Welcome to zero. I am Akshatrati. This week moving money to the right places. Here at Bloombergrain, we are starting to Geurope for next month's COP meeting in Baku in Azerbaijan. As regular listeners of the show know, I love COPS, the sheer energy and ideas, and the rainbow of delegates that show up every year. This year's meeting will be smaller than recent COPS and will come days after the
US election. It will also happen in a region that is between two active conflicts, and yet world leaders cannot avoid talking about how to tackle climate change. The big question that's going to be on the table at COP twenty nine has to do with finance. Specifically, it's to do with money that is moved from rich countries to poor countries to help we're dealing with climate change. The initial promise sum was one hundred billion dollars each year.
By twenty twenty, that didn't happen, but by twenty twenty two, rich countries claimed it was happening. At COP twenty nine, they now need to agree on a newer, bigger figure because the more emissions need to be cut and the more there needs to be adaptation to a hotter planet, the more expensive it gets for poor countries who did not contribute as many emissions to heating the planet in the first place. It is something we'll talk about a
lot over the coming weeks. Like when I crossed paths with COP twenty nine president at the Climate Week in New York, already had a list of questions for Mukdarbabayev.
Your name is Akshatra Yasha.
One of the big things I wanted to ask him was about the Loss and Damage Fund, which was set up to help climate ravish countries pay for immediate recovery.
I used supportive of the I and why Akshak, You're right that Loss and Damage Fund and the operationalization of this fund is one of the prioriti on COP twin can I and we make the good progress last week in Baku.
We'll bring you more from my conversation with the COP twenty nine president in a future episode as we get into the specifics of how these proposals are likely to play out in negotiating sessions. But first it's helpful to take a step back to understand how climate finance works in the first place, why it's so hard and what the most promising solutions seem to be. There's no one better equipped to explain all of this than Avinash Parsod.
He was previously an advisor to Barbados Prime Minister Mia Motley and he's someone we've had on the show before. In that episode, we talked about how climate finance should be thought of in three buckets. The first bucket is the largest. It represents big projects that provide big returns, say a wind farm or a major investment in drought resistant crops. Put money in and get more money out.
The second bucket represents instruments that make it possible to borrow money today from future people, things like government bonds that can be used to build sea walls that will cost money to day but save a lot more money from avoided flooding. And in the third bucket is funds to deal with extreme climate impact, like the Loss and Damage Fund. We will be hearing a lot about money for this bucket has to come in the form of
grants from rich countries. Avinash has been thinking about this problem for a long time, how to make global markets work to unlock climate financing, and in his new role as special advisor on climate change to the president of the Inter American Development Bank. He is putting those ideas into action. In this episode, we talk about the kinds of poor old global finance solutions that worked in the past and why we're still waiting for them to be
deployed on a larger scale. By the way, this episode sits in two buckets. It's a COP twenty nine episode, but also part of a new recurring series we are calling Moving Money, where we demystify how money gets to the right places to deal with climate change. Avinash, welcome back to the show.
Thank you.
Now. One thing that is becoming more in or obvious to people is that when you run the numbers, it has been clear that the cost of climate damage is globally will be more than the cost of the solutions to tackle it. And yet there is still a bottleneck that is typically around money, getting the financing to deploy these solutions. You've talked about finance all your life. Why is it such a difficult proposition when it makes economic sense.
Well, it's often because the people who benefit and the people who pay are different. And I think that's the challenge with climate finance. The whole world benefits and some more than others, some more climate runnable than others. And we're asking a different set of people who perhaps not suffering most from the climate today to make the biggest contribution, partly because they have contributed the greatest amount to the climate problem through a century of emissions.
You know.
One of the ways of trying to deal with this is by breaking it down, breaking down climate finance into the three buckets we talked about earlier, and the irony is the the smallest bucket is the hardest to fund, and that's because it's climate related loss and damage. It's estimated to be about one hundred and fifty billion dollars per year and rising. The more that we don't mitigate the climate, we don't adapt to the changing climate, this
number gets bigger. But the only really way to address that figure is through a cash transfer, and that's the hardest thing politically to do. Cash transfers come out of aid budgets, and aid budgets they're shrinking, they're not expanding. And the total aid in the world of the rich countries is around two hundred billion dollars right and we're saying that one hundred and fifty billion. It's almost the
same amount is additionally needed a doubling of aid. Well, we're nowhere near the political discourse where there's a doubling of aid. Some people are having aid, So that is the challenge. And I think that if and this is something that to be honest, talking to you at shutters help crystallize in my mind, if this is about handing
around a cap, we're never going to get to these numbers. Therefore, we need a systemic mechanism, a mechanism that makes this automatic and easy and daily and a key part of economic activity. And the thing is that there are actually many of these mechanisms around that are actually there that many people are completely unaware of it. It's almost like there's a there's a plot to make people not be aware of them, because it'd be so dangerous people were aware of them.
Well, one of those mechanisms is what we have through the cop system, the conference of Parties that happens every year. It forces developed countries and developing countries to make plans about how finance can flow and will flow to these countries. But it feels like every year these two parties butt heads and they come up with bigger and bigger numbers
and very little of that gets delivered. So as we go into COP twenty nine, the number right now being floated around is one trillion dollars should go annually from developed countries to developing countries. If eight budgets are two hundred billion dollars and not growing, this new figure of a trillion dollars, which in COP jargon is being called the new Collective Quantified Goal on Climate Finance NCQG for short.
First of all, what is this number and how realistic is a trillion dollars to be put under that number?
I think the one trillion dollars, which is a big number, is actually the right number. It is the number we need of cross border financing, international financing. It's not the total number we need for everything, but for the cross boarder bit, which is the hard bit, right getting countries to contribute to something global and international, not just in their own country. So it's good that we are now
focusing on a real number. One of the challenges of the one hundred billion dollars wasn't so much that it wasn't achieved for a long time. As it began getting achieved, it began becoming irrelevant, right.
And this one hundred billion is the previous goal that was supposed to be reached by twenty twenty but eventually reached in twenty twenty two, and that was about developed countries putting money towards developing countries, although how you counted that hundred billion dollars was also interesting, right, true.
But I want to segue a little bit about this number because when you talk about international agreements and unf Triple C and these things, people have a certain fatigue, a certain despair, belief that this can't work. We've been trying since nineteen ninety two, and I want to juxtapose that with things that have worked and do work behind the scenes, under the radar and with great irony, I think,
is the Oil Pollution Compensation Fund. So this is based around a disaster, the Tory Canyon disaster when I was growing up, and I'm fifty eight, so it actually happened before I was born, or just about as I was born, but of course I'm not remembering it happening then as it happened, but it was such a major disaster in the United Kingdom where I was growing up. The people were talking about it for a decade later. Ol tanker breaks up in the channel, oil is washing ashore on
the white beaches of Cornwall and Brittany. And bear in mind it took thirty years to get a loss and damage fund. Within three years Britain and France have managed to create an international scheme for which other people are going to pay for the cleanup. That is what is possible.
So now whenever there's an oil spill anywhere in the world, every single tanker of oil leaving a port contributes to the Oil Pollution Compensation Fund, which makes sure that a big chunk of that cost, one hundreds of millions, is
paid for by this mutualizing of the cost. And another mechanism that exists is that every single barrel of oil produced in the United States of America, a country that believes in low taxation and private enterprise and the state not being too medlisome, every single barrel of oil produced in America, every single barrel of oil imported into America, pays nine cents into the Oil Spill Fund, which currently
has eight billion dollars. So when we talk about so if you want to get one hundred and ninety two countries together and ask them to take money and an ad hoc bases out of their budgets to other countries. Politically, that's very hard. Indeed, we're getting governments that are being elected that are being tougher, are being more nationalistic, that are talking about building walls, not breaking down walls, and
providing funding and so that doesn't work. But juxtaposed to that are these mechanisms and systems that does raise money for pollution. And this is a different kind of pollution that we need money for, and we need money on the scale of the kinds of moneys that are being collected today.
And do you think these funds that were created decades ago where everybody contributes a small sum work because everybody could benefit from having access to this fund. So if there is an oil spill in the US, the fund would trigger and you'd be able to use the money to be able to resolve issues back home. Of course, the same thing could be true because it could happen in Nigeria and you could perhaps use the oil compensation fund to try and fund compensation there. But it is
in everybody's benefit, that's why it's working. Whereas these corp finance funds that we are talking about are very much a cash Transfer Fund, or as they would say, developing countries saying, we deserve this money because we didn't cause the problem. You did, and so you're supposed to help pay us to try and get clean energy, adapt to warming, to deal with the damages that are coming for a problem we didn't create it.
I think that the oil spill funded America is got the huge benefit of it being within one country and with the force of domestic legislation government. But the Oil Pollution Compensation Fund, which actually pre existed the oil spilage Fund, is an international agreement, and yes it's about one country at a time, but it's about any country that could benefit,
and it is a genuine no one really knows. Everyone's committed to putting money into this fund, even when they will not probably benefit from it directly, and so I think that shows it's possible. It's a sad fact of the day that rich countries observing pollution caused by something outside of their country becomes obvious to them that you need an international agreement, and they managed to get an agreement organized. Well, we need the same thing to support
climate vulnerable people. And whilst the poorest or the most vulnerable, of course, we will all be impacted. And many people in rich countries are experiencing the climate today. They're experiencing the changing climate, they're experiencing extreme heat in America in Europe.
After the break, I asked Cabinage where their insurance can play a role in helping climate finance, and he warns us against magical thinking. So let's look at the three buckets. The largest bucket is the bucket in which if you put money, you'll get more money out. Typically the bucket that is the energy transition where you build solo plants or wind turbines or whatnot. It's about four trillion dollars
on an annual basis. Then there is the second bucket, which is money you could borrow from the future to try and pay for adapting to climate change now so that future people pay less. And that's sort of roughly three hundred to four hundred billion dollars on an annual basis. And then there's the last bucket, which is the compensation bucket, the damages bucket, which is one hundred and fifty billion dollars. Say, now, the smallest bucket is still pretty large given the size
of eight budgets. So what do you think should happen at COP twenty nine to make the smallest bucket, the Loss and Damage Fund which now exists, actually start to become the sort of size that it will have real life impact in really protecting or helping people deal with the damages that come from a climate impact.
So I think you've described these buckets really well. Actually, I say is shorthand to your better description. Break it down into revenue, savings, costs. You know, there's a bucket for revenues, there's a bucket for savings where the savings are even great than the investment required to generate the savings, and it's a bucket for costs. And you're quite right, loss and damage it's in that cost bucket. And the challenge for this is it can't really be funded any
other way. There's no revenues, there's no savings. Your low income houses are being washed away. You've got to rebuild them again in a better place. So this is a lot of costs. We can rebuild them better to make sure they don't get washed away again. But this is a lot of costs. And I think that if the fund for Loss and Damage that the un established, the UNF triplecy established is an ad hoc fund that passes
around the cap every three years. We're just never going to get to those kinds of numbers one hundred billion dollars to two hundred billion dollars. There was an initial cap raising that generated seven hundred million dollars, and let's not begrudge that's that was organized very quickly immediately, but with all the lights blazing on the topic, we raise seven hundred million dollars and that was a one off. That wasn't a commitment for seven hundred million dollars every year.
That was one off for the fund. So that's not going to work for a fund that needs to respond to a loss and damage of a one hundred to two hundred billion dollars a year. We need a mechanism. Can the un F Triple C come up with that mechanism? I think that UNF Triple C plays a very important role, but it is not really able to come up with those financing mechanisms so easily, and so I think we need to explore all the different avenues, but we need
a mechanism. We need a mechanism like a dollar and every barrel of oil, gas and coal equivalent like a dollar and every container that is carrying contents that have a high carbon content in their production or supply. These things will get us the numbers we need. One dollar on a barrel of oil, gas and coal equivalent will fund loss and damage every year. And what is a dollar for a thing that moves in price by more than a dollar every week?
Until that happens. There have been a few ideas that have been floated to try and stretch the seven hundred million dollars that are there in the loss and damage fun today. Now, if rich countries is unable to fund one hundred million dollars, now, could they use the seven hundred million dollars to try and at least buy insurance for developing countries.
It won't work for a few reasons, but I think it's important to dwell a little bit on this because the numbers are so big. The politics of sending money abroad to foreigner is so difficult that it has led to a fertile ground for magical creation of magical solutions. The belief that we can create a token a credit for carbon reduction or biodiversity support has been around for a very long time, and insurance is another one of these magical solutions. Let's break this down now, insurance is
a way of spreading risk. It's not a way of removing the risk. At the end of the day, the premiums going in and the payments going out have to match each other. Now they don't need to match each other. On a daily basis, monthly, quarterly, annually. You can spread it across different people, spread it across time. But climate change is an uninsurable event because you can't spread it across time, and you can't spread it across different risks in the same way. Why can you not spread it
across time. You can spread something across time which is infrequent, which occurs saying once every ten years, and I pay in my premium annually, so I can pay one tenth of the cost every year, and on average I've paid for the payout. It's much more affordable for me. I couldn't afford to write off my car and pay for the whole car, but I can though, because this only happens to me once every ten or twenty years, I
could afford to pay in small amounts. So the key for insurance is the more time you have, the risk is spread over more time. But in climate change. The more time you have, the more disasters you have. The amount of disasters are increasing in frequency and loss, and that means that the more time I have, the bigger the premium needs to be to take into account these increasing costs. With the increasing frequency, the less not the smaller the premium. The other problem about insurance is it's
annually renewable. So what the insurance companies will say is, we can do it this year, knowing that there'll come a time they won't do it, perhaps in five years time, perhaps in seven years time, where the costs will outstrip what people can afford in premiums, and they'll say, well, when that happens, I will simply not ensure it. But the problem is that leaves the countries, you know, Upper
Creek without a paddle at the worst possible time. So they need to be investing today in resilience because investing in resilience takes time. So if in five years time you're going to lose the insurance, that's not the time to start investing in resilience. You need to use your premiums to be investing in resilience today so that in five years time you've got a resilience system. Now, could you not spread this risk across other risks? That's the
other way insurance can work. It works especially when people don't know your risk and they say, yes, join my pool. You people often say, look, there's trillions of dollars of risk capital prepared to come in. Well, they're not prepared to come in to lose their risk capital. They come in to spread it and if they know your risk. This is like people who are climate vulnerable are now people carrying a pre existing medical condition, and try to
get insurance with a difficult pre existing medical condition. You can't because people know it and they don't want you to join their risk pool because you're not averaging out the risks, you're raising the average risk. And so the fact that it's known as one problem. Here's the other problem is that we're getting correlations, mind boggling correlations as a
result of climate change that we never had before. In the island of Barbadi's where I was born, the year of flooding used to be a year that you didn't have a drought. You had it was a wetter year than average, you had floods. Now we're getting the same year can be a year of floods and a year of drought, and a year of sargassum seaweed growing in the warming sea climates, and a year in which the fish stock went down because the coral reefs are being bleached.
So the correlations are rising, so you can't spread it across risk or a cross time. And the danger is this belief, this belief in magic that somehow insurance as will come in and save us. It's a very dangerous belief because it means we're not doing the things we need to do, mitigating, adapting, building for resilience.
So we've talked about what the COP system looks like, and we've talked about what private finance could start to do or is starting to do in some places. But COP is upon us, and if funding climate damages, funding climate solutions is what this COP twenty nine is going to be all about. From your point of view, what would make this COP a success.
People have said that this is the finance COP. As someone who's come a little bit late to climate finance, I find that slightly odd because it seems every COP is the finance anyway, say this is the finance COP, because on paper, this is where the new Collective Quantifiable Goal, the NCQG. It took me about a year to work out what it meant and how to say it fast mugs, because everyone said it so fast it was like, what
do you say, NCQG. This is supposed to be where the new NCUG is decided, and at the moment it looks bleak. Actually, it looks like we've gone from World War two to World War one. People have gone deep into the trenches, shooting at each other from very short distances and not going anywhere. Developing countries have said the number we need is a trillion. Developed countries have said, maybe maybe there's a trillion, but that's not coming from
our budgets. There's no space there that could come from an onion of things. The outer layer might be private sector, the middle layer might be MDB's, and the inner layer maybe government budgets. And I actually think there there is a kernel not to stress this.
Onion onion of success here.
Yes, I I think that.
There is a pathway of advance there. But what developing countries are saying rightly is okay, you're mentioning things that you have no ability to control. Are you not bobbing us off with the idea that a private sector will be there because a private sector has not come. You bobbing us off with the fact that development banks will lend because they talk about it, but we're not seeing that expansion of lending. So I think that the pathway to success would be that we do have an onion,
but we have some real hard guarantees around it. So I think if developed countries were to say sixty seventy percent is coming from the private sector, and we are going to put up the guarantees that will back sixty to seventy percent, and we're going to provide the guarantees that will help the MDBs to fill the savings bit the two hundred to three hundred billion dollars per year that we need for investments and resilience adaptation that can be post paid from the savings, and then we're going
to raise our budgets to do this cost But I think that that's the way to get there. I think we're converged around the right number. That is good. We've converged around the different instruments. What we've not converged on is how do we get real commitment from those avenues.
Well, it is a niche reference, but an onion of success actually lands on me because I come from the town in India and Nassik, which is known for its onions. And if there's a bumper crop of onions that year, that makes all of the city very happy. So thank you so much. I mean I it's always enlightening to get your finance take, especially in this topic, which is so complicated but it's so crucial. Thank you so much, Akha, thank you for listening to Zero. And now for the
sound of the week. A heads up. What you're going to hear is not a weapon, is the sound of the US Mint in Denver producing pennies, coins that today cost more to make than the one cent they are worth, all part of the strange math of global finance. If you like this episode, please take a moment to rate and review the show on Apple Podcasts and Spotify. We are also on YouTube. Share this episode with a friend or with someone who's a penny pincher. You can get
in touch at zero pod at bloomberg dot net. Zero's producer is Mighty le Rao. Bloomberg's head of podcast is Sage Bowman and head of Talk is Brendan nunim Pati. Music is composed by wonderly special thanks to Matthew Griffin, Monique Molima and Jessica Beg. Also a bittersweet final special thanks to Ki Bendram, who has been a tireless champion of the show from day one and has shaped it to be the.
Show you love.
She is leaving Bloomberg Green, but not going very far, to a new role on Bloomberg Weekend. We will miss her and we wish her all the best for her future role. I am Akshatrati Back Sir