Cop29 deal fails to consider inflation so is not tripling of target, economists say

Experts say financial movements mean poor nations will in effect get billions less in value from £300bn pledge

A failure to factor in inflation means the $300bn (£240bn) climate finance deal agreed at Cop29 is not the tripling of pledges that has been claimed, economists have said.

The international talks in Baku were pulled back from the brink of collapse early on Sunday morning when negotiators struck an agreement in which rich countries promised to raise $300bn a year by 2035. On paper, this is a tripling of the previous climate finance target of $100bn a year by 2020, and has been trumpeted as such by the UN and others.

But the text makes no mention of inflation, missing an important recommendation from leading economists upon which the target is loosely based.

It means the world’s poorest countries will receive a sum they already consider inadequate for their needs, but that it will in effect be billions of dollars lower still as the money will lose its value over time, according to Guardian analysis.

Money pledged today is likely to have lost about 20% of its value by 2035, assuming the average US inflation rate of the past 15 years (2.38%) continues into the future, according to Guardian calculations. If interest rates are higher, the value could be even lower.

The target of $100bn by 2020 was set in 2009 and did not include inflation adjustments. If it had done, the target would have become $145bn in today’s money to reach the same value. Even taking 2020 as the baseline for the $100bn figure, due to high inflation rates in recent years current contributions would need to be about $120.5bn to reach the equivalent value.

Even though the $100bn target became easier to reach over time, donor nations still failed to meet it until 2022, two years past the deadline.

During the first week of Cop29, leading economists including Nicholas Stern said developed countries should provide at least $300bn a year by 2030, and $390bn a year by 2035. But crucially, they said the numbers, which were calculated using 2022 dollar values, would need to be updated.

“Targets will need to adjust for inflation over time,” Amar Bhattacharya, the executive secretary of the UN’s independent high-level expert group on climate finance and co-author of the study, said before they were agreed.

Projecting these into the future using the same historical inflation rate, the $300bn target by 2030 would become $368bn, and the $390bn target would need to be adjusted to $538bn to be compliant with the Paris climate agreement.

Developing countries and economists at Cop29 negotiations expressed their concern about the consequences of this technicality.

“It is basic economics (and fairness) that people compensate those that they harm,” said Michael Greenstone, a professor of economics at the University of Chicago, comparing the $300bn target to “a pint glass that now has a couple of splashes of water”.

He added: “So, the absence of inflation adjustment in Cop29’s promises removes a couple of drops but the real story is how empty the glass is.”

Lisa Sachs, the director of the Columbia Center on Sustainable Investment, said the agreed $300bn target was deeply flawed.

“The incoherent process yielded an incoherent commitment, just a small fraction of the necessary financing for developing countries. The $300bn per year committed – which includes private finance to be leveraged – is barely 12% of the estimated financing needs for developing countries, without even accounting for inflation,” she said.

“The [economists’] recommendations were on the basis of a thoughtful analysis of the investment needs, by geography, with respect to mitigation, adaptation and loss and damage. The commitment by developed countries at Cop, by contrast, is not based on anything other than an adversarial tussle about figures. No effort to ground the agreement in specific investment needs, costing exercises, or plans for how investment needs will be financed.”

The social economist Naila Kabeer, a professor of gender and development at the London School of Economics, said Sunday’s deal failed to incorporate recommendations on finance quality and affordability.

“The commitment of $300bn annually to developing countries by 2035 falls far short of the estimated amount even if modest inflation adjustments had been included – which they have not. But it is not just the financial shortfall that disappoints. It is also the lack of quality indicators, such as ease of access, critical for developing countries. The role of public finance has been minimised so they must now rely on the private sector to decide which developing countries have a suitably market-friendly environment. This is not a recipe for either the right kind of investments or their affordability,” she said.

Cover photo: By The Guardian