Climate Change and Poverty Reduction—Where Does Official Development Assistance Money Go?

There is an urgent need to mainstream the key challenges of climate change into sector and development planning and decision making processes to create sustainable long-term development. Mainstreaming is seen as making more efficient and effective use of financial and human resources. It is implementing and managing climate change policy holistically, which sustains development, rather than undertaking piecemeal activities. This involves building mitigation and adaptation capacity in both micro and macro economic development. Climate change is not only a national phenomenon but also a global phenomenon that requires the participation of both the public and private sectors. The importance of private sector participation is highlighted by the magnitude of the investment needed to manage climate change, and the fact that market mechanisms seem to be more effective in addressing climate change than does the public sector. Public sector involvement—such as grants, overseas development assistance (ODA), and funding from other countries—is equally important in mitigation and adaptation projects. Empirical results in this study emphasize that more caution is needed in directing ODA towards climate change mitigation and adaptation due to the links between various macroeconomic variables related to growth and poverty reduction. This implies that ODA given to other important causes related to achieving the Millennium Development Goals should not be reduced. The results show that energy efficient transfer of technology to developing countries should accompany any efforts towards directing ODA towards mitigation. Without that, ODA directed towards mitigation may have adverse effects on the pace of poverty reduction in developing countries. Thus, involvement of the private sector becomes crucial for energy efficient technological innovation and transfer.