Advancing equitable climate finance for developing nations: A moral, ethical and pragmatic imperative

Read as PDF

Copyright © 2025

Inclusive Society Institute

PO Box 12609

Mill Street

Cape Town, 8010

South Africa

235-515 NPO

All rights reserved. No part of this publication may be reproduced

or transmitted in any form or by any means without the permission in

writing from the Inclusive Society Institute

DISCLAIMER

Views expressed in this report do not necessarily represent the views of

the Inclusive Society Institute or its Board or Council members.

July 2025

Author: Daryl Swanepoel

CONTENTS

FOREWORD

1 INTRODUCTION

2 BACKGROUND: CLIMATE CHANGE, EMISSIONS INEQUITY AND THE DEVELOPING

WORLD'S MARGINAL ROLE

2.1 The origins and drivers of climate change

2.2 What needs to be done

2.3 Emissions responsibility: Who polluted most?

2.4 Africa's marginal role and major vulnerability

3 THE POLLUTER PAYS PRINCIPLE AND ETHICAL OBLIGATIONS

3.1 Historical emissions and climate liability

3.2 Moral responsibility beyond legal liability

3.3 Ethics of intergenerational and global justice

3.4 The failure of existing finance mechanisms

3.5 Climate justice is global justice

4 CLIMATE ACTION REQUIRES RESOURCES: A PRACTICAL IMPERATIVE

4.1 The high cost of climate solutions

4.2 Fiscal constraints in developing economies

4.3 The role of developing countries in global climate solutions

4.4 The costs of inaction are even higher

4.5 A moral and strategic imperative combined

5 COP29 PLEDGE: A STEP FORWARD WITH STRUCTURAL FLAWS

5.1 The composition of the pledge: Loans over grants

5.2 The flawed logic of burden-shifting

5.3 Case in point: The South African JETP experience

5.4 The danger of repackaged finance

5.5 A partial victory in need of structural correction

6 THE HIDDEN DANGERS OF CURRENT CLIMATE FINANCE STRUCTURES

6.1 South African case study: Currency volatility and escalating costs

6.1.1 Example 1: 10-year loan with capital redemption at maturity date

6.1.2 Example 2: 10-year loan: capital & interest redemption in 10 equal instalments

6.2 The solution: Denominate climate loans in local currency

6.2.1 Structural risk transfer: A hidden injustice

6.2.2 Fiscal sovereignty and planning certainty

6.2.3 A debt trap in the making

6.2.4 A modest reform with profound impact

6.3 Integration into the broader argument

6.4 Tied climate finance: Technology conditionality

7 RECOMMENDATIONS

8 CONCLUSION

REFERENCES

ANNEXURE A

Cover phote: istock.com - Stock photo ID:2172817661

FOREWORD

The global climate crisis exposes deep historical and structural inequalities between the developed and developing worlds. Although the latter, particularly Africa, contributes the least to greenhouse gas emissions, it is disproportionately vulnerable to climate-related shocks. This paper builds a two-pronged argument: first, that the "polluter pays" principle demands that developed nations shoulder the primary responsibility for funding climate mitigation and adaptation efforts in the Global South through targeted grants; and second, that even if developing countries are to contribute to climate solutions, they must be adequately resourced through fair, predictable and accessible financial mechanisms. These arguments are substantiated through ethical reasoning, historical emissions data and a critique of the current climate finance architecture. The paper concludes with a set of recommendations aimed at reimagining a just climate finance framework grounded in global justice and intergenerational equity.

1 INTRODUCTION

Climate change is the defining existential challenge of our time, but it is neither a neutral nor evenly distributed threat, since it exposes and often exacerbates the structural inequalities entrenched in the global economic and political order. While the entire planet faces the dangers of a warming world, it is the countries least responsible for causing the crisis that suffer its worst effects. This asymmetry between causation and consequence sits at the heart of the climate justice debate and it demands a transformative rethinking of global climate finance.

The current climate finance paradigm is built on a system that does not adequately differentiate between historical emitters and vulnerable nations. It fails to reflect the core principle that those who caused the problem must shoulder the primary responsibility for solving it. For over two centuries, the industrialised countries of the Global North have built immense wealth through carbon-intensive development, externalising environmental costs to the atmosphere and, increasingly, to the Global South. Meanwhile, the developing world, especially in Africa, South Asia, and small island states, has contributed the least to global emissions, yet faces the most devastating consequences, including droughts, floods, food insecurity and displacement.

At the centre of the contemporary climate discourse lies a pivotal question: how should climate action be financed, by whom and under what terms? The answers to these questions are not merely technical or economic, they are deeply moral and ethical. They shape the prospects for global solidarity, for sustainable development and for climate stability. A failure to answer them justly risks not only climate failure, but also geopolitical fragmentation, humanitarian crises and a collapse of trust between North and South.

This policy brief argues that climate finance must be rooted in justice, accountability and pragmatic solidarity. It must shift decisively from a paradigm dominated by loans and conditionalities to one centred on grants, equity, and risk-sharing. Developed countries must lead by acknowledging their historic responsibilities and fulfilling their pledges, not through unfair, even unethical burden-shifting mechanisms that exacerbate debt, but through meaningful financial transfers that enable vulnerable countries to act. At the same time, climate finance structures must be reformed to ensure accessibility, predictability and respect for national sovereignty.

Furthermore, climate finance is not merely a matter of reparations or compensation; it is also a matter of enlightened self-interest. Global decarbonisation, biodiversity preservation and climate resilience cannot succeed without the full participation of developing countries. That participation, however, depends on whether they are equipped with the financial tools, policy space and technological support needed to engage effectively. Without it, the world risks locking in a cycle of inaction and deepening injustice.

This brief advances a dual argument. First, that the "polluter pays" principle must be operationalised into real financial commitments from the Global North, primarily through non-repayable grants. Second, that climate finance must be restructured to eliminate mechanisms that entrench dependency, such as foreign-currency denominated loans or tied aid. Through historical data, ethical analysis and a focused case study, this document seeks to make a compelling case for a just, equitable and functional climate finance regime, one that recognises climate justice as an indivisible part of global justice.

2 BACKGROUND: CLIMATE CHANGE,

EMISSIONS INEQUITY AND THE

DEVELOPING WORLD'S MARGINAL ROLE

2.1 The origins and drivers of climate change

Scientific consensus confirms that climate change is driven by human activities, especially the burning of fossil fuels, industrial processes and deforestation (IPCC, 2021). These activities release greenhouse gases such as carbon dioxide (CO₂), methane (CH₄) and nitrous oxide (N₂O), which trap heat in the Earth's atmosphere and disturb the planet's energy balance (NASA, 2023). Since the Industrial Revolution, global atmospheric CO₂ levels have increased from 280 ppm to over 420 ppm today (NOAA, 2023).

2.2 What needs to be done

The IPCC (2021) recommends limiting global warming to 1.5°C above pre-industrial levels, requiring global net-zero emissions by mid-century. This involves deep decarbonisation, the protection of carbon sinks and major adaptation investments. The Paris Agreement (UNFCCC, 2015) outlines these goals but relies heavily on equitable climate finance, technology transfer and capacity-building for success.

2.3 Emissions responsibility: Who polluted most?

Cumulative emissions, rather than annual emissions, offer the fairest gauge of historical responsibility. The United States, EU and other industrialised countries account for over 70% of total historic emissions (Our World in Data, 2023). Africa, by contrast, contributes less than 4% despite comprising 18% of the global population (IEA, 2022).

2.4 Africa's marginal role and major vulnerability

Despite minimal emissions, Africa faces disproportionate climate threats: droughts, floods, sea-level rise and reduced agricultural yields. It stands to lose up to 15% of its GDP by 2030 due to climate impacts (AfDB, 2021). Yet African nations often lack the fiscal space and access to finance necessary to mitigate or adapt effectively (Oxfam, 2023).

3 THE POLLUTER PAYS PRINCIPLE AND

ETHICAL OBLIGATIONS

At the heart of the climate finance debate lies a simple and powerful principle, yet from which those in power, shy away: Those who caused the damage must pay to repair it. Also known in environmental law as the polluter pays principle, it is a doctrine that is both a matter of historical accountability and ethical justice. The United Nations Framework Convention on Climate Change (UNFCCC) explicitly endorses this principle, affirming that parties should act “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities” (UNFCCC, 1992).

3.1 Historical emissions and climate liability

The developed world’s industrialisation, spanning more than two centuries, was powered by coal, oil and gas, with no regard for the environmental consequences. The data is unambiguous: the United States, European Union, Russia, Japan and other high-income countries are together responsible for over 70% of cumulative CO₂ emissions since 1850 (Our World in Data, 2023). These emissions have built the wealth, infrastructure and technological dominance of the Global North.

In contrast, Africa contributes less than 4% of global emissions (IEA, 2022). Countries like Malawi, Chad and the Democratic Republic of the Congo have per capita emissions thousands of times lower than developed countries, yet they face the harshest impacts: desertification, failed crops, floods and rising sea levels. This asymmetry in contribution versus consequence forms the foundation of the ethical argument for reparative climate finance.

3.2 Moral responsibility beyond legal liability

The moral obligation of the Global North is not simply about numbers, it is about justice, fairness and restoring dignity. Climate change is not a random act of nature. It is the consequence of identifiable behaviours by specific actors in specific places over time. While developing countries are not without emissions today, their historical contribution is negligible and their capacity to mitigate or adapt is vastly limited.

Just as nations are expected to pay reparations for war, colonisation or human rights abuses, there is now a growing consensus that climate reparations are not merely charity, but a form of accountability (Caney, 2010; Gardiner, 2011). By failing to act on this responsibility, injustice is perpetuated and the burden of climate solutions placed disproportionately on those least responsible and least able to pay.

3.3 Ethics of intergenerational and global justice

Climate change also raises critical questions of intergenerational justice. Developed countries enjoyed centuries of carbon-intensive growth without constraint. Now, just as developing nations begin to grow, they are being asked to limit their emissions, often at great developmental cost. Without appropriate financial and technological support, this demand becomes morally untenable.

Moreover, climate change is a collective problem, but responsibility for its origins is not collective. To treat all countries the same, regardless of historical role or current capacity, is to ignore the essence of fairness. As philosopher Henry Shue (1999) argued, fairness in burden-sharing must reflect both the ability to pay and the causation of harm.

3.4 The failure of existing finance mechanisms

Current climate finance mechanisms fail to reflect this principle. As of 2022, over 70% of climate finance to developing countries came in the form of loans, often on concessional terms, but loans nonetheless (Oxfam, 2022). This means that countries who have polluted the least must go into debt to protect themselves from a crisis they did not cause. This inversion of justice is not only inefficient, it is morally indefensible.

Grants are not a gift; they are reparative instruments that recognise historical responsibility. Climate finance, if it is to be ethical and just, must shift from a paradigm of risk-sharing to one of liability and redress.

3.5 Climate justice is global justice

The polluter pays principle must therefore underpin every aspect of the global climate regime, from the structuring of finance to the governance of institutions. It is not enough to commit volumes of funding. The form, fairness and function of that funding must reflect the reality that the climate crisis is rooted in inequality.

To ignore this foundational truth is to compound the injustice. As Archbishop Desmond Tutu once stated, “climate change is a deeply moral issue” (Democracy Now, 2014). Without addressing its root causes, historical emissions and economic imbalance, the world will not only fail to solve the climate crisis but will deepen the very inequalities it seeks to overcome.

4 CLIMATE ACTION REQUIRES RESOURCES:

A PRACTICAL IMPERATIVE

While the moral argument for climate finance rests on historical responsibility, there is also a pressing pragmatic imperative for a massive and well-structured mobilisation of resources to the developing world. Put another way, climate action cannot happen without climate financing, particularly in the Global South, where the bulk of climate vulnerability exists but where capital, technology, and fiscal space remain limited.

4.1 The high cost of climate solutions

Mitigating and adapting to climate change entails significant costs. According to the UN Environment Programme (UNEP, 2022), adaptation alone in developing countries will require up to US$340 billion per year by 2030, while the estimated annual cost of mitigation across all developing nations exceeds US$600 billion. These figures do not account for losses and damages resulting from extreme weather events, that are projected to rise sharply with increased global warming.

Despite these needs, current levels of climate finance remain woefully inadequate. In 2020, developed countries collectively mobilised only US$83.3 billion, falling short of the US$100 billion annual pledge made under the Paris Agreement (OECD, 2021). Even more concerning is the disproportionate allocation of these funds - over 70% are disbursed as loans rather than grants (Oxfam, 2023) and a significant share is skewed toward mitigation rather than adaptation, despite the latter being more urgent in low-income, high-risk countries.

4.2 Fiscal constraints in developing economies

Most developing countries, particularly in Africa, face high levels of debt, narrow tax bases and competing developmental priorities. COVID-19 further strained public finances, with many governments forced to divert funds away from climate commitments toward immediate health and economic recovery needs (World Bank, 2023). Without substantial external support, the idea that these countries can fund ambitious climate programmes on their own is both unrealistic and unjust.

For example, in 2022, debt service in sub-Saharan Africa averaged over 15% of government revenues, leaving little room for investment in clean energy, climate-resilient infrastructure or disaster preparedness (AfDB, 2022). Climate action is not merely a matter of political will, it is a matter of financial capability, therefore, demanding climate ambition without supplying the resources is akin to demanding that a drowning man swim harder while denying him a lifebuoy.

4.3 The role of developing countries in global climate solutions

Ironically, many of the most effective and affordable climate solutions lie in the Global South. Africa hosts vast forests that act as carbon sinks, abundant solar and wind potential and untapped blue carbon ecosystems along its coasts (IEA, 2022). Likewise, many countries in Asia and Latin America offer low-cost pathways to decarbonisation if early investment is provided in renewable energy, clean transportation and sustainable agriculture.

In this sense, climate finance is not only a matter of justice but also of strategic efficiency. Every dollar invested in clean energy or climate resilience in a developing country often yields a higher carbon abatement return than the same dollar spent in an advanced economy (CPI, 2022). Yet without upfront finance, these opportunities are lost and the world’s ability to meet its 1.5°C target is severely jeopardised.

4.4 The costs of inaction are even higher

Inaction is not a neutral option, it carries costs that are exponentially higher. The World Bank (2021) estimates that climate change could push over 130 million people into poverty by 2030 without urgent adaptation and mitigation measures. Food insecurity, forced migration and social unrest are likely to intensify, particularly in fragile and conflict-prone states. The costs of dealing with such crises after the fact, through emergency relief, humanitarian aid or peacekeeping, far exceed the costs of preventive climate investment.

From a global economic standpoint, the Climate Policy Initiative (2022) has shown that every US$1 spent on climate resilience yields at least US$4 in avoided losses. This return on investment makes climate finance one of the most cost-effective public policy tools available.

4.5 A moral and strategic imperative combined

Thus, even setting aside the ethical arguments for reparative justice, there is a strong rational case for developed countries to urgently scale up climate finance to the developing world. Doing so is not just the right thing, it is the smart thing. It enables the world to decarbonise quickly and cheaply, averts humanitarian crises and reduces the geopolitical instability that inevitably follows environmental collapse.

In short, climate action in the developing world is a global public good. It must be treated as such in international policy and finance architecture. To continue under-resourcing the Global South not only entrenches injustice, it imperils the climate goals of the entire planet.

5 COP29 PLEDGE: A STEP FORWARD WITH

STRUCTURAL FLAWS

The 2024 United Nations Climate Change Conference (COP29) in Azerbaijan marked an important moment in global climate diplomacy. For the first time, developed countries formally committed to mobilising US$300 billion per annum over the next decade to assist developing nations with their climate mitigation and adaptation programmes (UNFCCC, 2024). This represents a tripling of the previous US$100 billion pledge made at COP15 in Copenhagen in 2009, which itself had consistently failed to be met in full (OECD, 2021). While the scale of ambition has grown, the structure and quality of the finance remain deeply problematic, raising serious concerns about both equity and effectiveness.

5.1 The composition of the pledge: Loans over grants

Of the US$300 billion annual commitment made at COP29, only 18% (US$54 billion) is to be provided in the form of non-repayable grants. The overwhelming majority, 67% (US$201 billion), is structured as concessional or soft loans, primarily disbursed through multilateral development banks (MDBs), bilateral financial institutions and climate-focused lending mechanisms. A further 15% (US$45 billion) is earmarked for risk guarantees and blended finance instruments, designed to de-risk private sector participation in climate-related investments (CPI, 2024).

While these mechanisms can mobilise additional funding, they often come with trade-offs, especially for low-income and climate-vulnerable countries. The heavy emphasis on repayable instruments, particularly in foreign currencies, undermines the very purpose of climate finance as a tool for supporting sustainable development. Loans, even on concessional terms, increase sovereign debt and restrict fiscal policy space in countries already struggling with high debt burdens (AfDB, 2022; UNCTAD, 2023).

5.2 The flawed logic of burden-shifting

The structural flaw lies not merely in the dominance of loans, but in the underlying philosophy that continues to guide international climate finance: that the Global South should assume partial financial responsibility for fixing a crisis it did not create. This approach ignores the historical responsibility of developed nations and effectively shifts the cost of climate adaptation onto the victims of environmental harm.

Moreover, while concessional loans are often touted as favourable, the conditionalities attached to them, such as fiscal discipline, regulatory reforms or the use of donor-country technologies, can limit policy autonomy and inflate implementation costs (World Bank, 2020). In essence, climate finance becomes a tool not of empowerment, but of control.

5.3 Case in point: The South African JETP experience

South Africa’s experience with the 'Just Energy Transition Partnership' (JETP), which was first announced at COP26 and then subsequently expanded at COP27, COP28 and COP29 is a good illustration of both the potential and the pitfalls of this model. Of the initial US$8.5 billion pledged, only a small fraction came as grants. The remainder consisted of concessional loans tied to the procurement of renewable energy technologies from donor nations, some of which were not the most cost-effective or suited to South Africa’s grid infrastructure (German Embassy, 2022; Meridian Economics, 2023).

The arrangement raised concerns domestically over sovereignty, debt sustainability and developmental alignment, since it highlighted the risk of adopting a cookie-cutter financial model without accommodating local economic realities.

5.4 The danger of repackaged finance

Another critical flaw in the COP29 pledge is that it includes a significant proportion of repackaged or relabelled finance. For instance, many donor countries count existing development aid or export credit as part of their climate finance contributions, thus blurring the lines between new and additional funding (Oxfam, 2023), which practice not only inflates reported figures, but also diverts resources from other pressing development needs, creating a zero-sum game for developing countries.

Furthermore, the complexity of accessing these funds remains a major barrier, since countries must navigate bureaucratic application processes, competing eligibility criteria and technical reporting requirements, which favour wealthier and more administratively capable nations (UNEP, 2022). This gatekeeping through bureaucracy perpetuates inequality within the developing world itself, resulting in the Least Developed Countries (LDCs) and Small Island Developing States (SIDS) being left behind.

5.5 A partial victory in need of structural correction

While the COP29 commitment is laudable in scale, it is deeply flawed in structure. A just climate finance system cannot rest on debt-heavy instruments, currency risk exposure and donor-driven procurement models. For climate finance to be truly effective, it must be:

• Predictable, to support long-term planning;

• Accessible, to all developing countries regardless of administrative capacity;

• Transparent, in accounting and disbursement; and

• Most importantly, equitable, recognising historical emissions and present vulnerabilities. 

Unless these structural flaws are corrected, COP29 may be remembered not as a breakthrough, but as a missed opportunity to recalibrate the global climate finance architecture toward fairness and functionality.

6 THE HIDDEN DANGERS OF CURRENT

CLIMATE FINANCE STRUCTURES

6.1 South African case study: Currency volatility and escalating costs

6.1.1 Example 1: 10-year loan with capital redemption at maturity date

A prime illustration of the risks of foreign currency-denominated climate loans is South Africa's experience following the $8.5 billion climate finance pledge made at COP26 in 2021 (German Embassy, 2022). Though these were concessional loans, the requirement to repay in euros exposed South Africa to severe exchange rate risk.

To illustrate, consider a hypothetical €100 million loan issued on 1 January 2015, at 3% annual interest, with capital repayment due on 31 December 2024. The euro-to-rand exchange rate was R13.98 in 2015 but rose to R19.52 by 2024 (Investing.com, 2025).

Table 1: Euro vs Rand exchange rates from 2015 to the end of 2024

Year	€:ZAR	Year	€:ZAR
2015	13.98	2020	15.70
2016	16.80	2021	17.79
2017	14.38	2022	17.96
2018	14.86	2023	18.10
2019	16.48	2024	20.19

Source: Investing.com

• Annual interest payments fluctuated, starting at R41,94 million and ending at over R58 million. Total interested repaid over the ten-year period would equate to R498.72 million

• The capital repayment alone amounted to R2,019 billion at the 2024 exchange rate.

• Total repayment (interest + capital) over 10 years reached R2,517 billion – 38,52% more than if the loan had been denominated in South African rand, because:

Were the loan to have been denominated in South African rand the repayments would have been as follows:

• Annual interest payments would remain the same for entire period, namely R41.94 million per annum. Total interested repaid over the ten-year period would equate to R419,4 million.

• The capital repayment alone amounted would have been fixed at R1,398 billion.

• Total repayment (interest + capital) over 10 years reached R1,817 billion

The detailed data underpinning the above numbers is contained in Annexure A, but the high-level calculations are set out hereunder:

To calculate the percentage difference between two values, specifically, how much more R2,517,720,000 is compared to R1,817,400,000,  the following formula is used:

 Applying the numbers:

Final Answer:

Approximately 38.52% more is paid when repaying R2.52 billion (when loan is denominated in Euro) versus R1.82 billion. when the loan is denominated in South African rand).

The glaring difference between the two funding models is illustrated in the figure below: 

Figure 1:  Data – Investing.com; Graphic - Author

Even with a relatively stable currency like the rand when compared to many other developing countries, the cost escalation is stark. Of course, for countries with more volatile currencies, the financial impact can be crippling.

Some economists argue that it is better to denominate the loans in local currency and then to compensate the funders for the currency exchange losses, the interest rate can be increased. However, calculations done in this study have shown that were the interest rate to be increased by 50% (i.e. 4,5%) then the premium will still amount to 16%. And were the interest rate to be doubled to 6%, it would no longer constitute a soft loan, but a normal commercial loan.

6.1.2 Example 2: 10-year loan: capital & interest redemption in 10 equal instalments

An alternative illustration based on the same loan over the same period and at the same rate of interest, but where both interest and capital is repaid in ten equal annual instalments, revealed an equally unfavourable outcome.

To recap, we assume a €100 million loan (denominated in Euro), 3% interest rate in 10 equal instalments. The mathematical formula will thus be:

Where:

• A = annual payment (equal instalment)

• P = loan principal (€100 million)

• r = annual interest rate (3% or 0.03)

• n = number of periods (10 years)

Thus:

Results:

Payment each year: €11,719,751

Total interest over the period in €17,197,510

Total repayment interest and capital: €117,197,510

Conversion to South African rand at prevailing exchange rates as indicated in Table 1

Year	Instalment	€:ZAR rate	ZAR value
2015	11,719,751	13.98	163,607,724
2016	11,719,751	16.80	196,891,817
2017	11,719,751	14.38	168,530,019
2018	11,719,751	14.86	174,155,500
2019	11,719,751	16.48	193,141,496
2020	11,719,751	15.70	184,000,091
2021	11,719,751	17.79	208,494,370
2022	11,719,751	17.96	210,486,728
2023	11,719,751	18.10	212,127,493
2024	11,719,751	20.19	236,621,773
Total in ZAR	1,948, 057,011
Total  @ 3% and no currency fluctuation (13.98)	1638421189
Premium in ZAR	309,635,822
Premium %	18,89%

Under any of the scenarios highlighted above, the rich countries remain rich, the poorer countries get poorer.

6.2 The solution: Denominate climate loans in local currency

One of the most pressing yet overlooked reforms in climate finance is the need to denominate concessional loans in the local currencies of recipient countries. The current system, because the financiers are primarily developed world nations and/or developed world dominated multilateral institutions, predominantly issues climate loans in hard currencies like the US dollar, euro or yen, exposing developing nations to exchange rate volatility that can drastically inflate their repayment obligations, undermine budgetary planning, driving them deeper into debt. This structure is not only economically inefficient, it must also be said, ethically indefensible (Oxfam, 2023; UNCTAD, 2023).

6.2.1 Structural risk transfer: A hidden injustice

By denominating loans in foreign currencies, donor countries and institutions externalise the financial risk onto recipients, so a country may, for example, enter into a concessional loan agreement with seemingly favourable terms, such as a 1–3% interest rate, only to find that depreciation of their local currency increases their repayment burden by 30 - 40% or more over the life of the loan (UNCTAD, 2023). This is not a theoretical risk; it is a well-documented and recurring reality in many African, Asian and Latin American economies (World Bank, 2023).

This kind of risk transfer is neither fair nor sustainable. It effectively punishes countries for global market volatility over which they have no control. Developed countries have the institutional and financial capacity to absorb this risk; developing countries do not. If the Global South must borrow to survive the climate crisis, the very least the Global North can do is absorb the currency risk (Caney, 2010; UNEP, 2021).

6.2.2 Fiscal sovereignty and planning certainty

Local currency loans would give developing countries the ability to anchor their debt servicing within their own fiscal and monetary frameworks, where repayments would be tied to revenue streams collected in the same currency, allowing finance ministries to project their debt-to-GDP ratios, plan multi-year expenditure frameworks and manage national budgets without the destabilising uncertainty of fluctuating exchange rates (UNCTAD, 2023).

Contrast this with the status quo, where exchange rate shocks force governments to either increase taxation, reduce social spending or incur new debt to meet old obligations, thus perpetuating cycles of austerity and dependency (Oxfam, 2023; World Bank, 2023). Currency-denominated climate finance is not only fairer; it is smarter macroeconomic policy (AfDB, 2021).

6.2.3 A debt trap in the making

The existing model is quietly but effectively sowing the seeds of a new debt crisis. Countries already constrained by shrinking fiscal space are being pushed to assume obligations whose real costs cannot be forecast at the time of signing. This is not just risky, it is reckless (UNCTAD, 2023). It creates a scenario where the more a country complies with global climate expectations, the more it suffers financial strain.

It is inconceivable that such a system could be tolerated in trade or defence agreements. Why then should it be acceptable in the most existential issue of our time? Climate finance that leaves the recipient worse off than before is not development, it is extraction by another name (Caney, 2010; Stone, 2011).

6.2.4 A modest reform with profound impact

Adopting local currency denomination is neither radical nor unfeasible. In fact, the tools already exist. Currency risk can be mitigated through international financial instruments such as:

•  Global reserve buffers or guarantees from institutions like the IMF, GCF or World Bank.

• Special Drawing Rights (SDRs) as stabilising mechanisms (IMF, 2022).

• Regional pooling of risk across multilateral development banks.

• Hedging instruments subsidised by climate funds (UNCTAD, 2023).

The cost of implementing such mechanisms is a fraction of the cost of issuing full grants, and yet the benefit in terms of stability, dignity and ownership for the Global South is transformative.

6.3 Integration into the broader argument

This case study highlights a fundamental injustice in the current climate finance architecture. Developed countries, whose emissions caused the crisis, not only offer loans instead of grants, but they also impose the financial risk of currency fluctuation on the very countries least equipped to manage it.

This is not climate justice, it is climate exploitation.

If the global community is serious about achieving an equitable climate future, then developed nations must not only increase the volume of finance, but fundamentally change its structure. Issuing climate finance in local currency is not an act of generosity, it is the bare minimum for a fair and just global compact.

6.4 Tied climate finance: Technology conditionality

Tied climate finance refers to financial arrangements in which climate-related loans or grants are contingent upon the recipient country purchasing specific goods, services or technologies, usually from the donor country. This practice, while often rationalised under the banner of ensuring “quality control” or “technical support,” represents a covert form of economic conditionality that erodes the developmental sovereignty of recipient nations. It also distorts local markets, drives up project costs and stifles domestic innovation.

At its core, technology conditionality undermines the principles of equity and partnership that should characterise climate finance. Instead of empowering developing countries to chart their own low-carbon development trajectories based on national contexts, needs and comparative advantages, it locks them into supply chains and technological ecosystems designed and controlled by the Global North. This compromises the autonomy of climate policy and perpetuates dependency rather than resilience.

The World Bank (2020) found that technology-tied procurement inflated renewable energy project costs in sub-Saharan Africa by up to 30%, a staggering figure in regions where every dollar must stretch across vast developmental needs. In many cases, donor-imposed technologies are not optimised for local climatic, infrastructural or maintenance conditions, leading to implementation inefficiencies, cost overruns, and operational failures. Furthermore, this undermines local industrial development by crowding out domestic firms and local entrepreneurs who might otherwise contribute to innovation, employment and sustainable development.

South Africa’s Just Energy Transition Partnership (JETP) again illustrates this risk. Reports by Meridian Economics (2023) and others have highlighted that large portions of JETP-linked funds were structured in such a way that procurement of renewable technology was effectively steered toward suppliers in donor countries. Not only did this create concerns over cost and compatibility with South Africa’s energy grid, but it also limited the potential for localisation, skills development and domestic industrial participation in the transition.

Technology conditionalities also contradict the broader objectives of the UNFCCC and Paris Agreement, which call for technology transfer and capacity building, not technology imposition. A conditional approach benefits the commercial and geopolitical interests of donors at the expense of climate justice and genuine partnership. By prioritising their own exports and strategic influence, donor nations risk undermining both the effectiveness and legitimacy of climate finance, so to remedy this, there must be a clear de-linking of finance from technology procurement. Recipient countries must be granted full autonomy to select, adapt, and develop technologies that are appropriate to their national circumstances and development strategies. This includes the right to engage local firms, adopt indigenous solutions and build technological capacity through open, competitive and transparent procurement processes.

Moreover, international climate finance should actively promote technology co-development and/or technology transfer, where donor funding supports collaborative innovation with local stakeholders, ensuring that knowledge, intellectual property and production capabilities are shared. This would foster self-reliance, enhance climate resilience and stimulate sustainable growth in developing economies.

Finally, conditionality-free financing would also better align with Sustainable Development Goal 9 (Industry, Innovation and Infrastructure), which calls for inclusive and sustainable industrialisation and innovation in the Global South. By removing technology restrictions, climate finance could become a catalyst for endogenous growth, rather than a channel for perpetuating economic hierarchies.

7 RECOMMENDATIONS

To advance a climate finance system that is truly equitable, will require the urgent introduction of structural reforms that both acknowledges the historical responsibility for the current climate crisis and that creates a sustainable path forward for developing nations.

First and foremost, the proportion of climate finance allocated as grants must be significantly increased. A minimum threshold of 50% in grants should be adopted to reflect the principle that those who polluted the most must shoulder the financial burden of fixing the problem. Loans, particularly those requiring repayment in foreign currency, should not dominate climate assistance in contexts where vulnerability and debt exposure are already high.

Equally critical is the denomination of climate loans in local currencies, because by shifting this financial risk to the creditor, typically a developed country or multilateral financial institution, recipient countries are empowered to engage in long-term budgetary planning. This shift will promote debt sustainability and instead of perpetuating the financial dependency of the developing world on the developed world, it will serve to promote a spirit of partnership between the developed and developing world.

Furthermore, it is imperative that loan conditionalities be overhauled, especially the tied financing arrangements that mandate the use of donor-country technology or consultants not only inflate project costs but also stifle local innovation and industrial development. Climate finance must serve the developmental interests of recipient countries, not the commercial interests of donors.

Access to global climate finance should also be streamlined and made more accessible, especially for countries with weaker institutional capacity. This includes simplifying application procedures, reducing bureaucratic hurdles and providing technical assistance where necessary.

Importantly, developed nations must accept that currency volatility risk is a cost of justice and one they must bear. Absorbing this risk as part of international development cooperation is far less expensive than providing full grant funding, yet it significantly relieves fiscal pressure on developing nations.

Finally, the upcoming UN Finance for Development Summit presents a unique opportunity to institutionalise these reforms in a new global compact. This summit should serve as the turning point where the world commits to a just and inclusive climate finance architecture, one that is not merely adequate in volume but fair in design.

8 CONCLUSION

The climate crisis is not merely an environmental emergency. It is a profound test of our global moral compass and at its core lies a question of justice, namely whether those who caused the damage will bear the cost of repair or will the burden be shifted onto those least responsible and least equipped to cope? The current climate finance architecture, unfortunately, perpetuates the very injustices it claims to address. It continues to treat finance as a privilege rather than a right, exposes vulnerable nations to debt traps through foreign-denominated loans and undermines sovereignty through tied aid and conditionalities that prioritise donor interests over developmental needs.

The current architecture is structurally flawed, since it prioritises volume over equity, complexity over accessibility and debt over dignity. This has resulted in a model where climate finance acts less as a tool for empowerment and more as a mechanism of dependency, reinforcing the same global asymmetries that contributed to the crisis in the first place. As such, the demand for reform is not a call for charity, but a call for accountability. The global South does not seek favours, but fairness. It does not demand handouts, but a restoration of balance in the climate compact.

A just climate finance system must embody four essential principles: historical responsibility, equitable burden-sharing, fiscal sovereignty and developmental autonomy. This means scaling up grant-based finance, denominating loans in local currencies to reduce risk, eliminating technology conditionalities and ensuring access for all, regardless of institutional capacity. These are not radical ideas, they are the minimum ethical and functional requirements for a global climate finance regime that seeks to be just and effective.

The time for rhetorical commitments is over. What is needed now is political courage and institutional innovation. The upcoming UN Finance for Development Summit must seize this opportunity to pivot toward a finance framework that is not only adequate in volume but just in design and implementation. Anything less would amount to betrayal, not just of the developing world, but of future generations everywhere.

In sum, the way forward is clear: finance must be fair, risk must be shared, sovereignty must be respected and justice must be done. Only then can the world hope to meet the climate challenge with unity, resolve and moral clarity.

REFERENCES

African Development Bank (AfDB). 2021. Climate Change and Green Growth. Abidjan: African Development Bank.

African Development Bank (AfDB). 2022. African Economic Outlook 2022: Supporting Climate Resilience and a Just Energy Transition in Africa. Abidjan: African Development Bank.

Caney, S. 2010. Climate change and the duties of the advantaged, Critical Review of International Social and Political Philosophy, 13(1): 203–228.

Climate Policy Initiative (CPI). 2022. Global Landscape of Climate Finance 2022. Climate Policy Initiative.

Climate Policy Initiative (CPI). 2024. Global Landscape of Climate Finance 2024. [Online] Available at: https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2024/ [accessed: 13 June 2025].

Democracy Now. 2014. Momentum on Fossil Fuel Divestment Grows as Harvard Professors, Desmond Tutu Call for Action.  [Online] Available at: https://www.democracynow.org/2014/4/11/momentum_on_fossil_fuel_divestment_grows [accessed: 10 June 2025].

Gardiner, S. M. 2011. A Perfect Moral Storm: The Ethical Tragedy of Climate Change. United Kingdom: Oxford University Press.

German Embassy in South Africa. 2022. Germany hails landmark International Partnership on Just Energy Transition in South Africa. [Online] Available at: https://southafrica.diplo.de/sa-en/04-news/2494406-2494406 [accessed: 10 June 2025].

Intergovernmental Panel on Climate Change (IPCC). 2021. Sixth Assessment Report. Geneva: IPCC.

International Energy Agency (IEA). 2022. Africa Energy Outlook 2022. Paris: IEA.

International Monetary Fund (IMF). 2022. Special Drawing Rights. Washington DC: IEA.

Investing.com. 2025. EUR/ZAR Historical Data. [Online] Available at: https://za.investing.com/currencies/eur-zar-historical-data [accessed: 10 June 2025].

Meridian Economics. 2023. Review of the IRP 2023. [Online] Available at: https://meridianeconomics.co.za/wp-content/uploads/2024/03/IRP2023-Modelling-Submission-20240318.0.pdf [accessed: 10 June 2025].

National Aeronautics and Space Administration (NASA). 2023. Climate Change: Vital Signs of the Planet. [Online] Available at: https://climate.nasa.gov/%C2%A0%C2%A0/ [accessed: 10 June 2025].

National Oceanic and Atmospheric Administration (NOAA). 2023. Global Monitoring Laboratory – CO₂ Trends. [Online] Available at: https://gml.noaa.gov/ccgg/trends/ [accessed: 10 June 2025].

Organization for Economic Cooperation and Development (OECD). 2021. Climate Finance Provided and Mobilised by Developed Countries: Aggregate Trends. [Online] Available at: https://www.oecd.org/content/dam/oecd/en/publications/reports/2021/09/climate-finance-provided-and-mobilised-by-developed-countries-aggregate-trends-updated-with-2019-data_aedc24d6/03590fb7-en.pdf [accessed: 10 June 2025].

Our World in Data. 2023. Cumulative CO₂ Emissions. [Online] Available at: https://ourworldindata.org/grapher/cumulative-co-emissions [accessed: 10 June 2025].

Oxfam. 2023. Climate Finance Shadow Report 2022. [Online] Available at: https://policy-practice.oxfam.org/resources/climate-finance-shadow-report-2023-621500/ [accessed: 10 June 2025].

Shue, H. 1999. Global Environment and International Inequality, International Affairs, 75(3): 531–545.

Stone, C. D. 2011. Should Trees Have Standing? United Kingdom: Oxford University Press.

United Nations Conference on Trade and Development (UNCTAD). 2023. A New Financial Architecture for Climate Action. Geneva: United Nations.

United Nations Environment Programme (UNEP). 2021. State of the Climate in Africa 2020. Nairobi: UNEP.

United Nations Framework Convention on Climate Change (UNFCCC). 1992. United Nations Framework Convention on Climate Change. [Online] Available at: https://unfccc.int/files/essential_background/background_publications_htmlpdf/application/pdf/conveng.pdf [accessed: 10 June 2025].

United Nations Framework Convention on Climate Change (UNFCCC). 2015. The Paris Agreement. [Online] Available at: https://unfccc.int/sites/default/files/resource/parisagreement_publication.pdf [accessed: 10 June 2025].

United Nations Framework Convention on Climate Change (UNFCCC). 2024. COP29 UN Climate Conference Agrees to Triple Finance to Developing Countries, Protecting Lives and Livelihoods. [Online] Available at: https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and [accessed: 10 June 2025].

World Bank. 2020. Evaluation of Climate Project Procurement. Washington, DC: World Bank.

World Bank. 2021. Poverty and Shared Prosperity 2021: Reversals of Fortune. Washington, DC: World Bank.

World Bank. 2023. Debt and Development in a Changing World. Washington, DC: World Bank.

ANNEXURE A

Data supporting the calculations as set out in paragraph 6.1. South African case study: Currency volatility and escalating costs

 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.

Email: info@inclusivesociety.org.za

Phone: +27 (0) 21 201 1589

Web: www.inclusivesociety.org.za