Environmental and Resource Economics

, Volume 63, Issue 2, pp 429–450 | Cite as

Development Aid and Climate Finance

  • Johan Eyckmans
  • Sam Fankhauser
  • Snorre Kverndokk


This paper discusses the implications of climate change for official transfers from rich countries (the North) to poor countries (the South) when the motivation for transfers is ethical rather than strategic. Traditional development transfers to increase income and reduce poverty are complemented by new financial flows to reduce greenhouse gas emissions (mitigation transfers) and become climate-resilient (adaptation transfers). We find that in the absence of barriers to adaptation, mitigation or development, climate change will make isolated transfers less efficient: A large part of their intended effect (to increase income, reduce emissions, or boost climate-resilience) dissipates as the South reallocates its own resources to achieve the mitigation, adaptation and consumption balance it prefers. Only in the case of least-developed countries, which are unable to adapt fully due to income constraints, will adaptation support lead to more climate resilience. In all other cases, if the North wishes to change the balance between mitigation, adaptation and consumption it should structure its transfers as “matching grants”, which are tied to the South’s own level of funding. Alternatively, the North could provide an integrated “climate-compatible development” package that recognizes the combined climate and development requirements of the South. If the aim is to increase both mitigation and adaptation in the South, development assistance that increases the income level, can be an effective measure, but only if there is an international agreement and the recipient country is not income constrained. If the recipient country is very poor, development aid may reduce adaptation effort.


Inequality aversion Mitigation Adaptation Climate finance  Development assistance Institutional barriers 

JEL Classification

D63 Q50 Q54 Q56 



The project was supported financially by the MILJØ2015 program at the Research Council of Norway. Fankhauser also acknowledges financial support by the Grantham Foundation for the Protection of the Environment and the UK Economic and Social Research Council. We are grateful for the discussions with Scott Barrett and comments from two anonymous referees, Katinka Holtsmark, Torben Mideksa, Linda Nøstbakken and various seminar participants. The authors are associated with CREE - the Oslo Centre for Research on Environmentally Friendly Energy—is supported by the Research Council of Norway.


  1. Banerjee AV, Duflo E (2011) Poor economics: a radical rethinking of the way to fight global poverty. Public Affairs, New YorkGoogle Scholar
  2. Barrett S (2003) Environment and statecraft. OUP, OxfordCrossRefGoogle Scholar
  3. Barrett S (2007) Why cooperate. The incentives to supply global public goods. OUP, OxfordCrossRefGoogle Scholar
  4. Barrett S (2008) Climate treaties and the imperative of enforcement. Oxf Rev Econ Policy 24:239–258CrossRefGoogle Scholar
  5. Bourguignon F, Sundberg M (2007) Aid effectiveness: opening the black box. Am Econ Rev 7(2):316–321CrossRefGoogle Scholar
  6. Bowen A, Fankhauser S (2011) The green growth narrative. Paradigm shift or just spin? Glob Environ Change 21:1157–1159CrossRefGoogle Scholar
  7. Bowen A, Cochrane S, Fankhauser S (2012) Climate change. Adapt Growth Clim Change 113(2):95–106CrossRefGoogle Scholar
  8. Bréchet T, Hritonenko N, Yatsenko Y (2013) Adaptation and mitigation in long-term climate policy. Environ Resour Econ 55:217–243CrossRefGoogle Scholar
  9. Bretschger L, Suphaphiphat N (2014) Effective climate policies in a dynamic North-South model. Eur Econ Rev 69:59–77CrossRefGoogle Scholar
  10. Buob S, Stephan G (2011) To mitigate or to adapt: How to confront global climate change. Eur J Polit Econ 27:1–16CrossRefGoogle Scholar
  11. Buob S, Stephan G (2013) On the incentive compatibility of funding adaptation. Clim Change Econ 4(2):1–18CrossRefGoogle Scholar
  12. Carraro C, Siniscalco D (1993) Strategies for the international protection of the environment. J Publ Econ 52(3):309–328CrossRefGoogle Scholar
  13. Carraro C, Eyckmans J, Finus M (2005) Exploring the full potential of transfers for the success of international environmental agreements, Note di Lavoro No \(>\)50, Fondazione ENI Enrico Mattei (FEEM), MilanoGoogle Scholar
  14. Chatterjee C, Sakoulis G, Turnovsky SJ (2003) Unilateral capital transfers, public investment, and economic growth. Eur Econ Rev 47:1077–1103CrossRefGoogle Scholar
  15. Collier P, Dollar D (2002) Aid allocation and poverty reduction. Eur Econ Rev 46(8):1475–1500CrossRefGoogle Scholar
  16. Collier P, Dollar D (2004) Development effectiveness: what have we learnt? Econ J 114(496):F244–F271CrossRefGoogle Scholar
  17. de Bruin K, Dellink R, Tol R (2009) AD-DICE: an implementation of adaptation in the DICE model. Clim Change 95:63–81CrossRefGoogle Scholar
  18. de Bruin K, Dellink R, Agrawala S (2009) Economic aspects of adaptation to climate change: integrated assessment modelling of adaptation costs and benefits. OECD environment working papers, No 6, OECD. doi: 10.1787/225282538105
  19. Dollar D, Easterly W (1999) The search for the key: aid, investment and policies in Africa. J Afr Econ 8(4):546–577CrossRefGoogle Scholar
  20. Easterly W, Pfutze T (2008) Where does the money go? Best and worst practices in foreign aid. J Econ Perspect 22(2):29–52CrossRefGoogle Scholar
  21. Ebert U, Welsch H (2012) Adaptation and mitigation in global pollution problems: economic impacts of productivity, sensitivity and adaptive capacity. Environ Resour Econ 52:49–64CrossRefGoogle Scholar
  22. Eyckmans J, Tulkens H (2003) Simulating coalitionally stable burden sharing agreements for the climate change problem. Resour Energy Econ 25:299–327CrossRefGoogle Scholar
  23. Eyckmans J, Fankhauser S, Kverndokk S (2014) Development aid and climate finance. Working paper 123, revised February 2014, Grantham Research Institute, London School of EconomicsGoogle Scholar
  24. Fankhauser S (1994) The social costs of greenhouse gas emissions: an expected value approach. Energy J 15(2):157–184CrossRefGoogle Scholar
  25. Fankhauser S, Pearce DW (2014) Financing for sustainable development. In: Atkinson G, Dietz S, Neumayer E, Agarwala M (eds) Handbook of sustainable development. Edward Elgar, CheltenhamGoogle Scholar
  26. Fehr E, Schmidt K (1999) A theory of fairness, competition, and cooperation. Quart J Econ 114(3):817–868CrossRefGoogle Scholar
  27. Grasso M (2010) An ethical approach to climate adaptation finance. Glob Environ Change 20:74–81CrossRefGoogle Scholar
  28. Haites E (ed) (2013) International climate finance. Routledge, LondonGoogle Scholar
  29. Heuson C, Peters W, Schwarze R, Topp A-K (2012) Which mode of funding developing countries’ climate policies under the post-Kyoto framework? UFZ-Diskussionspapiere, No. 10/2012, Helmholtz Centre for Environmental Research (UFZ)Google Scholar
  30. Hoel M (2001) International trade and the environment: How to handle carbon leakage. In: Folmer H, Landis Gabel H, Gerkin S, Rose A (eds) Frontiers of environmental economics. Edward Elgar, LondonGoogle Scholar
  31. Hoel M, Sterner T (2007) Discounting and relative prices. Clim Change 84:265–280CrossRefGoogle Scholar
  32. Hong F, Karp L (2012) International environmental agreements with mixed strategies and investment. J Publ Econ 96(9–10):685–697CrossRefGoogle Scholar
  33. Ingham A, Ma J, Ulph AM (2005) Can adaptation and mitigation be complements? Working paper 79, Tyndall Centre for Climate Change ResearchGoogle Scholar
  34. Ingham A, Ma J, Ulph A (2007) Climate change, mitigation and adaptation with uncertainty and learning. Energy Policy 35:5354–5369CrossRefGoogle Scholar
  35. Jacobs M (2013) Green growth. In: Falkner R (ed) Handbook of global climate and environmental policy. Wiley-Blackwell, ChicesterGoogle Scholar
  36. Kane S, Shogren JF (2000) Linking adaptation and mitigation in climate change policy. Clim Change 45:75–102CrossRefGoogle Scholar
  37. Kolstad C, Urama K, Broome J, Bruvoll A, Olvera M Cariño, Fullerton D, Gollier C, Hanemann WM, Hassan R, Jotzo F, Khan MR, Meyer L, Mundaca L (2014) Social, economic and ethical concepts and methods. In: Edenhofer O, Pichs-Madruga R, Sokona Y, Farahani E, Kadner S, Seyboth K, Adler A, Baum I, Brunner S, Eickemeier P, Kriemann B, Savolainen J, Schlömer S, von Stechow C, Zwickel T, Minx J (eds) Climate change 2014 mitigation of climate change. Contribution of Working Group III to the fifth assessment report of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge Chapter 3Google Scholar
  38. Kverndokk S (1994) Coalitions and side payments in International \({\rm CO}_{2}\) Treaties. In: van Ierland EC (ed) International environmental economics, theories and applications for climate change, acidification and international trade. Elsevier, Amsterdam, pp 45–74Google Scholar
  39. Kverndokk S, Rose A (2008) Equity and justice in global warming policy. Int Rev Environ Resour Econ 2(2):135–176CrossRefGoogle Scholar
  40. Kverndokk S, Nævdal E, Nøstbakken L (2014) The trade-off between intra- and intergenerational equity in climate policy. Eur Econ Rev 69:40–58CrossRefGoogle Scholar
  41. Lee DS, Moretti E, Butler MJ (2004) Do voters affect or elect policies? Evidence from the US House. Q J Econ 119(3):807–859CrossRefGoogle Scholar
  42. Markandya A (1998) Poverty, income distribution and policy making. Environ Resour Econ 11(3–4):459–472CrossRefGoogle Scholar
  43. Markandya A (2002) Poverty alleviation, environment and sustainable development: implications for the management of natural capital. Discussion paper, The World Bank, Washington, DCGoogle Scholar
  44. Markandya A (2008) Water and the rural poor: interventions for improving livelihoods in sub-Saharan Africa. FAO, RomeGoogle Scholar
  45. Markandya A, Pearce DW (1991) Development, the environment, and the social rate of discount. World Bank Res Obs 6(2):137–152CrossRefGoogle Scholar
  46. Markandya A, Nurty MN (2004) Cost benefit analysis of cleaning Ganges: some emerging environment and development issues. Environ Dev 9(1):61–82CrossRefGoogle Scholar
  47. Nordhaus WD (2008) A question of balance: weighing the global warming policies. Yale University Press, New HavenGoogle Scholar
  48. Pearce D, Barbier E, Markandya A (1990) Sustainable development. Economics and the environment in the third world. Earthscan, LondonGoogle Scholar
  49. Pindyck R (2013) Climate change policy: What do the models tell us? NBER Working Paper No. 19244, JulyGoogle Scholar
  50. Pittel K, Rübbelke D (2013a) International climate finance and its influence on fairness and policy. World Econ 36(4):419–436CrossRefGoogle Scholar
  51. Pittel K, Rübbelke D (2013b) Improving global public goods supply through conditional tranfers—the international adaptation transfer riddle, CESifo Working paper No. 4106Google Scholar
  52. Sachs J (2005) The end of poverty: economic possibilities for our time. Penguin, New YorkGoogle Scholar
  53. Schelling TC (1992) Some economics of global warming. Am Econ Rev 82(1):1–14Google Scholar
  54. Schelling TC (1997) The cost of combating global warming: facing the tradeoffs. Foreign Aff 76(6):8–14CrossRefGoogle Scholar
  55. Stern N (2014a) Ethics, equity and the economics of climate change. Papers 1: science and philosophy. Econ Philos 30(3):397–444CrossRefGoogle Scholar
  56. Stern N (2014b) Ethics, equity and the economics of climate change. Papers 2: economics and politics. Econ Philos 30(3):445–501CrossRefGoogle Scholar
  57. Temple JRW (2010) Aid and conditionality. In: Rodrik D, Rosenzweig M (eds) Handbook of development economics, vol 5, Amsterdam, pp 4415–4523Google Scholar
  58. Tol RSJ (2002) Estimates of the damage costs of climate change. Part II: dynamic estimates. Environ Resour Econ 21:135–160CrossRefGoogle Scholar
  59. Tol RSJ (2005) Emission abatement versus development as strategies to reduce vulnerability to climate change: an application of FUND. Environ Dev Econ 10:615–629CrossRefGoogle Scholar
  60. Tulkens H, van Steenberghe V (2009) Mitigation, adaptation, suffering. In search of the right mix in the face of climate change, CESifo working paper No. 2781Google Scholar
  61. UNFCCC (2010) Report of the conference of the parties on its fifteenth session, held in Copenhagen from 7 to 19 December 2009. Addendum–part two: action taken by the conference of the parties, 30 MarchGoogle Scholar
  62. World Bank (2010) World development report 2010. Development and climate change. Oxford University Press, OxfordGoogle Scholar
  63. World Bank (2012) Inclusive green growth: the pathway to sustainable development. World Bank, Washington, DCGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  • Johan Eyckmans
    • 1
  • Sam Fankhauser
    • 2
  • Snorre Kverndokk
    • 3
  1. 1.Center for Economics and Corporate SustainabilityKU Leuven Campus BrusselsBrusselsBelgium
  2. 2.Grantham Research Institute and Centre for Climate Change Economics and PolicyLondon School of EconomicsLondonUK
  3. 3.Ragnar Frisch Centre for Economic ResearchOsloNorway

Personalised recommendations