In Canada, the idea of the climate transition and reduction of greenhouse gas (GHG) emissions is a massive deal. You see it in political campaigns, corporate reports, and even taught in schools. Not only is it mainstream, but the GHG goals set seem achievable and realistic. Even so, Canada as a developed country, is struggling to deal with reducing GHG emissions. In 2021, Canada had the second highest carbon emissions per capita in the world at 15.2 tons per year! Moreover, despite committing to reducing GHG emissions from 2005 levels by 40-45% by 2030, in 2021, Canada had only decreased emissions by around 8.4%. Canada, a country with the 9th highest GDP in the world is failing to meet its climate goals.
This issue is not limited to Canada, but it is a global problem all countries are facing. In every country across the world, building a ‘greener’ society is just as important in the long-term but some countries are clouded with various other short-term issues. This is often the case in emerging markets and developing countries (EMDCs), which describe a subset of countries classified by a common set of economic factors.
This begs the question, if Canada is struggling to reach emissions reductions goals, how can less robust economies, or EMDCs, be faring?
Emerging Markets and Developing Countries
Investopedia describes EMDCs as “transitioning from a low income, less developed, often pre-industrial economy towards a modern, industrial economy with a higher standard of living.” The CFI Institute proposes six characteristics that can be observed in an EMDC:
Rapid Growth
High Productivity Levels
Increasing in the Middle Class
Transitioning from a Closed Economy to an Open Economy
High Levels of Instability and Volatility
Attraction of Foreign Investment
EMDCs are often divided into groups based on these characteristics. BRICS is an example of one of these groups, referring to Brazil, Russia, India, China, and South Africa. BRICS makes up 40% of the world’s population and contribute to more than 25% of the world's GDP and are grouped together as they are the economically best performing EMDCs right now—even often referred to as the G7 of the future. Another one of these groups are the N-11, or Next 11. This group includes Bangladesh, Egypt, Indonesia, Mexico, Iran, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam. This group is based on the similarities in education standards, investment policies and regulations, trade policy, political stability, and the macroeconomic environment. There are also sub-groups, such as MINT, referring to Mexico, Indonesia, Nigeria, and Turkey. This group refers to the demographic nature, rapid growth rate, and investment opportunities in the countries.
Overall, EMDCs come in all shapes and sizes, but could generally be regarded as countries where their percent share of global GDP is lower than their percent share of global population due to political, economic, regulatory, or other institutional related factors. Their low share of GDP also suggests their high economic growth potential.
Understanding the Emissions Potential of EMDCs
Let's start by looking at historical examples of how economic sectors shift as a country develops. Looking at the makeup of labourers in the US over time, it's clear that the economy shifted from agriculturally-based to a midpoint of manufacturing dominance and then to services. This is a general trend most economies follow as they develop, relying on higher productivity economic inputs through industrialization. This is how industrialization changes the economic makeup of countries.

Similar trends, but with different time frames, are observed in many of today’s rich countries and are expected to occur with current EMDCs. Understanding this, we can start to unravel the environmental Kuznet curve. Parallel to the curve relating inequality and income per capita, the environmental curve describes a hypothesized relationship between environmental degradation and income per capita. When economies undergo industrialization and development, with a higher percentage of the population moving to the middle class or an increase in wealth, environmental degradation often increases. However, as populations become even richer, similar to what we see in advanced economies, environmental degradation decreases. EMDCs are moving towards what is seen on the graph as an industrial economy with growing middle-income levels.

This basic economic analysis describes that the trends experienced in EMDCs, such as movement toward an industrial economy, a growing middle class, and an increasing human population, are all traditionally correlated with an increase in emissions. EMDCs are poised to become more significant emitters of pollution in the coming years if this growth model doesn’t change.
According to a report from the Brookings Institute, EMDCs, even excluding China, are expected to account for more than half of global annual emissions in 2030. This is parallel to the fact that EMDCs accounted for over 95% of GHG emissions increases from 2012 to 2022. Additionally, it is expected that 98% of global population growth and 90% of new middle-households in this decade will be from EMDCs. With rapid industrialization in EMDCs comes the need to focus on sustainable development to avoid this projected growth in emissions. It’s no small investment and definitely not one EMDCs are equipped to handle themselves considering that they simultaneously have to invest more into climate risk adaptation, and have comparatively less funds than more developed countries.
Quantifying the Need for Climate Financing
The International Monetary Fund (IMF) estimates that “financing needed to meet [climate] adaptation and mitigation goals are trillions of USD annually.” As of now, EMDCs are only seeing a mere fraction of this amount. The Tony Blair Institute (TBI) recently published insights into exactly how big this deficit is. They projected that there needs to be a 30% annual increase in EMDC-targeted climate-related financing by 2030 to meet global targets. Considering these projections, EMDCs should ideally be getting US$2.4 trillion in annual funding, equivalent to 30-50% of total global spending on climate financing in 2030, with US$780 billion from international sources, whether they be private or public in origin.

A report from the Independent High-Level Expert Group on Climate Finance published through LSE expects spending needs to be much higher, stating “US$1 trillion per year in external finance that [is] needed by 2030” for EMDCs other than China to achieve climate-related goals. It's clear we have a long way to go, and these hefty goals will not be achieved without the whole might of developed countries working together. Many advanced economies have looked to support EMDCs in achieving these financing goals, including Canada.
Canada’s Role in Climate Financing for EMDCs
Canada is, in fact, a global leader when it comes to working to bring climate finance to emerging markets. In 2021, at the G7 Leaders’ Summit, Canada announced intentions to double its international climate finance efforts to $5.3 billion by 2026. This new funding is to be implemented across a range of initiatives in 5 major categories, each with successful case studies (A full list of current commitments can be found here):
Increasing Climate Resilience
In the last 5 year commitment (2015-2021), Canada contributed $37.5 million to the Least Developed Countries Fund aimed at developing national climate information infrastructure. Overall, this initiative was estimated to positively impact 5 million people.
Clean Energy Transition
Canada contributed $200 million to the Asian Development Bank to support the development of clean infrastructure. US$15 million of this contribution went to developing a 47.5 MWp floating solar plant in Vietnam, which was the first large-scale plant of its kind.
Support for Gender Equality and Inclusive Climate Action
Canada provided over $5.3 million to a program in Honduras to safeguard forests under the leadership of women and rural and indigenous youths. This project helped enhance forest governance, with equal participation of women and youth, while also increasing access to education programs and business resources.
Better Access to Climate Finance
Canada helped begin the Climate Finance Access Network (CFAN) through the support of the Rocky Mountain Institute (RMI) and eventually provided CFAN with $9.5 million in funding, which primarily helped deploy adaptation programs in climate-vulnerable countries.
Mobilizing Private Sector Investment for Climate Action.
The Canadian Climate Fund for the Private Sector in the Americas (Phase II) received a $223.5 million contribution from the government, which was distributed to various initiatives. US$12.5 million went to support Nicaragua’s sugar industry transition via the integration of a national sustainable irrigation system.
Are Advanced Economies Providing Adequate Support?
Canada has been a huge advocate for climate financing for emerging markets, spearheading the push to reach the annual US$100 billion in climate finance to developing countries from developed countries, alongside Germany. This goal was established by the UNFCCC conference of the parties in 2015. In 2021, developed countries were around US$10 billion short of the US$100 billion goal. However, preliminary and unverified data show that the goal was met as of 2022. A two-year delay in achieving this goal may seem negligible, except when considering the next milestone is US$1 trillion a year starting in 2025. This is likely to prove a challenge, and developed countries must step up their game if we hope to adequately support the climate transition in emerging markets to meet the Paris Agreement Goals. Within the broad range of the types of climate financing, there are two areas that are underperforming: adaptation finance and the mobilization of private finance. Organization for Economic Co-operation and Development (OECD) reports see adaptation finance as “the key to building resilience,” from building climate-resilient infrastructure to developing local disaster response strategies. Private sector mobilization is more of an untapped cash reservoir, but one which requires work to encourage proactive involvement to de-risk potential projects, provide support and incentives, and help set up the ideal conditions for private investment in desired projects.
As it stands, the world is falling behind the goals set by the IMF. Despite this, even if funds are collected, there is still a question of being able to invest it effectively.
EMDCs Need More Than Money
EMDCs, more often than not, have weak institutions that are not well integrated into the global financial system. This can undermine the investment potential of EMDCs. There are five main risks that EMDCs usually carry when looking to deploy any type of financing.
Political & Economic Instability: EMDCs may not always have an effective political system and be free of conflict. Corruption, political volatility, and unpredictable policies are all factors that can threaten the ability to deploy climate financing.
Currency Risk: The unpredictable environment of EMDCs often affects the financial stability of the country, and part of this is the value of foreign currencies. When it comes to equity investments, this currency risk can greatly jeopardize investments.
Liquidity Risk: As seen in the characteristics of EMDCs, the lack of integration into global financial systems can slow down the ability to enter or exit financial positions in markets and securities.
Regulatory Risk: With weak institutions and unstable or underdeveloped governments, the regulatory systems may not be very reliable for new businesses or carrying out investments.
Economic Risk: Central banks in EMDCs may not perform effectively or even exist, which affects the ability to manage interest rates and inflation. Foreign macroeconomic trends may also disproportionately affect these EMDCs due to their weak institutions.
Not all EMDCs will demonstrate a huge risk factor within each of these five areas, but the risk still exists. No matter the circumstances, it does not change the fact that climate financing is very much needed. When looking at some truly effective climate financing programs, they are organizations that not only look to raise funds, but enable the effective investment and implementation of this financing. The Climate Finance Access Network (CFAN) is a great example of this.
CFAN: Deep Dive
CFAN primarily focuses on climate financing for Small Island Developing States (SIDS) and least developed countries (LDCs), which are often more vulnerable to the effects of climate change. LDCs particularly face trouble when accessing climate financing due to their weak institutional environment. CFAN is able to overcome these barriers by placing individuals highly trained in project management and financial structuring within institutions of the host countries. In addition, CFAN looks to hire locals to become actively involved in their initiatives and connect them to both donor institutions and other global advisors. Improving the institutional environment of many EMDCs, and training locals to be able to carry out project management, financing, and implementation is the other half of the issue that needs to be solved.
As seen in the Rocky Mountain Institute press release, “With initial support from Canada, CFAN launched in the Pacific in 2021 where seven advisors have since unlocked US$64.4 million in climate financing for resilience, while an additional US$463.8 million investment pipeline is under development.” With the success of the program, at COP28, CFAN announced the launch of its Caribbean chapter with initial support from Canada and the US in addition to a partnership with the Caribbean Community Climate Change Centre (CCCCC), which is supported by various government heads of Caribbean countries.
To wrap up, Canada is doing amazing work to bring financing through various programs to EMDCs, but the fact of the matter is that it’s still not enough. Although Canada has the 9th highest GDP in the world, the realization of climate financing for EMDCs requires a global effort at an unprecedented scale. Canada may have doubled their financing this year, but it is still a mere dent in the goals set by the IMF. Additionally, these financing goals must be supported by programs to improve the institutions of target EMDCs and work to effectively implement the financing. There is clearly still a long way to go in supporting EMDCs with sustainable development and climate financing.
I hope to continue writing on climate investing in EMDCs. This includes topics from the currency risks private investors face and mitigating this risk, identifying industries and countries for growth, and more! All in time.
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