Climate funds: Developed nations must step up

In 2009, at the COP15 Summit in Copenhagen, developed countries committed to jointly mobilise $100 billion a year for climate finance so that developing nations can take effective actions. The 2015 Paris Summit extended this goal through 2025.

The world saw several hydro-meteorological (floods, storms, heat waves) and climatological (droughts, wildfires) disasters, largely attributed to climate change, during this period. Unsurprisingly, the less endowed and vulnerable countries suffered disproportionately. But the promised funding remained elusive.

Not just that, instead of covering the shortfall, developed countries are now coercing developing nations into commiting to an unreasonable target of reducing carbon emissions to net-zero by mid-century. What will fix the widening chasm?

Inconsistent estimation

There are many disconnects, not just in the needs, but also in basics such as estimations on funds disbursed, as a proper methodology is not used in estimating the actual finance mobilised by developed countries towards the $100-billion obligation.

For example, based on recent estimates of the Organisation for Economic Co-operation and Development (OECD), climate finance provided and mobilised by developed countries amounted to $79.6 billion in 2019. These estimates are, however, disputed unequivocally by most recipient countries. The Climate Finance Shadow Report 2020, published by Oxfam, for instance, estimates climate finance flows at $22.5 billion in 2017-18 — only about a third of the $71 billion estimated by the OECD for the same period.

Such inconsistency in estimating international climate finance arises primarily because of two key issues related to the taxonomy of international climate finance: Clubbing development finance with climate finance and counting private finance as financial support.

Private non-grant capital, by virtue of its commercial orientation cannot be termed international climate finance. Nor can development assistance provided by multilateral banks and development finance institutions for infrastructure projects be classified as climate finance. These resources, used for the construction of roads or setting up electricity transmission and distribution infrastructure, for example, can be mobilised by developing countries in a business-as-usual scenario without any assistance from developed countries. To reduce the risk of ‘greenwashing’, and cover the risks and costs of climate externalities, climate finance must be new and incremental. Furthermore, only the grant-equivalent element of any claimed disbursement should be counted as climate finance.

Another cause of concern is the significantly low amount allocated for climate adaptation. Article 9.4 of the Paris Agreement states that the provision of scaled-up financial resources should aim to balance adaptation and mitigation.

In 2016, the United Nations Environment Programme (UNEP), in its Adaptation Gap Report, estimated the annual climate adaptation costs and financing needs at $140-300 billion by 2030 and $280-500 billion by 2050. In 2019, the OECD estimated the share of climate adaptation finance at $20.1 billion of the total $79.6 billion tracked.

One plausible reason for the higher investment in mitigation projects is that they are politically popular as they lead to a reduction in carbon emission — a global public good that benefits everyone, including the donor country. Such investments also bring international recognition for being “climate conscious” as project outcomes are clearly visible and measurable.

Climate mitigation projects are investable, which attract private financiers. On the contrary, adaptation sectors find it difficult to attract funds, especially private capital, due to high project development costs and lack of commercial viability or good investment returns. The benefits are also largely confined to the recipient countries.

Action plan

To make up for the shortfall and fulfilment of internationally agreed climate objectives by 2030, the developed countries must take immediate action. First, there is a need for clarity and consensus on the definition of international climate finance to put all controversies surrounding the classification of “climate relevant” projects to rest. This includes creating a taxonomy to make a clear distinction between development finance and climate finance and avoid possibilities of ‘greenwashing’.

Second, climate adaptation finance must be ramped up. Denmark, for instance, has committed to allocating 60 per cent of its climate finance to adaptation projects.

Third, international climate finance should be allocated to recipient countries on a need basis. Despite having a relatively smaller share in global greenhouse gas emissions historically, climate change vulnerable nations such Pacific Island Countries (PICs), Small Island Countries (SIDs), and Least Developed Countries (LDCs) are disproportionally affected by climate change.

Fourth, the $100-billion target should be revised to reflect the true extent of finance required to respond to existing and future adverse consequences of climate change. The post-2025 outlook should reflect a significant upward trend in the uptake of international climate finance by developed countries.

Jena is Regional Climate Finance Adviser at the Commonwealth Secretariat, and Jain is Climate Finance Analyst with Climate Policy Initiative

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