The US and Climate Development Finance: Five Steps from Humility to Ambition

February 05, 2021


Last week President Biden announced sweeping measures to reengage the US government in the fight against climate change, both domestically and in its foreign policy and financial assistance. The move to rejoin the Paris agreement and spend as much as $1.7 trillion at home puts the United States squarely back in the center of the fight against climate change. With US Special Envoy for Climate John Kerry suggesting the need for “humility and ambition,” we suggest five ways for the new US administration to be more ambitious on the international stage.

Alongside aggressive ambitions at home, the United States’ global leadership position will be enhanced by making a proportionate contribution to climate finance for development—we propose at least $10 billion per year by 2025. This would drive a sustainable and equitable recovery throughout the world and underscore the US commitment to fostering climate ambition.

A key year for climate and the US

Biden’s presidency begins at an important moment for climate action. The UK and Italy, co-chairs of the Conference of the Parties (COP) to the UN climate change convention, will seek new Nationally Determined Contributions (governmental plans to reduce emissions and adapt to climate change) for the first time since the Paris Agreement, and the UN will take stock of progress on the commitment of developed countries to mobilize $100 billion of climate finance. So far, the US has provided no additional finance towards that $100 billion, even though it was a US initiative, with a substantial push by then-Secretary of State Hillary Clinton to include it in the 2009 Copenhagen Agreement.

Domestically, Biden’s plans indicate a $1.7 trillion financial commitment to a variety of climate mitigation efforts. Transforming the US carbon footprint will be a major task—domestic emissions are around 20 tons of carbon dioxide equivalent per head per year, almost double the OECD and G20 which average under 11 (metric) tons per capita, and more than twice the per capita level in China (9.4 tons).

While this is no small undertaking, during the US climate “pause” of the Trump administration, the world has jumped ahead in its climate ambition. The European Union, under the leadership of Ursula von de Leyen, has committed to a 55 percent emissions reduction by 2030 and carbon neutrality by 2050. China’s President Xi’s commitment at the September 2020 UN General Assembly to move the Chinese economy to net-zero carbon emissions by 2060 was a signal shift in global climate ambition. Countries noticed the Chinese taking the global lead, particularly developing nations likely to be the worst affected by climate change. After four years of stasis, the US is lagging well behind other global powers on the biggest issue of our time.

So, the US will need to show even more ambition at home and abroad. Here are five ways for the US to put aside its humility, exert global leadership, and catch up to the rest of world:

1. Jettisoning fossil fuel subsidies across the globe

The Biden administration deserves credit for immediately acting on fossil fuel subsidies: it has now instructed federal agencies to eliminate these at home. But international action is needed; fossil fuel subsidies cost governments some $173 billion annually and encourage carbon-intensive consumption. But they are politically very difficult to dismantle; witness the French experience in 2018.

The political heat could be reduced with an international agreement to eliminate fuel subsidies. Doing so will free up valuable resources for climate efforts and COVID recovery. The World Trade Organization is the natural place for such an agreement but the G20 are the key actors to get the political consensus locked in. In a recent blog we look at the issues and key actors to get these negotiations going—and the prize is a fiscal and environmental boost. 

2. A bold additional commitment on climate finance for developing countries

The US can show its global climate commitment by making a substantial climate finance commitment towards the $100 billion per year collective target for developed countries that it initiated more than a decade ago. This target is integral to the Paris agreement’s intention of ensuring every country in the world can participate in the climate change fight. Importantly, and per the target, this must be “new and additional” money rather than funds from existing State, Foreign Policy, or Treasury international budgets.

How much should the US provide? In the last 11 years, the US has made no additional contributions towards the financing target, which runs to 2025. In fact, its total annual finance for development actually fell $2.3billion between 2009 and 2018 to $37 billion (face value, including aid and non-aid flows). If the US’s finance had moved in line with growth in its economy, it would already have increased its annual development spending by $19 billion. Over the same period, the EU27 (i.e., excluding the UK) increased annual finance by $20 billion, while Japan also increased by over $6 billion.

Raising spending on international finance is a challenge for any US administration but it is a central pillar of the Paris agreement, and a credible contribution would see the US increase annual finance by at least $10 billion by 2025. Not only would this show real commitment, but it would also support developing country budgets, which are severely strained by the COVID-19 crisis.

3. A strong focus on adaptation

The US can show leadership and drive recovery by allocating its new climate finance predominantly to adaptation and climate/COVID resilience, particularly in the least developed countries. We propose that three-quarters of support should be on adaptation. If the US does support mitigation, it should do so using less-concessional and mobilized private lending, and ensure that it is focused where it can achieve transformational changes in emissions (see point 5 below). This is unlikely to be in the poorest countries, whose emissions are and will be very low.

Adaptation funding will enable countries struggling with the economic impact of COVID to use the funding immediately to increase their resilience in health, education, agriculture, transport, and so on—rather than mitigation spending, which is of little immediate benefit to the countries themselves and which already accounts for over 70 percent of climate finance. Developing countries have led the call for a focus on adaptation, and the US can help meet the UN Secretary-General’s call for half of climate finance to go to adaptation. The US can use its traditional channels for this spend—though they will need to ensure projects increase resilience to climate.

In its existing aid portfolio, the US will need to incorporate climate risk. We’ll elaborate on this in coming work, but in short, the US can build on its good understanding of country and sector vulnerability, and Paris-compatibility should mean triaging all programs on how to adapt for climate impacts and to use renewable energy solutions where practical and affordable.

4. Accounting properly for climate spend

The current approach to international climate spend encourages other countries to re-badge existing aid as climate spend. The US can reform definitions of aid to avoid poor countries paying twice for climate and ensure climate finance is focused where it is needed most.

Climate mitigation spend counts fully as aid (official development assistance, or ODA) even though its “main beneficiary” (the 60-year-old core test) is not the recipient. Further, mitigation finance is most needed in countries where emissions are high, rather than in the poorest that ODA is designed for. Other high-income countries count mitigation as aid, not least to increase the spend they count towards the UN 0.7 percent/GNI aid target. As the US is not committed to that target, it does not have an interest in “plumping” its aid spend. Still, climate mitigation spend should be recognized and the US should work with the OECD’s Development Assistance Committee to develop a new measure of spending on global public goods (GPGs)—not just on climate mitigation but on other GPGs such as peacekeeping, R&D, and refugee welfare—and count only climate adaptation as aid. This will ensure true mitigation finance is focused where its most effective (not necessarily in poor countries), while ensuring remaining aid is not “green-washed.”

The Biden administration plans to take major steps in tackling climate change through domestic reform. Its proposals on fossil fuels look like they are arriving at just the right time. On international climate finance for developing countries, the US has almost 12 years of inertia to overcome. 

5. Reform multilateral institutions to measure and drive climate results

US leadership should be used to strengthen the multilateral institutions, particularly those focused on climate. These include the World Bank and multilateral development banks, where climate considerations need to be front and center in every investment decision. This transformation has begun, but American support for accelerating the change will be critical.

The US should also press for a sizable step-up in the effectiveness of the climate finance multilaterals, like the Global Environment Facility (GEF), Green Climate Fund (GCF), and the Climate Investment Funds (CIF). These are still relatively new institutions, but there is virtually no hard evidence on how the climate mitigation projects they support are actually performing. There are three reforms needed. First, the GCF and Climate Technology Fund (part of CIF) deserve credit for publishing data about their investments, and other institutions should be made to follow suit; all agencies funding climate mitigation projects should be required to publish expected and actual climate results. Second, the “transformative” benefits of climate mitigation—that is, results that fundamentally change the way things are done—need to be incorporated. Currently they are rarely quantified in the expected climate impacts, even though this is often the primary motivation for the project. Third, the cost-effectiveness of mitigating carbon is given too little attention in project choice. We found that in many climate mitigation projects the cost of removing greenhouse gases was hundreds of dollars per ton, while in others the cost was as little as $10 per ton.

The US is already a contributor to these funds and should advocate strongly for transparency, evaluation and effectiveness in their investment choices and operational decisions.

From humility to ambition

The Biden administration plans to take major steps in tackling climate change through domestic reform. Its proposals on fossil fuels look like they are arriving at just the right time. On international climate finance for developing countries, the US has almost 12 years of inertia to overcome. It should make a bold commitment to a new and additional financial contribution of at least $10 billion per year by 2025 and couple that with the intellectual and political leadership needed to drive a sustainable recovery throughout the world. 

We are grateful for supporting analysis from Euan Ritchie and helpful comments from Erin Collinson, Charles Kenny, Nancy Lee, and Masood Ahmed. All views and any errors are those of the authors


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.