-as-35-a-ton and https://african.business/2022/09/energy-resources/gabon-set-to-launch-first-batch-of-climate-credits
See https://www.iied.org/debt-for-climate-swaps-innovative-financial-instruments-for-public-debt-management; https://www.oecd.org/env/outreach/debt-for-environmentswaps.htm; and https://link.springer.com/article/10.1057/s41301-022-00329-0
https://www.imf.org/en/Blogs/Articles/2022/01/20/blog012022-a-new-trust-to-help-countries-build-resilience-and-sustainability
https://www.minecofin.gov.rw/news-detail/rwanda-to-access-us-310-million-under-the-new-resilience-and-sustainability-facility
Roberts, J. T., Weikmans, R., Robinson, S. A., Ciplet, D., Khan, M., & Falzon, D. (2021). Rebooting a failed promise of climate finance. Nature Climate Change, 11(3), 180-182. https://doi.org/10.1038/s41558-021-00990-2; Roberts, J. T., & Weikmans, R. (2017). Postface: fragmentation, failing trust and enduring tensions over what counts as climate finance. International Environmental Agreements: Politics, Law and Economics, 17(1), 129-137.
See https://www.eca.europa.eu/Lists/ECADocuments/SR22_09/SR_Climate-mainstreaming_EN.pdf