Context

The 29th Conference of the Parties (COP29) of the United Nations Framework Convention on Climate Change (UNFCCC), to be held in Baku, Azerbaijan, in November 2024, is being billed as the ‘finance COP’. Climate finance-related issues feature high on the agenda. Setting the New Collective Quantified Goal (NCQG), a mobilisation target for climate finance flows from developed to developing countries from 2026 onwards, will be the top priority. This will replace the previous mobilisation target of USD 100 billion per year by 2020, which was subsequently also made applicable through 2025. 

In this context, the definition of climate finance flows from developed to developing countries itself is contentious. This issue brief offers recommendations on the desirable attributes, definition, and mode of delivery of climate finance flows that should constitute the NCQG, as well as on the quantum of the NCQG itself.

Developed countries (Annex II countries in UNFCCC parlance) accounted for 57 per cent of cumulative global emissions from 1850 to 2019 (IPCC 2022). Further, Annex II countries have also not delivered on their emissions mitigation commitments under the Kyoto Protocol (Van Deursen and Prasad 2023). 

On the other hand, developing countries, which account for most of the world’s population, have contributed relatively less to historical emissions and are among the most vulnerable to the impacts of climate change. These countries need to increase their consumption of energy and materials for their developmental needs. At the same time, the Paris Agreement calls on all countries to undertake ambitious efforts in responding to climate change. Given these twin priorities, developing countries should not be forced to choose between development and climate action. If they are expected to pursue both concurrently, they should be provided external financial support. This is because developing countries face several financing constraints.

Consistent with the UNFCCC’s foundational principles of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) and equity, the Copenhagen Accord of 2009 (COP15) recognised the need to support climate action in developing countries with financial resources. In this connection, developed countries committed to providing USD 30 billion in climate finance to developing countries between 2010 and 2012, which was supposed to rise to reach USD 100 billion per year by 2020.

Since 2015, the Organisation for Economic Cooperation and Development (OECD) has annually reported on the progress towards the USD 100 billion per year by 2020 goal. Per the OECD, this target was reportedly achieved in the year 2022, two years behind schedule (OECD 2024). However, some observers, including Oxfam, and developing countries have raised questions over the accuracy, methodology, and verifiability of the OECD figures. In contrast to the OECD’s claim of USD 115.9 billion climate finance delivered in 2022, Oxfam estimates that the real value of support is between USD 27.9 and 34.9 billion (Oxfam 2024).    

The shortcomings of the OECD approach, as identified by various stakeholders, include (i) some reported figures are commitments but not actual flows; (ii) some reported figures represent existing developmental aid reclassified as climate finance, and are thus not new and additional; (iii) there’s a possibility of overreporting of climate relevance in self-reporting by multilateral development banks (MDBs) and bilateral aid agencies; and (iv) inclusion of public finance provided at market rates. 

On the matter of definition, the UNFCCC’s Standing Committee on Finance (SCF) invited submissions from Parties on the operational definition of climate finance in 2020. In response, 17 submissions were made by Parties or groups of Parties. They provide valuable insights into the positions of many developing countries on climate finance.

Recommendations

Drawing on our analysis of the various points in the preceding discussion, our recommendations span the desirable attributes, definition, and mode of delivery of climate finance as well as the quantum of the NCQG. 

A. Attributes

On attributes, we recommend that

  • Climate finance flows should either fund mitigation, adaptation, or both;
  • Only actual disbursals, and not commitments, should count as climate finance flows;
  • Climate finance flows should be new and additional, and not a reclassification of existing developmental aid; and
  • Only public grant capital, or the grant equivalent of other forms of public capital, along with the private finance that these mobilise (for example, through de-risking), should count towards climate finance flows.

B. Definition

Tying these attributes together, we propose the following definition of climate finance flows from developed to developing countries: “Disbursals of new and additional public capital by developed countries in the form of direct grants, as well as grants or grant-equivalent components of other forms of public capital, along with the private capital flows that these mobilise, which collectively contribute towards developing country climate finance needs”. 

C. Mode of delivery

On mode of delivery, we recommend that public climate finance from developed countries should focus on funding blended finance instruments. By mobilising many multiples in private capital, these can make the most efficient use of limited public capital, and thereby minimise public finance requirements from developed countries.

D. Quantum

Finally, on the quantum, the NCQG should bridge the gap between organic private climate finance flows to developing countries, and their external climate finance needs. An independent high-level expert group (IHLEG) constituted by the COP26 and COP27 presidencies and the UN Climate Change High-Level Champions concluded that developing countries (excluding China) will have external climate financing requirements of around USD 1 trillion per year by 2030. This requirement provides a credible basis for determining the NCQG.

The above recommendations constitute a framework to converge developing country perspectives onto a common ground. By approaching the topic of climate finance in a unified voice, developing countries could facilitate a breakthrough in climate finance negotiations, which so far has remained elusive.


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Posted On
08 November 2024
Tags
Blended Finance
Climate Finance
NCQG
Paris Agreement
COP29
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