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Poverty reduction and climate finance: pieces of the same development puzzle

By Susanna Gable, Deputy Director, Development Policy and Finance, Gates Foundation

Economic growth, poverty reduction, and climate action are deeply interlinked: none can move ahead without the other. So why isn’t more happening?

Our recent report A transition approach to poverty reduction and climate finance – The missing link to implementation from the Global Council on SDG1 points to the lack of ‘transition thinking’ both in policy and financing. It argues that to achieve poverty reduction goals alongside necessary climate actions, we need a just green transition supported by policy and financing that takes the specific development context and level of economic transition of each country into account.

The starting point: centering action at the country level

Too often decisions around the growth-poverty-climate nexus are discussed at a global or too general level, even when searching for concrete policy solutions. While climate change is a global problem, actions to tackle it will be taken by decision makers at the country level – be it politicians, businesses, citizens or consumers. It is therefore essential to approach this nexus from the country perspective when trying to understand the lack of implementation.

Principles for an inclusive green transition

Five principles should guide policymaking and financing decisions for an inclusive green transition that combats both climate change and poverty:

  1. Economic development and poverty reduction must be seen as pre-conditions for resilience in a changing climate.
  2. No matter the success of mitigation efforts, there is a need for adaptation.
  3. Mitigation actions need to be part of a sustainable development strategy that recognizes country-specific trade-offs.
  4. A just transition is essential for sustained development, where decent jobs and income are created for impacted communities.
  5. Climate justice and country ownership need to guide the design of policy responses.

A green transition adjusted to country context

In 2019, the poorest 50% of the world population emitted only 12% of global emissions but were exposed to 75% of relative income losses due to climate change, while the richest 10% contributed 48% of global emissions but were exposed to just 3% of income losses[1]. Rich countries need to assume the main responsibility for mitigation and urgently make resources available to developing countries who have least contributed to the crisis but are suffering the greatest impacts of severe climate events. A productive starting point is to approach the growth-poverty-climate nexus based on country income-groups, allowing trade-offs todiffer depending on where the country is in its transition from low- to high-income status. Broadly generalizing:

  • Low-income countries should have a clear focus on poverty reduction and the provision of basic needs, especially energy access, as well as on adaptation to build resilience which includes general economic development.
  • Lower-middle-income countries should focus on poverty reduction, economic development, and adaptation to increase resilience. They must also consider lock-ins in energy- and carbon-intensive paths and the economic feasibility of energy options, and ensure that long-term development is sustainable.
  • Upper-middle-income countries, which have developed but by locking in an unsustainable infrastructure system, should focus on attracting private flows to support investments in greener climate resilient development.
  • High-income countries, which have benefited from unsustainable economic development leaving a large climate and environmental debt,should lead in mitigation efforts nationally and step up support to mitigation and adaptation efforts in developing countries.

This general transition approach should be further adjusted to the country-specific context and the aggregated contribution to global emission, to accelerate climate action but also to avoid polarization and mistrust between countries. Tailored approaches at the country level will also be critical to address within-country inequalities. Emissions vary across countries but also across income groups, and climate-related income losses for the global bottom 40% are 70% higher than those of the average population.

A transition approach to financing and policy instruments

Building green and resilient economies will require the mobilisation of unprecedented capital, without jeopardizing support for the goal of eradicating global poverty and providing basic needs. Taking the starting point in a country’s economic transition stage from low- to high-income and its specific development challenges can help determine the realistic and efficient mix of financing and policy instruments.

Official Development Assistance (ODA) will continue to be essential, in particular for developing countries where domestic public resources are insufficient. The main focus of ODA should be to support people living in poverty, while catalyzing the green transformation. Building resilience in poor countries often means general development and improving institutions, which is precisely the type of support ODA provides. ODA is also an important piece of climate investments, in adaptation and investments with high upfront costs that are critical to prevent lock-ins into carbon-intensive patterns. In 2021, members of the OECD Development Assistance Committee (DAC) allocated 27.6% of their bilateral ODA to climate objectives, a 6 points drop from 2020.

The gap in investment could be bridged by the private sector which is not only essential for creating jobs and direct income generation, or climate-related efficiency enhancing investments, but also for raising tax revenues. Tax revenues in turn increase the room for public investments in poverty reduction and climate action. Using public climate finance and portions of ODA and other official flows to catalyze private investments can therefore have significant leverage effects. This catalytic effect will however differ from lower to higher-income groups, and will require tailored policy and financial tools, such as addressing the underlying investment environment risks, addressing market failures (e.g., carbon taxes, access to markets), and building and aligning the fundamental institutional financial structure globally, regionally and nationally.

Many solutions to the growth-poverty-climate challenges are available but major change will only happen when a large enough part of the international system moves in the same direction and when solutions are tailored to specific country contexts.

The OECD Development Assistance Committee’s Community of Practice on Poverty and Inequalities – which I had the honor of chairing in 2021-22 – offers a space for donors, governments, researchers and civil society to discuss how development co-operation can help address these challenges and contribute to making progress towards the one and only solution: global development within planetary boundaries.

[1] The World Inequality Lab’s data