(Bloomberg) --
From up high in the eastern Himalayas, Bhutan is one of the only countries that can say it’s doing more to cool the planet than warm it. But the nation of fewer than 1 million people, dotted with lush mountains that absorb heat-trapping carbon dioxide, isn’t rewarded for its low emissions or shielded from the devastating effects of climate change.
More than a dozen of Bhutan’s lakes are in danger of overflowing from melting glaciers, a source of constant anxiety for villagers who live along river banks. The government wants to build flood-protection infrastructure and organize resources to deal with disasters, exactly the sort of adaptive investment encouraged by the global climate negotiations underway in Glasgow, Scotland.
But such funding has been prohibitively difficult to secure. Bhutan’s pursuit of loans from the United Nations’ Green Climate Fund, a pool of money collected from rich countries, has taken nearly five years, says Sonam Wangdi, secretary of the country’s environment commission.
Representatives for countries like Bhutan are busy making their case this week at the COP26 summit that large emitting nations should do more to help them cope with the ravages of global warming. Yet they will return from Glasgow with far more in promised funds from private sources than governments, essentially leaving them at the mercy of the markets.
That’s not a reassuring outcome for Wangdi. It means countries facing elevated climate risks like Bhutan will have to pay more to borrow and won’t be seen as attractive destinations for green investment. A three-year bond Bhutan sold last year had a 6.5% coupon, more than 100 basis points higher than what neighboring India pays.
“We have borrowed up to the eyeballs,” Wangdi said. “It doesn’t make sense, you’re not able to help your people.”
Rich nations have failed repeatedly to deliver a promised $100 billion a year in climate finance meant to help the adaptation of poorer nations. Of the money that has materialized so far, only a small share has been distributed as grants with no strings attached. Now former Bank of England governor Mark Carney is mobilizing banks and asset managers representing around $130 trillion to shift funds into green projects.
There are huge questions around how developing nations will access that impressive-sounding sum. More frequent heat waves, flooding and hurricanes are already baked into their future on a planet that’s 1.1° Celsius hotter than pre-industrial times — making investment in protective measures a matter of grave urgency, but less appealing to anyone who want to avoid risk. Foreign investors tend to show far more interest in funding projects that lower emissions, such as solar farms and hydroelectric dams. Energy infrastructure can generate attractive returns. Climate resilience measures, including flood barriers and early warning systems, aren’t going to rake similar profits.
This sets up a difficult feedback loop. As climate change accelerates, the most vulnerable countries will become even less attractive to investors because warming temperatures will rapidly deteriorate their prospects for economic growth. Even if warming holds below the Paris Agreement’s stretch goal of 1.5°C, vulnerable countries will still face an average reduction in gross domestic product of 13% by 2050, according to an analysis by Marina Andrijevic, an economist at Humboldt University in Berlin.
The danger is particularly acute in Africa. “If this money comes into the world like that, from private sources, then Africa cannot access this money,” said Tanguy Gahouma-Bekale, a Gabonese official who chairs the African negotiating bloc at the ongoing climate talks. “Africa gets money with a high interest rate because of political risk and fear of war. We will not be able to use this money to develop ourselves.”
Gabon has been aggressively pitching itself as a destination for green investment. It has something that can help companies reach their own net-zero targets: thousands of acres of carbon-absorbing forest. The government has proposed all sorts of financing mechanisms, from green bonds and carbon offsets to bilateral agreements.
But that hasn’t lowered Gabon’s high barriers to entry in global markets. An advanced economy like Germany can sell debt for a period of 10 years at an interest rate of below zero, while Gabon’s rate is closer to 7% and subject to extreme fluctuations.
In fact, Gabon is rated as junk debt — seven notches below investment grade by Moody’s Investors Service — leaving the nation dependent on highly-speculative investors. A 2018 analysis backed by the UN identified a pattern in which climate vulnerability increases the cost of countries’ debt by 117 basis points.
There’s also a gaping technology gap that threatens to leave the poorest countries behind in the energy transition. While Africa may be the sunniest continent, its solar power capacity has lagged behind the smaller, cloudier U.K. until this year, according to BloombergNEF. The first electric bus factory in Uganda is only set to start producing vehicles in 2021, five years after India and more than a century after the U.K.
One way to minimize risk for private investors is to have rich governments go in first and back the projects unconditionally. Gahouma-Bekale argues that developed countries should raise closer to one trillion in climate finance a year by 2025 — 10 times their current target — and set aside half of the funds for adaptation measures. “We cannot just welcome, or be happy, when private companies raise this type of money,” he said. “We need first to start with public money.”
There are other possible methods for funding protective measures. After more than a week of talks at COP26, one of the biggest unresolved issues centers on a push led by African countries for a transaction fee on some carbon trading that would be authorized under Article 6 of the Paris Agreement. The proposal, which has been resisted by the U.S. and the European Union, would impose a levy on bilateral transactions, with the money devoted to paying for adaptation measures.
Palau will be under water in decades, making it an extremely risky investment. But that’s why it wants to see rich nations step up with help. “Large emitters with their insatiable appetite for advancement are continuing to abuse our environment,” said Palau President Surangel Whipp. “Our resources are disappearing before our eyes, and our future is being robbed from us.”
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