Background:
Climate finance is a cornerstone in the global response to climate change, essential for mitigation efforts to reduce global greenhouse gas emissions and adaptation measures that prepare communities for the effects of a changing climate. The challenge is immense: achieving net-zero emissions by 2050 is estimated to require an annual investment of $4 trillion in renewable energy, far lower than the $7 trillion spent on fossil fuel subsidies.
Despite this need, the funding landscape is currently characterized by a significant shortfall in promised funds from developed nations and a reliance on loan-based financing, which exacerbates the debt burden of vulnerable countries. The cost of financing can be up to seven times higher in emerging and developing economies compared with the United States and Europe. This disparity makes the clean energy transition for developing countries much more difficult as renewable energy development has zero on-going fuel costs but requires high up-front capital costs.
Against this backdrop, initiatives like the Bridgetown Agenda call for a radical transformation of the global financial system to ensure fair and adequate support for those most in need of building resilience and transitioning to clean energy.
Current Situation and Implications:
The latest OECD report says developed nations likely have met their overdue pledge of $100 billion in 2022. Additionally, efforts to tackle adaptation finance gaps are gaining momentum, with the call for countries to make progress on at least doubling adaptation finance by 2025.
Still, there remain massive financial requirements projected for mitigating and adapting to climate change effects, which far exceed the current commitments. The Green Climate Fund, for example, while being the largest climate fund globally with $30 billion raised, covers only a fraction of the hundreds of billions needed annually for adaptation alone. The financing landscape is further complicated by the reality that most public climate finance currently takes the form of debt with exorbitantly high interest rates for most of the world.
Outcomes for COP28:
COP28 stands as a crucial juncture for revisiting and potentially redefining the global climate finance architecture.
Key outcomes anticipated include:
- The advancement of discussions on meeting the $100 billion funding commitment and commitments to operationalize the Loss and Damage Fund with financial pledges already in place.
- Initiating constructive dialogues on the forthcoming New Collective Quantified Goal (NCQG) global finance target that will succeed the $100 billion goal
- Implementing Article 2.1c of the Paris Agreement to align all financial flows with emission reduction and climate resilience, marking a transition towards sustainable investments and away from fossil fuels
These discussions are expected to center around not just the quantity of funding but also the quality, focusing on making the finance more accessible and balanced between mitigation and adaptation. The UAE, as the host of COP28, will also hold the Adaptation Fund Contributor Dialogue, seeking pledges to support the most vulnerable nations. Furthermore, initiatives to improve conditions for these countries, such as reallocating Special Drawing Rights to the Resilience and Sustainability Trust, are on the agenda. Furthermore, recognizing that the current climate finance system is not fit for purpose, there will be discussions on the role governments and international financial institutions (IFIs) can play. The World Bank president Ajay Banga is expected to deliver a progress report during COP on “a new approach to track climate outcomes based on impact.”