Why climate finance must be reformed at COP26

Sustainable Leaders | Global

By George Blake, Kingfisher Writer

Published November 4th, 2021

Wealthy nations have long reaped the benefits of unconstrained pollution, often at the expense of others. Now within the context of climate change, all have a moral duty to assist lower-income countries to ensure their economies can develop in a sustainable manner. Yet it is these nations which continue to fail to meet their own climate finance targets.

Back in 2009, at COP15 in Copenhagen, wealthier nations pledged to ‘mobilise’ $100 billion in climate finance annually from 2020, in order to assist vulnerable nations in combating climate change. This target was missed, with a released ahead of the COP26 (drafted by the UK government as one of its host responsibilities) admitting the target was unlikely to be met until 2023.

This represents a major blow to lower-income countries that rely upon climate finance to maximise their reductions in greenhouse gas (GHG) emissions. The conclusions of the delivery plan also risks undermining the trust between nations which is critical to successful negotiation outcomes.

Delegates and world leaders will be heading to Glasgow’s Scottish Event Campus (SEC) for the COP26 conference (1st-12th of November) | Rob Donnelly / Flickr

The $100 billion pledge agreed at COP15 acts as a mechanism to transfer wealth from ‘developed’ - wealthy nations part of the Organisation for Economic Co-operation and Development (OECD) - to economically ‘developing’ nations, facilitating emission reductions and enhancing adaptation measures. Despite the pledge itself being relatively arbitrary and falling massively short of the actual needs of vulnerable countries, it was viewed as an important symbol of trust and solidarity between ‘developed’ and ‘developing’ countries, as well as acknowledging the ideas of climate justice.

Richer nations were able to reap the benefits of fossil fuel resources exploitation to rapidly industrialise and develop, with Europe and North America responsible for 62% of cumulative GHG emissions from 1751 to 2019. Hence, it is expected that these nations will provide climate finance to enable ‘developing’ nations to grow their economies in a sustainable manner.

The system of Nationally Determined Contributions (NDCs), established under the Paris Agreement, allows lower-income countries to propose two emission reduction targets. A minimum target where no external funding is provided, and a potential target if a given sum of climate finance is provided.

Richer countries have long polluted unabated and are largely responsible for the climate crisis | Tony Webster / Flickr

Despite rhetoric calling for countries to meet the $100 billion goal in advance of COP26, this has long seemed unlikely, with the total estimated to sit around $88 to $90 billion.

A $10 billion shortfall may appear relatively modest, especially given the target is likely to be reached by 2023. But this masks the damage done to the trust between nations and ignores the fact that the $100 billion target has long been viewed as a minimum, expected to increase over time. With a UN report estimating poorer countries require around $6 trillion annually, up to 2030, in order to finance just half of the climate actions set out under their NDCs.

‘Poorer countries require around $6 trillion up to 2030 to finance just half of the climate actions set out under their NDCs’

So why has the target been missed? It largely relates to the fact richer nations made no formal agreement on what each should pay, allowing some to avoid paying their ‘fair share’. The main culprit, perhaps unsurprisingly, is the US, which based on GHG emissions and GDP should contribute $40 to $47 billion annually, but in reality, contributes just $8 billion.

Other nations that provide less than half their ‘fair share’ are Australia, Canada, Greece, Iceland, New Zealand, and Portugal. In total, over half of the OECD Annex II nations failed to meet their responsibilities.

Some richer countries continue to fail in providing adequate climate finance| OECD (2021) / Nature

Problems also exist regarding the mechanism by which climate finance is delivered; whether finance exists in the form of grants or loans, and whether the money actually delivers any tangible climate benefits.

The percentage of public finance that comes in the form of loans varies year to year and depends on the source consulted, with values ranging anywhere from 40% to 75%. Such proportions are potentially highly significant, as for poorer countries loans are often of little use, limited spending power means projects are unlikely to generate enough revenue to avoid increasing debt levels.

Some of the countries that actually meet or go beyond their financial responsibilities, most notably France and Japan, provide almost all their funding in the form of loans. Furthermore, as argued in a 2020 Oxfam report, beyond grants, only benefits accrued from lending at below market rates should be included in finance figures, not the full value of the loan.

This wind farm is Turkana, Kenya - the largest in Sub-Saharan Africa—was partly by the UK’s Department for International Development (DFID) | DFID / Flickr

Concerns have also been raised around how climate finance is defined, with some countries including generic development aid as climate finance. Insisting aid projects (such as road construction), which do not explicitly target climate action, as ‘climate relevant’.

These concerns have been echoed by many middle to low income countries; in 2015, India’s finance ministry challenged the OECD’s figure of $62 billion in climate financing, arguing that it was closer to $1 billion. While Antigua and Barbuda’s climate change ambassador publicly accused rich nations of artificially inflating their figures.

Once loan repayments, interest, and other forms of over-reporting were accounted for, Oxfam estimated the true value of climate finance to be closer to $20 billion

Furthermore, despite calls for a 50 / 50 split, most funding is funnelled towards mitigation rather than adaptation measures, doing little to enhance the coping capacity of vulnerable nations. Countries exposed to dispoportionate climate risk are also burdened with higher capital (around 10%) relative to other countries.

These shortcomings in climate finance directly frustrates the level of action poorer nations can take, exacerbating the exposure of the most vulnerable and least culpable to more costly annual damages.

Vulnerable countries - such as Bangladesh - are calling for more climate finance to be earmarked for adaptation, such as building flood resistant homes | UN Women (Asia / Pacific) / Flickr

A variety of measures are needed to ensure that ‘developed’ nations collectively plug this funding gap; (1) all countries must contribute their ‘fair share’ of funding, (2) improved finance quality, ensuring a 50 / 50 mitigation and adaptation split, and minimising finance provided via loans, (3) minimising capital cost for countries subject to climate risk, (4) greater use of multilateral institutions—such as the Green Climate Fund—established under the Paris Agreement, and (5) more robust data reporting.

The COP26 conference represents a critical window for improving existing finance pledges, delivery mechanism, and transparency. A substantial step-change in attitude would go some way to restoring trust and affirm that richer countries are seriously considering ideas of common but differentiated responsibility.

Given that climate financing forms the backbone of the global system of NDCs, it is time to overhaul the current regime.

Featured Image: Visible Hand | Flickr

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