Implementation of climate finance / Transparency

Taking a holistic approach to climate protection and poverty reduction

Climate change mitigation and poverty alleviation in German climate finance, Photo: J.Böthling, Brot für die Welt

What contributions do German-financed climate change mitigation projects make toward long-term decarbonization and poverty reduction in developing countries? An analysis by addressed this question in the context of global climate change and the challenges of the fight against poverty and hunger in developing countries. It concludes that German climate finance to date has not been sufficiently focused on sustainable development paths that reduce poverty. The involvement of civil society and the local population as an essential element of social participation is also not systematically anchored in mitigation projects.

Climate change is confronting developing countries in particular with massive problems, hampering the fight against hunger and poverty and often exacerbating the situation of the poor. It can only be stopped by a profound transformation of the energy system, both in industrialized and developing countries. Decarbonizing the economy and successfully limiting global warming to no more than 2°C must therefore be top priorities to ensure that development goals remain achievable. This realization is reflected in the international context by efforts such as those of the United Nations to merge its environmental and development agendas in the negotiations on the Sustainable Development Goals (SDG). How exactly this should work and the role of climate finance will be remains completely unclear, however.

Climate finance and energy policy in developing countries

According to a study done by Friedrich Ebert Foundation the challenges faced by developing countries in the energy sector can be summarized as follows:  the poor need access to energy to improve their living conditions, while the emerging middle class needs to use energy more efficiently, or reduce its energy consumption in some cases. This points toward three fields of activity: overcoming energy poverty, building a modern energy infrastructure and creating an energy policy framework.

To date, the relationship between climate finance and poverty reduction has been discussed primarily in the context of adaptation projects and climate-resilient development, even though the energy sector is also facing fundamental challenges in this regard at the moment. In addition to overcoming energy poverty, energy projects have an impact on the situation of the local poor (relocation due to large dams, etc.) and on a country’s path of development. This raises the question of who profits from the energy infrastructure being put in place. The answers here can be very different for women and men, for example. Generally speaking, developing countries that already emit considerable quantities of CO2 will need assistance in transforming their energy sectors, while the least-developed countries, which contribute little to climate change, should pursue a development path based on sustainable, renewable energy sources that takes the needs of their poorest citizens into account.

Climate finance and transformational change

At the same time, it is becoming increasingly clear that the 2°C limit can be met only by transforming the development paradigm and not solely by improving existing systems. Transformation and transformational change are the buzzwords du jour that are increasingly being stated as objectives of climate finance. The goal of the Green Climate Fund (GCF), for example, is to finance “a paradigm shift”. The NAMA Facility co-financed by Germany explicitly supports projects with the potential for transformational change. There is little clarity at present as to what this means, however.

Work is underway in various places to develop criteria by which climate finance can identify and promote “transformational” projects. The Wuppertal Institute developed a definition in a research project that describes transformational change as a structural change that alters institutional, technological and cultural interactions and opens up new paths of development. Due to their high degree of complexity, it is impossible to assess in practice whether projects are transformational or determine the specific contribution they make toward transformational change. Instead, the Wuppertal Institute has identified several factors that should be taken into account when planning and implementing climate projects. These include pioneer activities, coalition building, regulatory changes and anchoring social acceptance for the processes of change in society (see Fig. 1).

Stages of transformation processes, Source: Wuppertal Institute

With its transition to renewable energy (“Energiewende”), Germany has embarked on a venture that is seen internationally as a reference project which can provide lessons for promoting the transformation of energy sectors in developing countries as well. These lessons should also be incorporated in the climate finance of Germany’s central actors, who to date have pursued their own respective agendas – the Federal Ministry for Economic Cooperation and Development (BMZ) from the perspective of promoting development, and the Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) with a greater focus on environmental issues and reducing emissions.

Does German climate finance contribute to long-term decarbonization and poverty reduction?

An analysis performed by of the BMZ and BMUB projects from 2010 to 2012 contained in the project database explored this question using publicly available information. For the funded projects for which a public project description was available (just under two-thirds of all projects), the analysis concludes that three-quarters of the projects make a lasting contribution to long-term decarbonization and climate-friendly development of the countries that extends beyond the duration and/or scope of the project. While 94 percent of the projects of BMUB’s International Climate Initiative (ICI) have this as their explicit goal, the same can be said of only two thirds (65 percent) of the BMZ projects. By contrast, poverty reduction as a focus in the objectives and measures or work with particularly vulnerable population groups is apparent in only 22 percent of all of the projects analyzed. Here there is a large discrepancy between the BMUB (4 percent) and the BMZ (32 percent).

Overall, German climate finance projects have a considerably stronger focus on reducing emissions than on sustainable development paths including poverty reduction and thus reflect the current state of the debate. There are, however, several areas that require critical scrutiny.

  • In at least a quarter of the projects, no climate-related focus can be made out in the objectives or measures, yet they are being credited toward German climate finance at least in part.
  • While technologies such as large-scale hydropower reduce CO2 emissions, they entail major problems – including the relocation of the local population or other environmental hazards – and should therefore not be funded by climate finance.
  • Some projects, such as energy efficiency measures in energy-intensive industries or the construction of transmission lines, raise the question of path dependency, i.e. whether the measures are ambitiously geared toward achieving long-term decarbonization or represent marginal improvements with the purpose of maintaining the existing system. Many project descriptions lack such a classification, however.

With regard to energy policy challenges in developing countries, a clear focus can be made out in German climate finance.

  • Improving the legal, political, institutional and socio-economic framework of the energy sector is the focus of 86 percent of the projects. They cover a broad range of measures, including the improvement of laws and regulations, capacity building for national and/or local actors, publicity campaigns, improving planning processes, the development of monitoring systems and the like. In the case of the ICI, a stronger focus on current UNFCCC processes can be made out such as NAMA and low-emission development strategies (LEDS).
  • 26 percent of the projects promote the introduction of climate-friendly technologies or technical innovation. The two Ministries differ in their approaches, however. While the ICI generally supports pilot plants, technical innovation in the field of renewable energy and energy efficiency, the BMZ focuses mainly on KfW projects involving the construction of large-scale systems, especially in the field of solar energy, as well as the improvement of transmission grids.
  • 17 percent of the projects are related to overcoming energy poverty in connection with climate protection, either through poverty-oriented climate projects or by measures such as putting a strong climate focus in development projects. This is done almost exclusively by the BMZ.

With regard to the contribution of German climate finance toward transformational change in the energy systems of developing countries, the approach does not appear very systematic, however. The introduction of technological innovation through pilot activities is particularly prevalent in ICI projects, and changing the regulatory environment is a key element in numerous others. The two further aspects highlighted by the Wuppertal Institute – coalition formation and anchoring of social acceptance for changes in the energy system – do not appear to be systematically integrated into the projects, however. Even though the participation of civil society is a key element for the development of coalitions and the promotion of social acceptance for changes in the energy sector,  only 29 percent of projects with a climate focus explicitly include civil society participation in project planning and implementation.


Against the background of international discussions on the link between environmental and development agendas and transformational change, the analysis allows a number of conclusions to be drawn for German climate finance:

  • The climate change mitigation projects analysed are particularly up to date with the current state of the dabate in those fields which already featured in the Ministries’ funding profiles to date. Yet, a systematic integration of new developments and debates around poverty reducing and transformational development paths as well as a coherent approach in German climate finance is still lacking.
  • The climate focus must be expanded and strengthened at the BMZ in particular to ensure that projects that pursue other vital development goals while relegating climate protection to the back seat are not counted toward climate finance. This is related to the question of whether dedicated climate finance resources are indeed being allocated on top of development finance rather than simply earmarking development funds as climate finance in order to comply with international financing commitments.
  • In principle, the energy challenges faced by developing countries are reflected in the primary fields of climate finance. As a strategic focus of climate finance, creating a modern energy infrastructure and an energy policy framework has a much higher priority than promoting innovation. Projects to overcome energy poverty are funded exclusively by the BMZ, but to a lesser extent than the other two areas.
  • Even though the ICI is a strategic instrument of the German government for the implementation of the UNFCCC, it should put a stronger focus on poverty reduction. This is essential to ensure that the poor also benefit from changes in the energy sector.
  • The participation of civil society is an important element of transformational change in the energy sector but is not sufficiently anchored in climate finance projects. A central element necessary to trigger the social changes that will be crucial to staying within the 2°C limit is thus missing.

Christine Lottje