Aid for trade and climate change financing mechanisms: Maximizing benefits from complementarities

15 December 2009

Trade and climate change issues are intricately linked, especially in Africa, whose economies rest on agriculture, a sector that is highly vulnerable to climate change. The cumulative evidence shows that sub-Saharan Africa will be the most affected region of the world.  Climate change-induced events, such as droughts, global warming and sea-level rise, will have substantial impacts on Africa's agricultural crops, livestock and fisheries, water resources, coastal zones, infrastructure, as well as human health.

What are the links between climate change-adaptation measures adopted by African Least Developed Countries (LDCs) and Small Vulnerable Economies (SVEs) and their trade impacts? Africa's position in world trade is marginal, and various factors, including Africa's geography, concentration on low-value, inefficient agriculture, distorted policies, deficient infrastructure and poor institutional support, have prevented African LDCs and SVEs from taking advantage of existing market access privileges to integrate the world economy in ways that make an impact on economic development and poverty alleviation.

Aid for Trade and the Global Environment Facility

The Aid for Trade (AFT) initiative has been welcomed as a framework that carries the potential to help developing countries, and LDCs in particular, address key infrastructure-related bottlenecks, as well as helping these countries build productive capacity in the hope that these investments will allow them to generate greater exports. A significant amount of AFT resources have flowed to Africa; however, the demand for such funds far exceeds the available endowment, which, moreover, is uncertain of being replenished beyond 2010. Africa received 42 percent of total AFT in 2007, but it bagged the bulk of the increase relative to the previous year. This trend is encouraging, and given donors' engagement with Africa's development agenda, it is likely to be sustained into the future, subject to further resources being available.

African LDCs have also been receiving aid from the Global Environment Facility and from bilateral donors to implement climate change-related adaptation projects. These projects have spanned a wide array of sectors, involving a multitude of specific measures. Under the LDC Fund (a fund that helps LDC's carry out National Adaptation Programmes of Action), 80 projects, with a total project value of US$101.3 million, have been approved for funding, 14 of which are currently under implementation. These projects will use up a large chunk of the LDC Fund's endowment of US$179.9 million, and will leave little for future projects. The total cost of projects based on National Adaptation Programmes of Action (NAPAs) submitted by African LDCs amount to US$586 million, which is far above the fund that is left to be utilized.

In the absence of additional resources, it will not be possible for these countries to implement adaptation projects. While other funding options are available, the requirement for co-financing will mean that African LDCs and SVEs incapable of pooling funds from other sources (including debt) will not be able to adapt adequately to climate change. Those that do will actually be paying to adapt to climate change. This would be really unfortunate since it is well established that these countries contribute the least to climate change but are the most affected by the phenomenon.

Linking trade and climate change financing

Co-financing between AFT and the GEF provides an opportunity to secure the additional funding needed to implement projects that integrate components of climate change adaptation and trade competitiveness. A complementary and reinforcing approach between the two financing initiatives is likely to bring additional benefit and greater effectiveness in tackling climate change and trade-related issues, given the fact that many of the climate change-related projects have clear trade-related impacts. The synergies are most obvious in sectors like agriculture, fisheries and livestock, and water resources. Climate change adaptation needs in these sectors can be matched to AFT categories such as economic infrastructure or building productive capacity in so far as they have impacts on export capacity or competitiveness.

While AFT resources can supplement available GEF funds to support projects that address both climate change adaptation and trade competiveness, it is crucial that additional resources be mobilized for aid for trade: existing AFT funding should not be diverted to finance climate change adaptation needs.

The case studies of adaptation and AFT projects show that the desired complementarity between climate change financing mechanisms and aid for trade is already a reality. Based on the lessons learned from these case studies, we propose a strategy for making these development assistance frameworks complementary and mutually reinforcing in meeting a common set of objectives. This strategy rests on four pillars:

Maximizing synergy

A significant degree of complementarity already exists between the types of projects that are financed on AFT and climate change. Many of the adaptation projects identified in the NAPAs have clear links to economic infrastructure and/or building productive capacity in the AFT initiative. These links should be recognized and built upon to develop and maximize synergies between AFT and climate change projects. One way in which this can be done is by specifying the trade impacts of NAPA projects, and linking up NAPAs and Poverty Reduction Strategy Papers (PRSPs).

Inadequacy and co-financing requirements in adaptation funds as scope for AFT

Adaptation funds are grossly inadequate to meet the numerous projects in need of funding. Moral responsibility calls for greater resources to be put at the disposal of vulnerable countries to combat the damaging economic effects of climate change. Yet, the future of the LDC Fund is uncertain. On the other hand, while AFT commitments have increased from the 2005 baseline, there is no guarantee that these funds will continue to flow in smoothly far into the future. It is therefore critical that LDCs impress on their richer, industrial partners the need-indeed, the moral obligation-to provide more aid for adaptation purposes. In so doing, LDCs and SVEs can appeal for AFT and climate change financing initiatives to be coordinated in a way that would permit greater coherence, transparency and predictability in the two initiatives. Moreover, the AFT initiative can help co-finance climate change projects that will have a measurable impact on the trade capacity of the implementing countries, provided additional resources are provided.

Governance structure

Achieving complementarity between AFT and climate change financing mechanisms at the operational level requires, in the first place, that a country submits its NAPA and PRSP at the same time and to the same funding agency as complementary documents to be read together. This is not only technically cumbersome-especially for human resource-constrained LDCs and SVEs-it is also impracticable because the AFT initiative lacks a governance structure like that of the GEF. As long as adaptation projects are financed through global funds like the GEF while AFT projects are funded directly by donor countries, it will prove difficult to achieve the desired complementarity between the two funding initiatives. Hence, the call for greater complementarity between AFT and climate change financing initiatives is a call for greater coordination in the disbursement of AFT resources, ideally through a centralized facility like the GEF.

Learning from experiences

Both AFT and climate change financing initiatives have existed long enough to generate positive experiences that can be drawn upon in the effort of making the funds operate in a coherent, complementary and mutually reinforcing manner. In fact, each financing initiative boasts some features that the other initiative can learn from and adapt to improve delivery and effectiveness of aid. Climate change-funded projects are generally better coordinated and are more fully owned by the implementing country than AFT projects are. On the other hand, the latter are more deeply rooted in development and poverty reduction.

Conclusion

Africa's woes go beyond environmental concerns. Most LDCs are, in fact, more concerned with day-to-day survival than with climate change. It is widely recognized that trade can lift these countries out of poverty and place them on the path of sustainable growth. Consequently, a number of these countries have received AFT to help them invest in trade-related economic infrastructure and to build supply-side capacity. This article argues that climate change and aid for trade financing initiatives can be used in a complementary manner to overcome their specific weaknesses, promote synergies, and provide a common voice to affected countries in their plea for more aid. Promoting greater coherence and complemetarity between these financing initiatives should be motivated by lessons of good practice in their implementation. It also calls for the formalization of the aid-for-trade initiative, which has, until now, operated at the bilateral level in a rather uncoordinated manner.

Vinaye Dey Ancharaz is a senior lecturer and head of the Department of Economics and Statistics at the University of Mauritius.

This article is based on a larger study forthcoming as an ICTSD publication. See  Ancharaz, V.D. and R.A. Sultan (2009). "Aid for Trade and Climate Change Financing Mechanisms: Best Practices and Lessons Learned for LDCs and SVEs in Africa".

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