Results — Evaluation Dutch climate finance for development
Over the past decade, the issue of climate change has played a prominent role in Dutch development cooperation and foreign policy. The Netherlands aimed to reach poor countries and target finance for adaptation to climate change. Did Dutch aid reach the intended countries, and which sectors and target groups benefitted? The Netherlands also used ODA to mobilise private sector finance. What was the additionality of these public funds? And what should future climate finance look like? This evaluation, as part of a larger set of studies on climate change policy, provides answers to those questions.
Introduction
Climate action has become an important and urgent topic on the international agenda - culminating in the Paris Agreement - and climate finance to support developing countries is a crucial instrument for action. The Netherlands committed itself to contributing to the joint objective of supporting developing countries with at least 100 million USD a year from 2020. It aimed to reach poor countries and target finance for adaptation to climate change. Did Dutch aid reach the intended countries, and which sectors and target groups benefitted? The Netherlands also used ODA to mobilise private sector finance, blending public and private funds. What was the additionality of these public funds? And what should future climate finance look like: should donor countries use ODA, mainstream climate into assistance and/or green all of their policies and financial flows? This evaluation, as part of a larger set of studies on climate change policy, provides answers to those questions.
Sand bags to protect built area from flooding, Jakarta, Indonesia
Conclusions and recommendations
1. Reach of Dutch climate finance
Overview of non-climate targeted ODA, public climate expenditure and mobilised private climate finance per year (2010-2019) in billions of euros.
The Netherlands estimated its own ‘fair share’ in the global commitment to support developing countries at EUR 1.25 billion annually from 2020. Climate finance has steadily increased, reaching EUR 581 million public and EUR 752 million mobilised private sector finance in 2019. The Netherlands is on track towards its fair share objective, thanks to an increase in mobilised private sector finance.
Construction of new drainage channels in Southern Bangladesh, Enhancing Resilience Programme
A concern in the international debate is whether sufficient climate finance would be available for low income countries and for adaptation. Although no targets were set at the onset, from discussions and later communications by the Dutch ministry we consider a minimum percentage of 50% to be desirable, for both low income countries and for adaptation. In 2019, 60% of public climate finance was spent on low income countries, and 69% was spent on adaptation.
Recommendation 1: If the (new) minister wants to increase climate resilience while alleviating poverty, the current emphasis on low-income countries and adaptation finance should be maintained.
Solar power in Jordan
Regarding Dutch public climate finance in 2019, 23% went to activities that mobilised private finance. Activities for which private finance was mobilised focused more on mitigation and more on middle income countries than activities that did not mobilise private finance.
Recommendation 2: If the new minister wants to optimise the amount of private sector climate finance mobilised (by public finance), she/he can continue to use blended finance. However, maximising the impact of climate action should be the key consideration, rather than maximising the amount of climate finance spent.
Soil and water management using plastic foil, near Surakata, Indonesia
The 2016-2019 portfolio showed a mix of finance for adaptation, mostly in the water and agriculture sectors, and finance for mitigation, mostly in the renewable energy sector. In other words, the Netherlands supports both adaptation and mitigation, inter alia through climate mainstreaming in activities with other development objectives.
Urban farming, Jakarta, Indonesia
Dutch data on climate finance in development cooperation is fragmented. There is no single database or single information source that gives a complete overview of Dutch climate finance, disaggregated by country, distinguishing adaptation and mitigation, and including the mobilised private sector finance.
Recommendation 3: The Ministry of Foreign Affairs could set up a more transparent and more comprehensive database for Dutch climate finance. The best way forward seems to improve the use of IATI.
Floods in Jakarta, Indonesia
The target groups mentioned in policy notes - women, poor and vulnerable groups, farmers and youth - are not consistently included in project design, approval, monitoring and reporting. In particular, gender is identified as a priority in Dutch development policy and in programme and funding design, but these intended results are rarely confirmed in evaluations and gender is not consistently mainstreamed.
Recommendation 4: Under a new minister, DGIS should formulate a clear policy position and operationalise it, with the aim of reaching the intended target groups and promoting gender equality.
2. Additionality of ODA in blended finance for climate action
Blended finance: phases in support to private sector development
For this study, we developed a conceptual framework that distinguishes between the different private sector development phases that a successful development project may pass through: from innovative ideas (new products or new markets) with an uncertain, risky business case, to mature, less risky business cases, ready to be scaled up commercially.
We find three categories of projects:
Projects with innovative ideas with an uncertain business case, can make a convincing claim on additionality, because the private sector is not yet involved.
Projects with a nearly commercially viable business case, in need of financial products (loans or equity), can make a convincing claim that the commercial sector does not offer this finance.
However, there is a category of project in between the other two: they are not very innovative, nor is it evident that no commercial finance will be available. In these cases, the claim of additionality is often not convincing.
Recommendations:
(5) The ministry, implementing agencies and fund managers should categorise project ideas into three sets: (i) innovative with an uncertain business case, (ii) nearly commercially viable, and (iii) a category in between.
(6) For these different sets of proposals, implementing agencies and fund managers can then assess additionality based on different criteria.
(7) The relevance of the additionality criteria also depends on the sector and the context.
A successful initiative ideally moves from an innovative idea to a commercial project ready to be scaled up. However, in practice, the different instruments funded by DGIS, which include non-revolving programmes and revolving funds, insufficiently support this graduation from innovation to commercial upscaling.
Recommendations:
(8) DGIS should develop an overarching private sector development strategy, following the theory that projects need to evolve from (i) innovations supported by highly concessional funds to (ii) commercial upscaling supported by less concessional funds.
(9) DGIS and the implementing agencies should discuss how the current gap between non-revolving programmes supporting innovations, on the one hand, and revolving funds, on the other hand, can be bridged.
(10) DGIS, in discussions with the main agencies, could decide that existing financial vehicles need to be adapted, or additional vehicles need to be set up.
The appropriate finance blend for different sub-sectors in different stages of sector development.
Not all climate action can be supported by blended finance. Blended finance fills a niche of temporary support between what can be funded commercially and what requires continued public support.
Recommendations:
(11) DGIS and the implementing agencies should develop an assessment framework that helps them decide what type of finance is most appropriate for climate action, varying from ODA, long-term subsidies, highly concessional blended finance, low concessional blended finance, to commercial funding.
(12) DGIS should pay more attention and give priority to supporting the enabling environment (addressing policies and market failures) for investments in climate action.
3. Discussion and recommendations for future climate finance
Following international and Dutch commitments to the Paris Agreement and earlier climate agreements, work to increase support for climate action in developing countries is needed at three levels simultaneously, which we present here in three pathways: (i) dedicating climate finance for development, (ii) mainstreaming climate into development assistance, and (iii) aligning all policies and finance flows to climate objectives.
Three pathways to support climate action in developing countries: (i) dedicated climate finance, (ii) climate mainstreaming of ODA, and (iii) alignment of all policies and finance flows with climate objectives.
Climate change increases the costs of development in the short term. For instance, more floods and droughts will require additional investments in disaster risk reduction and infrastructure. Yet disaster risk reduction also saves costs. And prioritising renewable energy now prevents loss from fossil fuel related investments later.
An internationally agreed, overall needs assessment for climate finance has been lacking. The UNFCCC is currently drafting a Needs Determination Report to improve methodologies for needs assessments. If climate action were based on the needs indicated in developing countries’ plans, it would focus more on results, rather than financial input targets – and it would also increase Southern ownership.
Recommendations for a modestly ambitious cabinet:
(13) Continue to support partner countries to develop country plans with a budget for climate action. The UNFCCC could provide guidance on methodologies for needs assessments. A new cabinet could use developing countries’ national plans as a starting point for decisions on budget and allocation.
(14) In light of the enormous needs and the limited budget, a new cabinet needs to make smart choices, to maximise development impact and climate impact. Country plans can help manage for results rather than on the basis of financial inputs.
More ambitiously:
(15) The ministry can actively contribute to international discussions, setting new and ambitious goals and targets for climate finance.
(16) The ministry could proactively support governments in developing countries in formulating country strategies in which three pathways are considered: dedicated climate finance, climate mainstreaming of ODA, and policy coherence.
Paris Agreement. World leaders at the, COP 21, Paris 2015
One of the three pathways for future climate finance is to allocate dedicated climate finance for development. While developed countries committed to contributing USD 100 billion per year, from 2020 onwards, to support developing countries, there are different interpretations of what can be counted as climate finance. Current public climate finance is not ‘new and additional’ to previous development assistance budgets, which has led to criticism. Parties to the UNFCCC plan to decide on a new target amount of climate finance for 2025 onwards.
Recommendations for a modestly ambitious cabinet:
(17) If the new cabinet agrees with the new target amount for donors, it could continue to dedicate development assistance to climate action in line with its commitments and ambitions and with what can be considered a ‘fair share’, within the ODA budget.
More ambitiously:
(18) The new cabinet could substantially increase its climate assistance, working towards a fair share of the new funding target to be set for the period after 2025.
(19) The new cabinet could already start dedicating ‘new and additional’ climate funding to developing countries. This can be done on top of the regular ODA budget – or by increasing the current ODA budget.
Parkland agroforestry with Faidherbia albida, Niger
The second of the three pathways is to align all development assistance with the climate objectives in the Paris Agreement. ODA-funded activities can be climate-relevant, climate-sensitive (doing no harm) or climate blind. Currently, a substantial part of Dutch development assistance is climate relevant, but we have not assessed whether there are other ODA activities that have negative effects.
Recommendations for a modestly ambitious cabinet:
(20) The ministry could make an extra effort to align all of the ODA budget and portfolio to climate change objectives and international commitments. At the very least, all assistance should be climate-sensitive and do no harm.
More ambitiously:
(21) Stepping up current efforts, a substantial part of assistance could do good (be climate relevant), by mitigating climate change, or by helping vulnerable groups adapt.
(22) Assuming that poverty reduction remains a central objective, mainstreaming climate adaptation into development programmes, e.g. in agriculture, will need to remain a key objective.
(23) Enhance the ‘climate-smartness’ and climate impact of activities, in particular for adaptation. Besides climate markers, policy officers should use climate-relevant indicators, baselines and targets to measure and achieve climate impact.
Frontier Hydro (FMO), Uganda
The Paris Agreement aims for the alignment of all policies and all financial flows to climate objectives, beyond development cooperation. Governments can promote private sector engagement and help create an enabling environment for green investments in developing countries. Experts and critics call upon governments to abandon incoherent domestic policies, for instance favouring fossil fuel use, and harmful trade and agriculture policies. Aligning (greening) all policies will affect all financial flows, including private ones – and they are much bigger than development assistance.
Recommendations for a modestly ambitious cabinet:
(24) A new cabinet could continue to align policies that directly affect developing countries with its climate objectives. These include support for Dutch companies abroad. Phasing out direct support to the fossil fuel industry (as planned) would be a baseline.
(25) A new cabinet can continue to support innovation in climate-relevant technologies and support an enabling environment for private sector development in developing countries.
More ambitiously:
(26) A new cabinet can go further by identifying policy incoherencies in Dutch and EU domestic policies indirectly affecting developing countries (trade and agriculture). A new cabinet can address these issues and rectify inconsistencies to prevent doing harm.
(27) To maximise impact, the focus should shift from mobilising private finance from companies to nudging private finance in whole sectors, with new or adjusted policies and regulations, including greener fiscal policies.
(28) A new cabinet could consider enhancing carbon credit systems and carbon taxing, so that non-ODA revenue can be used e.g. to invest in climate action around the world. It could also introduce new climate-friendly taxes and tariffs, and discourage climate-unfriendly practices (in line with WTO rules and with EU rules and proposals such as the Green Deal).
The international reporting system is imperfect: not all climate finance data are disaggregated by project and by recipient country and mobilised private sector climate finance is aggregated. The Dutch MFA plays an active role in identifying the methodologies to determine the climate finance needs of developing countries and in improving the reporting on climate finance. Developing countries currently complain about the lack of transparency of support. Their climate action ambitions are reflected in national plans, in particular the nationally determined contributions.
Recommendations for a modestly ambitious cabinet:
(29) The Dutch MFA can improve its own reporting and dissemination of reported data, so that developing countries know what climate action takes place in their country. This requires access to disaggregated data, by project and country.
(30) Once developing countries have elaborated national plans, such as the NDCs, the Netherlands can determine how its contributions fit in these country plans, in dialogue with governments, increasing the ownership of developing countries.
More ambitiously:
(31) At a higher level of ambition, the MFA could work actively to achieve greater transparency of climate finance reporting, in the UN and the OECD.
(32) Similarly, the MFA could promote greater Southern ownership, after providing a good example, encouraging other donors to base their climate action on the national climate plans of developing countries.
