Climate finance will be center stage during November’s 27th UN Climate Change Conference of the Parties (COP27) in Egypt. Rich countries’ governments will be urged to spend much more money in the developing world and follow through on unfulfilled promises.
- Climate finance here refers to the financial support that richer, high-emitting countries provide or mobilize to help less developed nations deal with climate change and build low-carbon economies
- Climate finance can generally be separated into distinct topical areas, including money for adaptation, mitigation, loss, and damage.
At COP27 developed countries will be under pressure to fulfill their commitment made in 2009 to provide $100bn per year in financing to developing countries, agree on a post-2025 climate finance arrangement and target, and increase global funding for adaptation projects. Increased public and private sector mobilization, debt considerations, and finance for countries experiencing irreparable loss and damage will be key points of discussion.
Why is climate finance needed?
To limit the impacts of climate change, there must be a rapid shift from polluting fossil fuels to clean energy and other technologies, which will require large amounts of capital. Conservative estimates indicate that by 2030, climate finance needs to rise to roughly $5 trillion per year globally to fund measures to fight the climate emergency. The current reality is starkly different – average annual global financing for climate action was merely $632 billion in 2019/2020.
It is generally agreed that developed countries are the ones with the money and responsibility to fund these necessary changes. They, as a group, have historically emitted the most greenhouse gasses and benefited from industrialization. Many were also major colonial powers, and continue to disproportionately contribute to climate change.
While it is true that the biggest economies contribute the most to climate finance, this is not relative to their economic size – and they are largely not paying their fair share. For example, African climate negotiators have called for $1.3 trillion a year in investment by 2030. Estimates of global need are much higher, however current investment, particularly in developing countries is far below that.
How climate finance is distributed
Developed countries have various channels which they can use for climate finance contributions. Currently, most climate finance (71% or USD 48.6bn in 2020) has been in the form of loans rather than grants.
These loans, while useful in some circumstances, increase the debt load of developing countries whose economies have been weakened by the COVID-19 pandemic, rising prices of food and fuel, and a strong US dollar.
This finance has mostly gone to middle-income countries with low-income nations receiving only 8% of the funding. By contrast, fossil fuels got 50 times that in public support in 2020. And developed countries mobilized trillions domestically to confront the Covid crisis.
Private finance also is primarily in the form of loans, typically allocated towards mitigation and not towards addressing adaptation needs. However, relatively little money has come from private finance, despite bold claims by US officials about its potential contribution.
Multilateral development banks – like the World Bank and IMF – are expected to play a major role in mobilizing climate finance, and so far they have failed to do so.
What to watch this year at COP27
The biggest question at COP27 this year will be: Where is the money? Key climate finance priorities at COP27 include finance for adaptation, loss and damage, and a new finance goal. COP27 is also being billed as an ‘African COP’ – occurring on a continent disproportionately affected by climate change – African countries are already spending billions in an attempt to cope with the climate crisis. Yet, total annual climate finance flows for Africa in 2020 were only $30bn – roughly 12% of the amount needed. Currently, officials say Africa has benefited from less than 5.5% of global climate financing. Climate finance negotiations will include a specific focus on how African nations, particularly those who are among the Least Developed Countries group, might benefit.
In 2009, developed countries pledged to mobilize $100bn a year by 2020 to support developing countries. That pledge has remained unfulfilled and according to the OECD, countries provided only $83.3bn in 2020 (Oxfam estimates the real value of climate assistance provided to developing countries was only one-third of that). Last year, developed nations released a detailed plan to provide at least $100bn annually in climate financing to developing countries starting in 2023 – three years after the promised delivery date – but the plan lacks provisions for rich countries to make up the shortfall and the Alliance of Small Island States (AOSIS) soundly rejected it saying the goalpost had been moved further. There is currently no mechanism for ensuring that developed countries meet their pledges, nor do they face any penalty for missing deadlines.
At the 2021 United Nations General Assembly, the US announced it will double its climate finance contribution to $11.4bn a year by 2024 – out of which $1bn was appropriated in 2020. While the US is working towards closing the gap, recent estimates show the US ranks last in terms of contributing its fair share. According to an analysis from ODI, the US should contribute about $41bn annually.
- financing to reduce impacts and adapt to the adverse effects of climate change
COP26 concluded with a commitment from rich nations to double adaptation finance from 2019 levels by 2025 – providing low- and middle-income countries (LMICs) with $40bn annually as part of a commitment by developed countries to provide $100bn annually in climate finance to developing countries. This funding is to protect communities from the impacts of climate change, such as destruction of homes and livelihoods.
Yet, developing countries aren’t getting the adaptation assistance promised:
- Only 20-25% of committed concessional finance across all sources is earmarked for adaptation
- Adaptation finance reached $28.6bn in 2020 – an increase from $20.3bn in 2019
- About 65% of the $356mn that was pledged to the Adaptation Fund at COP26 is still outstanding
- Only $21.8 billion total adaptation finance is expected by 2025, according to the International Institute for Environment and Development (IIED)
A successful COP27 adaptation finance outcome would include a transparent implementation plan for the 2025 doubling target, as well as a signal that adaptation grant-based finance will increase.
Loss and Damage Finance
- funding activities to avert, reduce, and address losses and damages resulting from acute and long-term impacts of climate change
Current loss and damage finance are inadequate, as climate impacts are already creating mounting losses and disasters. Loss and Damage will be a key point of discussion and contention at COP27. With UN secretary-general Antonio Gutteres describing it as ‘the litmus test’ for the talks.
At COP26, after a demand by developing countries to establish a loss and damage finance facility, countries agreed to establish the Glasgow Dialogue on Loss and Damage to discuss potential funding arrangements. The issue was recently added to the official agenda for COP27, a win for potential beneficiary countries.
Talks will focus on establishing a dedicated finance fund for loss and damage, with funding that is separate from adaptation finance. AOSIS recently proposed a “Loss and Damage Response Fund” that would allow for voluntary funds from government donors. This would build on small existing commitments made by Scotland, Wallonia, philanthropies, and most recently the first wealthy federal government, Denmark. The United States, and other developed nations that might be expected to contribute funds, continue to block progress, citing fears of potentially politically unsustainable future liabilities.
Negotiators will also seek to operationalize the Santiago Network on Loss and Damage, created in 2019 to provide countries with technical information and assistance to address loss and damage.
Post-2025 Climate Finance Goal
Countries must set a new collective quantified goal (NCQG) from the $100bn annual floor. Despite the failure to reach $100bn a year, this figure is likely to be larger, as developing country needs have grown considerably. Financial support goals sought post-2025 include a robust process that takes into account the needs of developing countries and the quality and scope of finance, as well as the quantity. For example, how easy it is for developing countries to access climate finance and the form it takes – grants or loans – will be part of the discussions.
At COP27, deliberations of the NCQG will continue, building upon a COP26 outcome that agreed to set a new goal for post-2025 climate finance. The failure to meet the $100bn commitment will lead to a prioritization from climate activists towards the post-2025 target and securing a greater portion of finance for adaptation.
- In 2021, South Africa announced a partnership (JETP) with Germany, the UK, the EU, the US, and France to mobilize $8.5 bn to support a transition to a low emissions economy and away from coal. An investment plan is expected to be released by COP27, but has been bogged down in negotiations with richer nations about how the funds would be spent. Additional JETP announcements are also expected on plans for Vietnam and Indonesia.
- While African nations push for more climate financing for the continent, there is mounting pushback against any moves to abruptly shift away from fossil fuels, without adequate support for clean energy.
- Given the growing debt burdens of many developing countries, relief and reform of multilateral banks, and so-called “debt for nature swaps” are likely to inform negotiations, if not form a direct part of them.