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Climate Finance - Moving Beyond the 'Polluter Pays'

Climate change adaptation funding is frequently characterized as reparations or compensation for costs imposed by historical emissions. This characterization derives from the ‘polluter pays’ principle. The flows associated with climate finance are thus frequently conceived of as payments owed that are distinct from, and logically additional to, traditional aid flows which are conceived of as investments in the wellbeing of poor people and poor countries.

The polluter pays principle (PPP) undeniably has intuitive appeal. However, perhaps now is the time to adopt a framework within which the logic of differential responsibilities between developed and developing countries remains intact, but which is based on variations in capabilities, rather than culpability for the problem of climate change.

Responsibility for the current levels of greenhouse gases in our atmosphere is skewed towards the developed world, especially when we consider emissions on a per capita basis. Even though developing countries are responsible for a relatively small share of cumulative emissions, the negative effects of climate change are widely regarded as very likely to be relatively greater in developing countries.

Further, there are a number of problems with PPP, and a number of potential benefits associated with moving away from it:

1. There is a tension between conceptualizing climate finance as separate and distinct, on the one hand, and the broad agreement that climate and development issues are strongly interlinked and hence best tackled jointly, on the other.
2. PPP has provided impetus for the widespread spawning of new funds and disbursement mechanisms, with a high potential for duplication and wasteful complexity.
3. Private money must form a significant part of future climate finance, with public money increasingly used to leverage private funds. It is not easy to see how a system focused on compensation could be designed in such a way as to simultaneously help catalyse the necessary private sector financial flows.

These are serious, but perhaps not insurmountable, issues. However, there are also even more fundamental problems with the application of PPP to the climate problem.

How much should the polluter pay?

Assessing the liability of the polluter is crucial if PPP is to be successfully applied, for this we must be able to quantify the impacts of climate change. The numerous attempts to do so almost invariably compare futures under climate change to an alternative or counterfactual scenario where global climate change due to human activity is not present. Typically, for the counterfactual, evaluations assume that the climate of roughly the second half of the twentieth century persists into the twenty-first century. The difference between the climate change scenario and the counterfactual would then represent the cost that the polluter should play.

The technical challenges in conducting these assessments are immense, rendering conclusions subject to substantial debate. Unfortunately, an even more difficult issue exists. This relates to the counterfactual ‘no climate change world’. Current science tells us that such a world is—whatever actions we take—purely hypothetical as the climate is going to change regardless. Comparing climate change futures with such a scenario, is, as has been shown by UNU-WIDER work, useful in terms of planning as it highlights the likely divergences from recent historical experience that climate change might impose. However, a purely hypothetical counterfactual, one that directly contradicts climate science, does not provide a solid basis for assessing liability under PPP.

If developed countries are to be held liable for cumulative emissions from some historical point in time, then the counterfactual ‘reduced climate change world’ should surely consider the implications of the mitigation policies that would have been required to constrain emissions from that date. This is a wildly complex technical challenge. And the conclusion that the entire world, including developing countries, would be somewhat worse off, at least in material terms, than they are today if rapid industrialization had not taken place cannot be ruled out and may even be likely. After all, there is broad agreement that future mitigation policies are likely to impose costs. Hence, had mitigation policies been imposed historically, they should also entail costs. To take an extreme example, had fossil fuels been forsaken at the dawn of the industrial era, the benefits (and the costs) of an industrialized economy would certainly have been delayed. Industrialization may not have taken place at all.

Overall, the application of PPP to climate finance is a disconcertingly murky enterprise that is highly unlikely to yield solid conclusions, and may even serve to undercut arguments for financial and other resource flows designed to help developing countries confront climate change.

An alternative way to approach climate finance based on theories of justice

If PPP is inadequate, where then can we turn for guidance on how the cost of climate change mitigation and adaption could be best shared? One answer lies in the work of political theorists, and in particular in the work of John Rawls and Amartya Sen. Rawls asked us to imagine collectively deciding on principles of justice from behind a ‘veil-of-ignorance’, a position in which we are unaware of our own individual attributes such as class, race, gender, and ability. From such a position, Rawls surmised, we would, after putting in place guarantees of political and social rights, seek to maximize the position of the worst off members of our society.

Rawls originally applied this method to considerations of justice within individual nation states, resisting the idea that his principles of justice could be applied internationally on the basis that states, unlike individual citizens, are self-sufficient enterprises. However this clearly breaks down in the face of the global challenge represented by climate change. If one were today designing international institutional arrangements from behind a veil-of-ignorance without knowing in which country in the world one would end up, it is highly likely that one would prefer some international system designed to cope with climate change. Furthermore, one would be likely to design an international system that took special account of particularly vulnerable populations, such as those living in small island states whose very existence is threatened by sea level rise.

The critiques, revisions, and enhancements to the Rawlsian constructs of justice set forth by Sen (2009) provide further guideposts for the future of the international institutional architecture. In particular, Sen emphasizes continual improvement of institutional systems as opposed to a one-off leap to a system judged to be best by some ex ante reasoning.

Within such a framework, the logic of differential responsibilities between developed and developing countries would remain intact, but would be based on variations in capabilities, rather than culpability for the problem of climate change. Beyond enhanced clarity, this framework has the advantage that it fits well with the by now well-recognized need to holistically consider developmental, adaptation, and mitigation policies. This framework also fits more comfortably with the manifest need to catalyse private finance to achieve linked developmental, adaptation, and mitigation objectives.

While these exhortations are extremely general and leave a great deal to be worked out, they do lead us away from a long set of discussions that have, as yet, borne little fruit and appear unlikely to do so in future.