By Aidy Halimanjaya

Summary

An earlier study by Halimanjaya (2016) identifies that a few donors are greener than others. Japan, Germany, France, Norway and the US commit to reduce global emissions and allocate a larger share of bilateral official development assistance (ODA)  to mitigation finance (1998-2014). These green donors have different ways of allocating mitigation finance

and have a different major destination of mitigation finance. To identify determinants according to which individual donors allocate climate mitigation finance across developing countries, this research paper introduces a mitigation finance allocation framework (global needs, recipients’ performance, recipients’ needs and donors’ interests). A two-part model was used to analyse a three- dimensional Rio Markers panel dataset (donor-recipient-time), representing five green donors and 180 developing countries in the time period 1998–2010. The findings are summarised below.

1. There is a consensus of major green donors on how to combat climate change

While the determinants that the donors used to allocate mitigation finance across countries are heterogeneous, their responses to global needs are almost homogenous. Developing countries with large carbon sinks and good institutional performance tend to be the main destination for major green donors’ mitigation finance. These five donors pour their money with a hope that their money can save the world’s tropical forests as the last frontier against the increasing global temperature.

2.  Mitigation finance from five major green donors is not a free gift

Some donors expect their money for mitigation finance brings more economic and political benefits in return. As with environmental aid, and aid more broadly, Japan and France’s allocation of mitigation finance is influenced by their geopolitical interests, which may divert it from its principal objective of mitigating greenhouse gas emissions. One new finding is Japan, Germany, France and Norway’s emerging interest in allocating mitigation finance to their Clean Development Mechanism (CDM) host countries, where they may seek to catalyse their private companies’ investment in green projects.

 Some green donors exhibiting stronger geopolitical and trade interests than others. Nonetheless their financial allocation shows a concerted response to global needs via their protection of carbon sinks. Despite the donors’ positive responses to global needs and recipients’ needs, mitigation finance, as the largest part of climate finance, is influenced by donors’ interests, which can divert mitigation finance from its global objectives. A contemporary and unique trend in aid policy emerges from the aspirations of donors to play a role in catalysing large private-sector investment in green development with a risk of overcrowding richer developing countries and promoting global inequality. However, this paper argues that supporting small to medium businesses can balance this risk to some extent.

Access the full text here: Allocating climate mitigation finance: a comparative analysis of five major green donors.

This journal article is published in Sustainable Finance and Investment in 2016 (online) and it was written as part of a Doctoral Research Project.