Albrecht Arthur Arevalo
This discussion paper developed after COP26 focuses on two key questions: Have commitments been met and are finances being used in accordance with commitments? With COP27 now happening, the paper also recommends areas for collaborative action for international organizations and related stakeholders.
At the 15th Conference of Parties (COP15) of the UN Framework Convention on Climate Change (UNFCCC) in 2009, developed countries committed to providing US$ 100B yearly by 2020 for developing countries’ climate change-related needs.
Identified in the Copenhagen Accord, this was made in accordance with the principle of common but differentiated responsibilities and respective capabilities, recognizing relatively low greenhouse gas emissions from developing countries, as well as the prevalence of major socio-economic challenges in these areas. These were reiterated in the preamble of the Paris Agreement in 2015 with the addition of ‘equity’ as a guiding principle.
The US$ 100B commitment, referred to as climate finance, has been a major topic of international climate negotiations since its inception. There are several different organizations and entities involved in its delivery. Generally, and recognizing that some of these functions and phases often interconnect or overlap, these are:
- Formulation into financial instruments such as grants and loans through bilateral agreements between countries. This is also done multilaterally via multilateral development banks, and operating entities of the UNFCCC’s Financial Mechanism like the Green Climate Fund and the Global Environment Facility.
- Implementation at the country-level based on the Nationally Determined Contributions (NDCs) of Parties/governments, and at the local-level through non-government organizations, communities, and similar stakeholders.
- Accounting and reporting of climate finance commitments and usage at multiple levels. The Standing Committee on Finance established at COP16 plays a central role in coordinating and rationalizing these functions.
Attempts have been made to define climate finance, but it remains an evolving term. The first was by the UNFCCC in 2014: “Climate finance aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.”
A more recent definition on UNFCCC’s website says that climate finance “refers to local, national or transnational financing – drawn from public, private and alternative sources of financing – that seeks to support mitigation and adaptation actions that will address climate change.”
While the UNFCCC definitions are helpful in giving a general idea and direction, further specificity is needed as this has direct consequences to the operationalization of climate finance in actual practice. For instance, there is the lack of a common framework that identifies what can and cannot be considered as climate finance. Added to this is the non-binding nature of the US$ 100B commitment. Issues related to this definitional gap are raised in literature, COP meetings, and other avenues.
Have commitments been met?
According to the Organisation for Economic Co-operation and Development (OECD), climate finance provided and mobilized by developed countries totaled US$ 58.6B in 2016 and increased to US$ 79.6B in 2019. These climate finance contributions were aggregated into the following:
- Bilateral public finance from Australia, Austria, Belgium, Canada, Denmark, Estonia, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom, United States
- Multilateral public finance from multilateral development banks (MDBs): African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Caribbean Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, World Bank Group
- Export credits
- Private finance
Oxfam International, in its Climate Finance Shadow Report 2020, challenged the figures in OECD’s report and said that the reported numbers were overstated and that the actual amounts are less than half – around US$ 15-19.5B per year from 2015-2016, and US$19-22.5B per year from 2017-2018. Oxfam did not include 2019 figures in its report.
Oxfam analyzed the OECD figures and subdivided the aggregates according to type. Their findings show that around 75-80% of climate finance via bilateral and multilateral channels from 2015-2018 consisted of loans and other non-grant instruments. This means that developing countries only had access to 20-25% in the form of grants during that period.
Oxfam also found that non-concessional finance consisted of an estimated 30% from 2015-2016 and increased to 36% from 2017-2018. “For bilateral finance, being defined as non-concessional means this finance is not offered on terms generous enough to qualify as ODA [Official Development Assistance].”
Concessionality is a critical element in delivering climate finance because it allows for flexibility and accessibility. The Green Climate Fund (GCF) defines concessionality as “funding with below-market terms and conditions” and is aimed at “lowering the cost of borrowing or minimizing the risk in a transaction for the borrower.”
Concessional finance for climate action helps “accelerate development objectives” to developing countries through financial products such as “loans, grants, and to some extent, equity investments.” In the case of loans, below-market interest rates and long grace periods are typically utilized.
Another challenge is the over-reporting of climate relevance. Because climate change is multi-sectoral, the climate component of some development projects is overstated.
This is true for both bilateral and multilateral contexts. For instance, a primarily agriculture-based project may be tagged as climate-based even if the climate component is only secondary or a by-product. Because of this, bilateral flows are estimated to be US$ 10.5-13.5B lower from 2017-2018.
An analysis of flows from MDBs is not possible as noted by Oxfam, due to the lack of accounting information and transparency available on a per-project basis.
The insights Oxfam provides are important considering the debt challenges faced by many developing countries, many of which are highly vulnerable to climate risks and shocks and where climate change is driving their debt deeper. Included here are members of the Vulnerable 20 group of the Climate Vulnerable Forum from the regions of Africa and the Middle East, Asia-Pacific, and Latin America and the Caribbean: Afghanistan, Bangladesh, Barbados, Bhutan, Costa Rica, Ethiopia, Ghana, Kenya, Kiribati, Madagascar, Maldives, Nepal, Philippines, Rwanda, Saint Lucia, Tanzania, Timor-Leste, Tuvalu, Vanuatu, Vietnam.
In response, Oxfam and several other entities proposed that only grant-based mechanisms should be considered as climate finance.
These problems appear to have been foreseen as early as 2011 by then UN Independent Expert on Foreign Debt and Human Rights, Cephas Lumina, who explained in a statement that, “Climate finance is not a matter of charity, and should be seen as a legal obligation under the UNFCCC and a moral responsibility on the part of those that have contributed the most to it.”
A 2021 technical analysis of climate finance flows by the World Resources Institute (WRI) shows that, in descending order, Japan, Germany, France, the US, and the UK are the top five contributors of bilateral climate finance, while the US, the UK, Germany, France, and Japan are the top five contributors of multilateral climate finance from 2013 to 2018.
Significant contributions of these countries though have not been without controversy. For example, Japan was criticized for including coal finance in its reports. In 2020, the United States pulled out of the Paris Agreement under the presidency of Donald Trump, significantly affecting climate finance commitments until the country rejoined in 2021.
It is worth noting that developing countries are doubly challenged by debt surges linked to COVID-19 pandemic recovery efforts. Barriers to the implementation of climate-related projects and programs are also experienced due to health and safety factors. Taken with other disruptions such as vaccine insufficiencies, these impacts are projected to result in a global decrease in economic growth. As noted in the World Bank Group’s Global Economic Prospects (January 2022), even though the global economy rebounded to 5.5% in 2021, a major decrease to 3.2% is expected in 2023.
Are finances being used in accordance with commitments?
Climate finance works towards two major themes – adaptation and mitigation. The Intergovernmental Panel on Climate Change (IPCC) defines adaptation as “the process of adjustment to actual or expected climate and its effects.” On the other hand, mitigation is “a human intervention to reduce emissions or enhance the sinks of greenhouse gases” that may refer to “technologies, processes, or practices.”
In accordance with Article 9 (4) of the Paris Agreement, climate finance “should aim to achieve a balance between adaptation and mitigation.” However, data from the OECD shows that a large majority went to mitigation efforts, averaging about 70% from 2016-2019 (almost two-thirds). Meanwhile, adaptation efforts averaged only 20.5% during the same period (approximately one-fifth). Cross-cutting efforts, a mix of both themes, made-up around 9% (nearly one-tenth).
Funding challenges for adaptation efforts is one of the major components of what the UN Environment Programme (UNEP) describes as the adaptation gap, where the implementation of plans is limited or restrained by unavailability of funding, technology, and knowledge. Though adaptation finance is on an upward trend, the adaptation gap remains largely inadequate, and is projected to widen due to the impacts of the COVID-19 pandemic, according to the UNEP Adaptation Gap Report 2021.
It is worth noting that climate finance requirements increased since the announcement of the US$ 100B commitment. An analysis of NDCs from 153 Parties by the UNFCCC Standing Committee on Finance (SCF) in 2021 indicates the need for US$ 5.8-5.9 trillion in cumulative finance by 2030.
This does not yet include needs related to Loss and Damage, an additional theme exclusive from adaptation and mitigation that refers to unavoidable or irreversible climate change-related impacts resulting from the shortcomings of mitigation and adaptation.
Recommendations in scaling up climate ambition
The scaling up of climate finance is urgently needed for the implementation of climate commitments and plans from local-global levels.
The discussion of key questions highlights major gaps in the climate finance process. There are major differences in estimates across sources, including methodologies used in computations. However, the US$ 100B commitment remains largely unmet. The SCF noted the need for an even more ambitious climate finance goal of US$ 5.8-5.9T by 2030 for the full implementation of all NDCs.
“The US$ 100B target is therefore a floor, not a ceiling,” according to the Independent Expert Group on Climate Finance in their December 2020 report, Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance.
It may even be the case that US$ 5.8-5.9T is a large underestimation that does not yet consider additional commitments made at COP26. One example is the Glasgow Leaders’ Declaration on Forests and Land Use endorsed by 141 Parties covering over 90% of forest cover globally. From 2019-2020, only US$ 25B of climate-related funding was spent on this sector according to data compiled by the Climate Policy Initiative. This covers both developing and developed countries. Given the bold scope of the declaration, current levels of actual financial commitments are not enough.
To put the challenges into perspective, the Fossil Fuel Finance Report 2021 said that US$ 3.8T was poured by private banks into fossil fuels from 2016-2020. This includes fossil fuel expansion activities like mining and fracking that are harmful to forests and landscapes. Indeed, data from the Global Forest Watch and WRI highlighted that primary rainforests lost in 2020 are equivalent to the landmass of Belgium, or roughly 3.6 million hectares.
Below are five recommendations where international organizations and related stakeholders may collaborate towards greater climate ambition. This is not meant to be an exhaustive list, but these are deemed as ‘foundational steps’ towards long-term responses:
1. Define and operationalize climate finance into a common framework with adequate transparency and reporting mechanisms
This will help ensure that all stakeholders will be guided by the same principles and methodologies. It will also clarify foundational questions such as whether non-concessional finance and non-grant instruments can be considered, and how to determine the climate-relevancy of multi-sectoral development projects to avoid overstatements.
This is also key to addressing accountability concerns as mechanisms typically differ across countries and institutions. The SCF may play a central role in this because of their coordination-related functions. Insights may be drawn from existing methodologies and comparisons in literature such as those highlighted in the 2020 Joint Report on Multilateral Development Banks’ Climate Finance and the environmental and social standards set in the Asian Infrastructure Investment Bank’s Environmental and Social Framework.
2. Strengthen the climate finance agenda in succeeding COP meetings and COP-related events
For the UNFCCC, this means prioritizing the mobilization of climate finance-related matters not only in the annual global-level COP meetings, but also in regional-level events such as the Regional Climate Weeks in Asia Pacific, Africa, Latin America and the Caribbean, and the Middle East and North Africa.
These may also be occasions for inviting greater involvement of non-Party stakeholders, and improving NDCs at the country-level, an urgent need based on the NDC Synthesis Report in 2021 that shows current NDCs are directing the world to a 2.7°C rise in temperature by the end of the century, far from the 1.5°C target.
3. Align climate finance strategies with NDCs and National Adaptation Plans
International financial institutions such as Multilateral Development Banks or fund entities may choose to design their strategies around the priorities identified by countries in their national-level plans. The GCF claims to utilize this approach. However, the institution has been criticized in the past for being “distant” from the needs of project partners.
This approach is conducted by platforms for dialogue and exchange such as the Asian Development Bank’s NDC Advance and would help increase the likelihood of effective and relevant projects. It would also be beneficial in terms of pinpointing possible needs like capacity-building, linking feedback systems for better monitoring, and may potentially increase cost-efficiency.
4. Define and strengthen the operationalization of Loss and Damage via the Santiago Network on Loss and Damage
This includes the allocation of adequate funding for its operations and the explicit recognition of Loss and Damage as separate from mitigation and adaptation. Lessons and opportunities may be gained from the newly created Loss and Damage Fund initiated by the Government of Scotland that was announced at COP26 which enables greater accessibility on the ground. A new Glasgow Loss and Damage Facility was also proposed at COP26, and was supported with financial commitments from philanthropies. If continued, this Facility would enable greater mobilization towards Loss and Damage efforts.
5. Streamline processes in relation to climate finance accessibility for non-Party stakeholders such as non-government organizations and local communities
Capacity and accessibility concerns were highlighted by non-Party stakeholders at COP26, which highlighted barriers such as arduous application procedures and multiple levels of bureaucracy. Addressing these would increase the effectiveness of funding institutions such as the GCF, and would enable the implementation of projects which otherwise would not have happened. For capacity-related purposes, the role of the Paris Committee on Capacity-building may be worth reviewing and clarifying as it is within their mandate to “address current and emerging gaps and needs in implementing and further enhancing capacity-building in developing countries.”
Albrecht Arthur “Brex” Arevalo shared with Ecojesuit this paper he wrote on climate financing for an International Organizations Seminar as part of his studies at Sophia University where he is currently pursuing a Master of Arts degree in Global Studies. Brex was also part of the Ecojesuit secretariat and managed the networking and coordination from 2018-2021. He continues to engage with Ecojesuit and he can be reached through his email: brexarevalo@gmail.com.
