Development Aid and Climate Finance

Abstract

This paper discusses the implications of climate change for official transfers from rich countries (the North) to poor countries (the South) when the motivation for transfers is ethical rather than strategic. Traditional development transfers to increase income and reduce poverty are complemented by new financial flows to reduce greenhouse gas emissions (mitigation transfers) and become climate-resilient (adaptation transfers). We find that in the absence of barriers to adaptation, mitigation or development, climate change will make isolated transfers less efficient: A large part of their intended effect (to increase income, reduce emissions, or boost climateresilience) dissipates as the South reallocates its own resources to achieve the mitigation, adaptation and consumption balance it prefers. Only in the case of least-developed countries, which are unable to adapt fully due to income constraints, will adaptation support lead to more climate resilience. In all other cases, if the North wishes to change the balance between mitigation, adaptation and consumption it should structure its transfers as "matching grants", which are tied to the South's own level of funding. Alternatively, the North could provide an integrated "climate-compatible development" package that recognizes the combined climate and development requirements of the South. If the aim is to increase both mitigation and adaptation in the South, development assistance that increases the income level, can an effective measure, but only if there is an international agreement and the recipient country is not income constrained. If the recipient country is very poor, development aid may reduce adaptation effort.

Unconditional aid and green growth

“…The literature distinguishes between two kinds of environmentally motivated donations: mitigation transfers and adaptation transfers (Eyckmans et al 2013). Mitigation transfers aim at reducing emissions in the recipient country; therefore they can be considered as a public good benefiting all countries.…”

“…A literature on climate finance that relates to our study has been emerging. Eyckmans et al (2013), in a two period Stackelberg game, use a framework in which a donor cares about the well-being of the recipient, while using a binding global emissions constraint to address the climate change externality. They study the interaction between climate finance and development aid by comparing three types of transfers from a donating developed country towards a receiving developing country: development, mitigation, and adaptation aid.…”

Unconditional Aid and Green Growth

“…Eyckmans et al (2013), in a two period Stackelberg game, use a framework in which a donor cares about the well-being of the recipient, while using a binding global emissions constraint to address the climate change externality. They study the interaction between climate finance and development aid by comparing three types of transfers from a donating developed country towards a receiving developing country: development, mitigation, and adaptation aid.…”

“…We depart from existing literature by analysing unconditional aid in a theoretical dynamic model, using a noncooperative infinite horizon framework. Unlike Eyckmans et al (2013), we employ a Ramsey framework to model South's growth, with endogenous capital investment processes for green and brown capital respectively. Damage flows from global pollution, affecting the welfare of both countries, address the pollution externality.…”

“…To the recipient, aid acts as development aid, influencing consumption and total investment, as well as mitigation aid, by influencing the relative investments in green and brown capital. We follow Eyckmans et al (2013) by not considering global welfare: each country takes only its own welfare into account when taking its decisions. Our model also links the green investments literature and climate finance literature; to our knowledge only Claude et al (2012) study a similar link.…”