Climate Finance

WHAT IS CLIMATE FINANCE?

Climate finance covers all sources, streams and modalities of funding supporting mitigation, adaptation and loss and damage. It can be drawn from international, national or subnational sources; from public or private entities. Achieving a sustainable transition towards a climate-proof world requires a drastic shift in our production system. Renewable energies must replace fossil-fuel; communities must adapt to impacts; infrastructures must be climate-proofed. All these actions require money. The challenge of climate finance is not only to create additional sources of finance to support these activities but also to make existing finance “green”. The objective is that mainstream finance becomes climate finance. 

According to the 2019 Global Landscape of Climate Finance published by Climate Policy Initiative, an average of 579 USD billion was spent in 2017/2018 for climate finance. 92% of this flow went to mitigation, as its ability to generate profit attracts a variety of investors. About 56% comes from private actors. On the other hand, adaptation finance -  sometimes associated with development finance - is critically lacking funding.  Currently, 76% of climate finance raised is domestic (spent in the same country as where it came from).

International climate negotiations treat climate finance primarily as an issue of justice. According to the principle of “common but differentiated responsibilities and respective capabilities (CBDRRC)”, developed countries must support the developing countries financially in their climate transition. As we will see, this has always been a complicated issue to settle on during the negotiations.

CLIMATE FINANCE UNDER THE UNFCCC

At COP 15, in Copenhagen, Parties committed to raising 100 USD billion per year for climate finance. There are several controversies related to this statement. Loans are included in the 100 USD billion, which is contested by several Global South countries, who argue that this instrument leads to further North-South indebtedness and control. Moreover, this number has no scientific basis. 

The UNFCCC hosts several multilateral funds dedicated to developing countries:

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  • The Global Environment Facility (GEF) was created in 1994 to finance mitigation projects under the convention. 

  • The Adaptation Fund (AF) was created under the Kyoto Protocol in 2001 and now serves the Paris Agreement. As indicated by its name, it is dedicated to financing adaptation activities

  • The Green Climate Fund (GCF) was created in 2011 and serves the Paris Agreement. It has the particularity of committing to spend equally on mitigation and adaptation, giving equal importance to the two pillars of the Paris Agreement. 

  • The Special Climate Change Fund (SCCF) and the Least Developing Countries Fund (LDCF) are two special funds under the GEF. 

 

At COP 16 in 2010, Parties created the Standing Committee on Finance (SCF), in charge of assisting the COP in improving the coherence, coordination, and mobilization of climate finance resources. It is also in charge of the logistics of climate finance reporting by the Parties. The SCF organizes a Forum on Climate Finance at every COP.

THE PARIS AGREEMENT AND THE KATOWICE CLIMATE PACKAGE

Article 9 of the Paris Agreement is dedicated to climate finance. It states that developed countries have the obligation to support developing countries financially, where developing countries are encouraged to contribute. Paragraph 5 of Article 9 of the Paris Agreement requires developed countries to provide information on planned and future support for developing countries. 

In the Paris Agreement, the modalities as well as what information would be required under this exercise remains unclear. At COP23, delegations became entangled in the question of how the issue will be dealt with. The group of African countries wanted to comprehensively negotiate the modalities in the hope for more reliability and predictability of future climate financing. Developed countries feared that this may be the first step leading to regular financing cycles with binding commitments every two years, which is considered as a red line. 

On finance, the Katowice Climate Package (COP 24, 2018) was kept relatively permissive. It defines what constitutes climate finance, how it will be reported and reviewed. Developed countries are obliged to report every 2 years on planned climate finance. Negotiations on matters related to market mechanisms (Article 6 of the Paris Agreement) were blocked by Brazil which tried to include contested rules that would allow loopholes in carbon accounting (see the section on Article 6 of the Paris Agreement). 

RECENT DEVELOPMENTS AND UPCOMING ISSUES

At COP 25, the most pressing issues related to finance were on negotiations of rules for the Article 6 of the Paris Agreement - which had failed the previous year - and on finance for Loss and Damage (see the Loss and Damage and Article 6 sections). There were debates on whether to instruct the GEF and GCF to work more on the issue of Loss and Damage. 

COP 25 also marked the last year before reaching the end of the pre-2020 era, and its “100 USD billion per year” goal. Negotiations emerged on the definition of a new finance target for 2025 and beyond. There are debates on the necessity of such a target because many argue that the “100 billion by 2020” achievement is controversial. 

Another emerging worry is the impact of the imminent leaving of the United States from the Paris Agreement. Many anticipate a weakening of public climate finance institutions. 

In 2020, the emergence of the global Covid-19 pandemic disrupted economies, societies and finance. Many vulnerable countries confronted multiple disastrous events, combined into a “perfect storm” while the world faced an imminent economic crisis. This raised many concerns about the future of climate finance. Will finance levels be maintained? How to make sure that climate finance contributes to health and sanitation support? The international community is also looking at how to “build back better” our economy, and use this crisis as momentum for boosting a carbon-free transition.

TO GO FURTHER

SOURCES

UNFCCC (2020). Introduction to Climate Finance. (online) Available at: https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance

Climate Policy Initiative (2019). Global Landscape of Climate Finance 2019. Available at: https://www.climatepolicyinitiative.org/wp-content/uploads/2019/11/2019-Global-Landscape-of-Climate-Finance.pdf 

 

UNFCCC (2015). The Paris Agreement. Available at: https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

 

Carbon Brief (2019). COP25: Key outcomes agreed at the UN Climate talks in Madrid. (online) Available at: https://www.carbonbrief.org/cop25-key-outcomes-agreed-at-the-un-climate-talks-in-madrid

 

UNFCCC (2018). Decision 12/CMA.1. Available at: https://unfccc.int/sites/default/files/resource/cma2018_3_add1_advance.pdf#page=35