Climate Finance and Geostrategic Interests in the Pacific

During the July 2022 Pacific Islands Forum, U.S. Vice President Harris announced plans to scale up its diplomatic engagement and triple its foreign aid contributions to the South Pacific. This announcement was followed by the introduction of the Pacific Islands Embassy Act in Congress which would establish three new embassies in the Pacific Islands in an explicit effort to counter increased Chinese influence in the region. The Pacific Islands—comprising 14 countries and seven territories—are an underdiscussed, yet increasingly important, strategic theater of great power politics between the U.S. and China as well as transnational challenges such as climate change. As U.S.-China relations steadily deteriorate under mounting economic, military, and technological competition, the Pacific Islands are caught between global superpowers vying for regional influence, all while trying to advance their economies and withstand the accelerating impacts of climate change.

The following analysis explores Chinese and American strategic and security interests in the Pacific region, the potential economic and security impacts of climate change on the Pacific Islands, and the role of climate development finance in PICs’ economies. Failure to meet the region’s immediate and future climate adaption and mitigation needs could amplify regional risks for both China and the U.S.

Pacific Island Countries are Strategically Important to Multiple Powers

Covering 15 percent of the world’s surface and spread across hundreds of islands, the Pacific Islands provide vital commercial and military sea lanes between Australia and New Zealand as well as Hawaii and the U.S. West Coast. The islands provide basing and anchorage for various countries’ air and naval forces, allowing the U.S. and its allies to improve force interoperability and capacity building while enjoying general freedom of movement across the Pacific. Currently, the U.S. has ship rider agreements with 11 countries, which allow law enforcement to embark on U.S. vessels and several bases in Guam and Micronesia. The bases also support space surveillance and data collection activities to help inform space traffic management and space debris tracking.

For China, the Pacific Islands play a significant and strategic role in that country’s economic, security, and maritime interests. PICs such as Kiribati, the Marshall Islands, Micronesia, and Papua New Guinea are among the top 20 largest exclusive economic zones in the world, which grant countries rights to the natural resources 200 nautical miles from their coastlines. Given the islands’ strategic geographic location and rich resources, China has sought to maintain and protect its sea lines of communication and access for transporting key raw materials by incorporating the islands into its Maritime Silk Road initiative. The Pacific Islands, particularly Micronesia, play a critical role in China’s offshore defense strategy and development of its naval forces. Micronesia is especially important to the U.S. and its allies as it is home to several U.S. territories and is used, in part, to contain China’s regional influence and military operations. As part of its Pacific expansion efforts, in April 2022, China signed a security agreement with the Solomon Islands, which would allow China to establish a military and paramilitary presence in exchange for $730 million in financial aid.

As China accelerates its engagement in the region, it is providing bilateral investment incentives to PICs to strengthen economic ties while also garnering diplomatic support for the One China Policy. To date, China has established diplomatic relationships with 10 PICs. By contrast, Taiwan’s formal diplomatic ties to the region dropped from six to four in 2019 following Kiribati and the Solomon Islands’ decision to reverse their recognition of Taiwan in exchange for Chinese foreign assistance and closer economic ties. Although China’s latest attempt in June 2022 to create a regional economic and security pact with 10 PICs was unsuccessful, due to lack of consensus on key security issues such as maritime and cybersecurity Beijing continues to widen its economic and political engagements across Asia, suggesting that the Pacific Islands’ strategic importance will continue to grow.

Climate Change is an Existential Threat to the Pacific Islands

While the U.S., China, and their respective allies compete for strategic access and resources in the region, the security priorities of the Pacific Islands remain fixed on nontraditional security threats such as climate change. The Pacific Islands are among the world’s most vulnerable to the effects of climate change, which poses an existential threat to these low-lying Pacific Islands in atoll archipelagos and is already upending the lives of their populations. Rising global temperatures threaten to destroy marine life and the economies that depend upon marine ecosystems throughout the region.

Rich in natural resources, the Pacific Islands depend upon the export of commodities including timber as well as blue economic activities such as tourism, maritime transport, energy, and fishing. Tourism is estimated to account for between 20 and 50 percent of economic activity in countries like Samoa, Palau, and Fiji. The region also supplies more than 30 percent (1.4 million tons) of the global market for tuna and two million tons of minerals ($2.6 billion) such as copper, nickel, and gold annually. However, due to economic mismanagement, inadequate infrastructure, and ecological degradation caused by overfishing and under-regulated forestry and mining activities, PICs economies remain relatively underdeveloped and undiversified. While commodities provide the backbone to several Pacific Island economies, including Papau New Guinea and the Solomon Islands, PICs are estimated to receive less than 12 percent of the final value of natural resources extracted.

Industries such as tourism, fisheries, and mining are also heavily susceptible to climate change, which could cause significant economic losses to those industries and PICs’ GDP. Currently, Pacific economies are losing an average of 7.4 percent of GDP each year to climate-related hazards.

As temperatures continue to climb, regional GDP is expected to decline further by an average of 8.8 percent per year in the event of 2.5 degrees Celsius warming, or 9.8 percent if temperatures rise by more than 5 degrees Celsius.

Rising global temperatures will also devastate access to food and freshwater sources throughout a region that already depends heavily on imports. About 20 percent of the region’s imports are food, with some countries such as Kiribati and Tuvalu importing 43 to 80 percent of their food. High tides, ocean overwash, and frequent extreme weather events are leading to the contamination of freshwater sources and coastal erosion, reducing overall crop productivity. Tuna populations and other marine life, which serves as a vital food source for islanders, are at risk of depletion and destruction due to climate-related ocean acidification, the deterioration of coastal and aquatic ecosystems, and rising ocean temperatures. These dynamics are set to increase import dependence and food security risks across the PICs.

Climate change and its impacts are also contributing to displacement throughout the region. According to the International Organization for Migration (IOM), 243,386 people across Fiji, the Marshall Islands, the Solomon Islands, Tonga, and Vanuatu were displaced by extreme weather events between 2008 and 2018. For low-lying atoll nations such as the Marshall Islands, sea-level rise imperils territorial rights as several islands could become uninhabitable by the end of this century. If rising temperatures are not contained, out-migration from the islands could increase dramatically as people look for safe shelter and sustainable livelihoods.

Disaster Relief, Development Aid, and Climate Finance Could Be Key to Strengthening Diplomatic Ties with the Pacific Islands

At the Pacific Islands Forum, Pacific leaders noted that rising geopolitical competition in the Pacific threatens regional stability and peace. At the same time, China’s intensifying involvement and expanding presence in the region offers an opportunity to foster dialogue and engagement with the region’s other partners regarding climate issues. Climate change’s far-reaching impacts on livelihoods, conservation, and Pacific economies places substantial fiscal pressures on PICs. Expanding access to climate finance and augmenting development assistance could alleviate these fiscal pressures placed on the Pacific Islands and bolster diplomatic relations between PICs and large economies seeking to enhance their engagement in the region.

Official development assistance is a crucial lifeline to Pacific economies, as the Pacific Islands rank among the most aid-dependent regions in the world. Over the past decade, more than 60 bilateral and multilateral donors delivered over $3 billion in foreign development assistance annually to the region, equivalent to 8 percent of the region’s GDP. For PICs such as Tonga, this aid makes up a significant portion of GDP, with remittances and Official Development Assistance (ODA) accounting for over 60 percent of GDP. The top donor to the region is Australia, followed by New Zealand and China. Since 2009, Chinese investment in the region has steadily risen, while assistance from Australia, New Zealand, and the U.S. has leveled off. 

While grants comprise the majority of development assistance to the region, loans make up the largest portion of assistance from China. Chinese loans have sparked concern among other countries, including Australia and the U.S., that Beijing is offering loans as a mechanism for increasing China’s presence and political influence in the region. However, China is not the primary driver behind rising debt risks in the Pacific. Already heavily indebted prior to the pandemic, average debt-to-GDP ratio for Pacific states rose from 32.9 percent in 2019 to 42.2 percent in 2021 as PICs took on additional loans to combat COVID-19 and the economic downturn stemming from the pandemic. The IMF-World Bank debt sustainability analysis for low-income countries lists seven PICs as being at high risk of debt distress: Kiribati, the Marshall Islands, Micronesia, Papua New Guinea, Samoa, Tonga and Tuvalu. Leaders in the region are taking note; in April 2022, the Pacific Islands Forum held its first Pacific Regional Debt Conference, focusing on the debt and fiscal sustainability challenges facing the region. Adapting and mitigating the immediate and indirect impacts of climate change may push already heavily indebted countries to take on additional debt if other financial options are not available.

At COP17 in 2011, wealthy countries recognized that low- and lower-middle-income nations needed additional access to finance to combat the pressures of climate change and adapt their economies. At the meeting, donor nations pledged to deliver $100 billion in climate finance to developing economies each year by 2020. “Climate finance” refers to public, private, and multilateral financing that supports mitigation and adaptation actions that address climate change, such as reducing emissions and increasing the resiliency of human and ecological systems to negative climate impacts. These funds are provided in the form of grants, loans, risk-mitigation instruments, and equity.

Although financing for climate adaptation and mitigation rose over the past decade, donor countries have consistently failed to deliver on their annual $100 billion climate financing pledge. Climate finance flows to PICs are relatively low, compared to total climate financing needs. Since 2016, climate finance flows to Oceania have averaged only 1.04 percent of total global climate finance to developing economies; 20 percent of these flows deployed using a debt instrument. The island nations face a large climate finance “gap,” equaling an average of nearly 9 percent of the region’s annual GDP. Due to persistently low levels of climate financing to the region, Pacific Islands Leaders at the Forum demanded that high-emitting countries commit to increasing annual climate financing contributions to developing nations at COP27 to $200 billion.

Given the security and economic threats presented by climate change, and the fiscal limits of PICs, these countries will accept assistance on climate adaptation and mitigation from multiple donors, including the U.S. and China, provided these donors are serious about tackling climate change, and the terms of this assistance are favorable for the recipient. Centering the security priorities of Pacific Island nations is critical to improving diplomatic ties in the region. But commitment to climate action is only part of the equation for improved relations with PICs; strong political alliances in the region may be built by the countries that can provide debt-free or low-interest financing without political strings attached. Engagement strategies in the region will thus need to demonstrate their commitment to PICs and their needs.

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Gahyun Helen You is a policy analyst at FP Analytics, the research and advisory arm of Foreign Policy. Her research focuses on international security, economics, cyber and technology policy, and governance. She is a graduate of New York University.

Miranda Wilson is a Policy Fellow with FP Analytics, Foreign Policy’s independent research and analysis division. Her work focuses on climate-related topics, including finance and resilience. She is a graduate of the Johns Hopkins School of Advanced International Studies.