The Spillover Effects of Climate Change from Developed to Developing Countries

The effects of climate change have been evident in 2022 in many areas around the world. Some areas have experienced flooding, as seen in vast regions of Pakistan, and some areas have experienced warmer temperatures and drought conditions. Other areas have seen less snowfall or precipitation during the winter months. With less snow accumulating on mountains, less precipitation and/or with warmer temperatures earlier in the year, many areas have seen less water flows. The European Commission Report about Drought in Europe - August 2022 explained that the drought conditions in Europe in the summer of 2022 were caused by wide and persistent lack of precipitation combined with a sequence of heatwaves.

These conditions have devastating implications on areas dependent on snow or continuous water flows as water storehouses for drinking water and for agriculture. Less precipitation has devastating effects on the fertility of soil and less water in river discharges also has a negative effect on the energy sector, which uses water for hydroelectric power generation and cooling systems of other installations, and on other human activities.

As these climatic conditions become more frequent, water scarcity will become a bigger issue. In a recent discussion during a seminar organized by the Korea Institute for International Economic Policy on Global Transition and Food Security, I raised my concerns that what we have seen during the past summer is just an intro or a “sneak-peek” to what we will be experiencing in the future, and there is no doubt many countries are unprepared for the crisis.

If we take Europe as an example, according to the European Parliamentary Research Service from December 2019, over 40% of total water use in the EU goes to agriculture, reaching 80% in some regions. In addition, the share of the irrigated area in total agricultural area in the EU is only 6% (Eurostat, 2016), meaning that as irrigation practices expand because of drier conditions, the share of total water use that will be directed to agriculture will grow. The question is, where will the water come from?

As water shortages become more acute in developed countries, these countries will have to resort or expand the use of technologies which create, conserve, manage, and treat water, just as Israel, a leading water-tech country, has done to manage its water crisis in the last decades. The use of desalination, even in countries which currently have no water shortages or have not even raised this possibility, will most probably become a necessity. In this regard, despite having several strategies in the fields of water management, climate change adaptation and food security, which include spreading the use of irrigation, the European Union acknowledges in its EU Blue Economy Report 2022 that in the EU and UK, 60.5 million people and €1,158 billion of economic activity are exposed to water scarcity and as a result, the use of desalination is a necessity. However, the market for newly developed desalination plants has not been growing as expected. Investments in improving and utilizing atmospheric water generation technologies will also be more substantial in the future.

Having said all that, adaptation to the water challenges created by climate change is just one area of investments needed in developed countries. Climate change will require these countries to take other measures to adapt their infrastructure to climate change. For instance, high temperatures this summer have caused railway infrastructure to buckle under the intense heat and roads and airport runways to melt. Adapting this infrastructure to a changing reality will require billions of dollars of investments.

The implications of these adaptation needs will directly affect the availability of financial flows to developing countries. Climate financing in developing countries relies mostly on the traditional sources of funding, which include funds provided by developed country governments from their national budgets either bilaterally or multilaterally (through the World Bank, Development Banks, the GCF, CIFs, and other dedicated funds) or through leveraged private sector funds. If developed countries will have to finance their growing domestic adaptation needs that were not realized fully before, this means it will be a bit more difficult to find the available funding sources to transfer to the developing world. This is especially true when even today there is a significant financing gap where infrastructure needs in the developing world exceed current investments.

Even when using off-budget expenditure measures, as countries do to finance many infrastructure projects, there are adaptation measures that do not create enough revenues, making off-budget borrowing not a viable solution for certain funding needs. Under the assumption that national budgets are not infinite sources of financing, and developed countries are now faced with reduced fiscal resources as well as tighter international banking regulations, all these create strains on financial transfers from donor countries. Domestic political and economic pressure might also elevate this problem.

As for private sector funding, which focuses on commercially viable projects, one should remember that in the developed world, infrastructure projects are relatively low risk. This makes them more attractive to certain private sector financing institutions than the same types of projects in much of the developing world, where sovereign, political, macroeconomic, market, credit, technical and other types of risks are much higher. It is not surprising then to read that according to the World Bank, 83% of investments in infrastructure projects in 2017 in developing countries were funded by government entities and state-owned enterprises rather than the private sector.

As if reality wasn't hard enough for financing adaptation infrastructure projects in the developing world, where climate related risks are expected to be more intense than in the developed world, it seems things are going to become even harder in the future. Innovative, holistic, reforming, and transformative solutions will have to be put in place to meet these financing challenges and to raise and utilize adequate financing for all countries.

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