Council on Energy, Environment and Water Integrated | International | Independent

What Is Climate Finance and Why It Must Go From Billions to Trillions
At COP29 in Azerbaijan, reaching a consensus on the New Collective Quantified Goal is crucial.

Simran Sukhija
03 June 2024

In the world of climate finance, it is not just about dollars but the value that is placed on saving our planet. At global climate summits—from the Ad Hoc Work Programme (AHWP) of the UN Framework Convention on Climate Change (UNFCCC) that was recently discussed in Colombia to the annual Conference of Parties (COP)—'climate finance' is a recurring topic of discussion.

But what exactly does this term mean and why is it so crucial? Despite three decades of discussions, no universally accepted definition of climate finance exists today. The first Needs Determination Report in 2021 indicated a need of nearly USD 6 trillion for implementing climate action plans in developing countries by 2030, and this didn’t fully cost for adaptation.

The UNFCCC defines climate finance as “local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.” In other words, climate finance is generally understood as the flow of funds aiming to reduce emissions and build resilience of human and ecological systems.

It is especially crucial for developing countries facing both climate crisis and economic development challenges. They lack the financial resources necessary to mitigate the worst effects of climate change and transition towards sustainable low-carbon economies. Developed countries, being the historical emitters, must aid developing countries in their decarbonisation journey, keeping in mind the fact that climate change is an evolving scenario that comes with incremental costs. In line with the needs of developing countries, India has called for developed countries to provide at least USD 1 trillion per year from 2025, composed primarily of grants and concessional finance, urging them to take a proactive stance towards fulfilling their climate finance commitments.

As COP28 last year deferred most finance issues to COP29, the agreement on a New Collective Quantified Goal—a new global climate finance goal—replacing the USD 100 billion commitment will serve as the guiding star for future climate action.

The Climate Finance Saga

Countries and agencies recognised the necessity of establishing dedicated financial mechanisms to streamline financial support for developing countries under the UNFCCC. It was proposed that existing international entities such as the Global Environment Facility (GEF), established in 1991, should be entrusted with operating these mechanisms. Consequently, in 1994, the GEF was designated as an operational entity of the UNFCCC financial mechanism, providing critical financial assistance to developing countries to address environmental challenges.

At COP16 in 2010, the Green Climate Fund (GCF) was established as the financing vehicle for developing countries within the global climate architecture. In 2011, it was further designated as another operating entity of the mechanism along with the GEF. The Standing Committee on Finance was established in the same year to assist the COP in exercising its functions regarding the mechanism, enhancing coordination in the delivery of climate finance, and measurement, reporting, and verification (MRV) of support provided to developing countries.

In the realm of climate finance commitments, in 2009, developed countries committed to mobilising USD 100 billion annually by 2020 to address the needs of developing countries. In 2015, it was decided that developed countries would continue their existing collective mobilisation goal through 2025, and before 2025, a new collective quantified goal will be set from a floor of USD 100 billion per year. This new goal would take into account the needs and priorities of developing countries.

Is Climate Finance a Contentious Issue at COP29?

The debate over climate finance between developed and developing countries remains a recurrent theme at every COP. COP28 in Dubai continued this trend with no decision yet on what climate finance is and what the new goal should be. While notable pledges were made during the conference—such as the United Arab Emirates committing USD 30 billion to the new fund ALTÉRRA, with an emphasis on improving access to funding for the Global South, and the World Bank's pledge to increase climate funding to 45 per cent of total lending by 2025—these are just the tip of the iceberg. It's also important that these commitments be translated into tangible mobilisation of funds to drive meaningful change.

Has the USD 100 billion goal intended to be achieved by 2020 been met by developed countries? There are concerns among developing countries about the absence of a standardised methodology and a unified definition of climate finance to track the goal. This discourse was in part prompted by the 2023 OECD report, which suggested that the goal looks likely to have already been met as of 2022, which was repeatedly cited as positive news by developed countries at COP28. Another report released by OECD in May this year claims that in 2022, developed countries provided and mobilised a total of USD 115.9 billion in climate finance for developing countries. This report carries immense significance as it is the first time the OECD has officially confirmed the fulfilment of the USD 100 billion climate finance goal. The release of this report just before the Bonn Climate Change Conference, scheduled from 3 June to 13 June 2024, is poised to ignite discussions and intensify negotiations.

What Insights Does the Report Provide?

According to the OECD's Climate Finance Provided and Mobilised by Developed Countries in 2013-2022 report, even though the goal is said to have been met, the primary form of public climate finance remained loans, rising from USD 49.6 billion in 2021 to USD 63.6 billion in 2022. This poses an unsustainable financial burden on climate-vulnerable countries. It’s important to look into the form climate finance flows in—whether as grants, loans, or equity.

Another report, ‘Climate Finance Shadow Report 2023’ by Oxfam, shows that while the OECD says USD 83.3 billion was mobilised in 2020, the real amount of climate finance was USD 21-24.5 billion only. India raised this report at COP28. The report raises uncertainties about the accuracy, methodological robustness, and verifiability of climate finance reporting, emphasising the need for a meticulous examination of the climate finance that developed countries claim to have mobilised.

A significant increase in funds is needed, but the key question remains: Given the struggles of developed countries in meeting the USD 100 billion pledge, how can we set a loftier New Collective Quantified Goal?

At COP29 in Azerbaijan, reaching a consensus on the New Collective Quantified Goal is crucial. However, disagreements persist, particularly regarding the timeframe, structure, and transparency arrangements for tracking the goal. For the quantum, some proposed targets were USD 1.1 trillion or a share of at least 1 per cent of the GDP of developed countries, or a mix of quantitative and qualitative elements. For the timeframe, options include a short-term five-year plan (2025–2030), a 10-year framework of two five-year operational periods (2025–2030 and 2030–2035), and an aspirational and actionable time frame accompanied by a shorter-term time frame of 10 years and a long-term timeframe until 2050, with built-in reviews. Even during the Ad Hoc Work Programme (AHWP) discussion in April 2024, disagreement persisted as the US labelled the new collective quantified goal as 'voluntary' for those who 'choose to pay’ while India, representing like-minded developing countries, vehemently opposed the American interpretation.

With the NCQG steering the course, climate negotiations are approaching a decisive moment this year. This is crucial as the World Meteorological Organisation states that the likelihood of global temperatures exceeding 1.5℃ within the next five years has significantly increased, and nine of the 10 hottest years on record were in the last decade.

Steps to Facilitate Consensus on Climate Finance

  • It is important to adopt a New Collective Quantified Goal to replace the USD 100 billion commitment. The goal should be focused not only on its quantum but also on setting an incremental trajectory across years towards meeting it, considering the evolving needs of developing countries. This should clearly highlight the role of developed countries in mobilising this fund in a timely manner.
  • Expanding funding sources by strengthening private sector involvement and addressing risk perceptions, which hinder private climate-aligned capital flows to developing countries, is also essential. In this regard, international financial institutions and multilateral development banks should scale up funding and mitigate private sector risks by providing financial support to cover project costs or revenue shortfalls, offering risk-sharing instruments like guarantees and insurance, and co-investing in climate projects to build confidence and encourage private sector participation.
  • To address the lack of trust and transparency among countries regarding finance mobilisation, it's crucial that both developed and developing countries agree on a common definition of climate finance and establish robust accountability measures. While it has always been challenging to agree on a common definition, the starting point could be a consensus on the purpose of climate finance and emphasising the importance of delivering climate finance over mere pledges.

COP29 in Azerbaijan will be a finance COP, with the anticipated decision on the new collective quantified goal poised to shape the future of global climate action. As the adage goes, 'The best time to plant a tree was 20 years ago; the second-best time is now.'

Simran Sukhija is a Research Analyst at the Council on Energy, Environment and Water (CEEW), an independent policy research institution. Send your comments to [email protected]

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