29 Nov 2023, 09:55
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Global

Q&A: COP28 and the 100 billion U.S. dollar climate finance commitment

Two weeks before the start of the UN climate conference COP28 in Dubai, the OECD has said developed countries might have finally made good on their pledge to mobilise 100 billion U.S. dollars climate finance in 2022, two years later than promised. However, the organisation’s assessment is based on preliminary and unverified data and NGOs have criticised it in the past for over-stating actual support given. Although 100 billion U.S. dollars represents only a fraction of the total climate finance required, the pledge made by developed countries nearly 15 years ago plays a critical role in ensuring global collective action on climate change. It has totemic value as the cornerstone of trust between developed and developing countries. This Q&A explains the basics of the pledge and what to expect regarding climate finance at COP28 in Dubai.

What is the 100 billion U.S. dollar climate finance pledge?

In 2009, developed countries agreed at the 15th Conference of Parties (COP15) to “mobilise” 100 billion U.S. dollars per year by 2020 for climate action in developing countries. It had first been proposed by former UK prime minister Gordon Brown a few months ahead of COP15, calling for a “new international partnership on public finance for climate change” based on equity, additionality, shared governance and predictability. Then, when arriving at COP15, U.S. secretary of state Hillary Clinton announced the pledge, claiming it would be destined for the “poorest and most vulnerable” countries and that it would have a strong focus on adaptation and forestry. 

The figure, arbitrary and not based on an analysis of countries' actual needs, was formalised during COP16 in Cancun the following year. The conference also established the Green Climate Fund (GCF) to act as a key delivery mechanism. The Paris Agreement, set up at COP21 in 2015, also reaffirmed the 100 billion U.S. dollar pledge and its signatories decided that this sum should be given each year between 2020 and 2025. The text of the agreement refers to meeting the target with support from private, public, multilateral and alternative sources and says that 50 percent of the funds would have to go to mitigation and 50 percent to adaptation. Since then, the pledge has become a benchmark for evaluating the developed nations’ overall commitment to climate action.

There is no standard multilaterally agreed definition of climate finance. Despite efforts since 2013, negotiators at the UN Framework Convention on Climate Change (UNFCCC) have not been able agree on how to measure the countries’ pledges on finance. [see infobox]

What is climate finance?

There is no standard multilaterally agreed definition of climate finance. Despite efforts since 2013, negotiators at the UN Framework Convention on Climate Change (UNFCCC) have not been able agree on how to measure the countries’ pledges on finance.

Most developing countries want a common standard definition, while developed countries argue that the operational definition is preferable as it is “broad enough” to cater to the dynamic and evolving nature of the need.

The Standing Committee on Finance (SCF), established at COP16 in 2010, was asked to prepare biennial assessments of climate finance flows using existing sources of data. As each of these sources used a different definition of climate finance, the SCF had to develop an “operational definition” to use for its assessment report:

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.

This is a very broad definition and allows for the use of diverse accounting methods, resulting in a range of outcomes. The OECD reported that developed countries had mobilised 83.3 billion U.S. dollars in 2020 (2021 data has also been available since November 2023), while the NGO Oxfam estimated that real support was no more than 24.5 billion U.S. dollars. Key issues that require clarification for any future definition include:

  • Whether all financial instruments – grants, loans, concessional loans, investments and insurance – should be counted at face value;
  • Determining the climate component of bilateral and multilateral funded projects;
  • Determining whether the climate finance provided is new and additional, not just reallocation of existing development aid towards climate purposes.

Have rich countries lived up to the pledge?

It is contested whether developed countries have lived up to the pledge.

Following the request of donor countries, the Organisation for Economic Co-operation and Development (OECD) – a majority of whose members are high-income economies – has been tracking progress towards this pledge since 2015. It produces regular analyses of progress made, processing data with a two-year delay. According to the latest estimate, the total in 2021 reached 89.6 billion U.S. dollars. On the basis of preliminary and unverified data, the OECD also said the goal looks likely to have finally been met as of 2022. However, OECD analyses have been contested in the past, and critics say actual climate finance has amounted to much less.

The climate finance gap can be attributed to a small group of developed countries, according to a report by the Overseas Development Institute (ODI) based on 2020 data. The U.S. has the biggest responsibility, providing just 5 percent of its “fair share,” based on a calculation that considers the size of the economy and historical emissions. It should have provided 43 billion U.S. dollars in 2020 but it sent 2 billion U.S. dollars only. Some of the other countries that did not deliver what they should are Canada, Italy, Spain and Australia. Only seven provided and mobilised their fair share (Sweden, France, Norway, Japan, the Netherlands, Germany and Denmark).

Ministers from Canada and Germany said in an open letter that they are confident that the pledge will be met this year but warned that data on the finance delivered in 2023 won’t be available until 2025 due to the way the OECD produces its reports. However, all signals do not necessarily point in that direction. This year’s replenishment round of the Green Climate Fund had limited progress. The total of 9.3 billion U.S. dollars was less than in the last round in 2019, not delivering on this year’s 10 billion U.S. dollars target. No funding pledges have yet been made by the U.S. and China, the world’s leading polluters, but further announcements could happen at COP28.

How do countries report on their commitments?

The 100 billion U.S. dollars a year is a collective commitment of developed countries. There is no official assessment of each country’s share of the goal. However, developed countries are required to provide forward and backward-looking information regarding their climate finance commitments. The biennial reports about future finance must include information about the amount and type of climate finance they propose to provide to developing countries.

The backward-looking information on the delivery of the pledged finance is compiled from different sources. (1) The main source is the biennial reports submitted by countries; these are national reports. (2) Other sources include the biennial assessments and overview of climate finance prepared by the SCF, which provide aggregate level information on bilateral, multilateral and mobilised private finance. (3) Other aggregate level reports, such as the OECD’s report series, provide information on bilateral public climate finance, multilateral public climate finance (attributable to developed countries), and mobilised private finance. (4) Finally, the annual report of the multilateral development banks (MDB) provides information on climate finance flows from eight MDBs.

What is the money meant for?

As there is no standard definition of climate finance, there is a wide array of programmes and projects to which the funds contribute, sometimes with questionable relevance. Billions of spending is scarcely documented, reported Reuters and Big Local News, who created a database with of 44,000 contributions made between 2015 and 2020. Among projects classified as climate finance were Japan financing a new coal plant in Bangladesh, Italy supporting a retailer in opening chocolate and ice cream stores across Asia and Belgium backing a romantic movie in Argentina.

Another issue is that significantly more money is earmarked for mitigation than for adaptation. Every assessment of global climate finance, irrespective of their different accounting approaches, finds that a higher share of finances is spent on mitigation compared to adaptation. The Overview of Climate Finance Flows, prepared by the SCF and presented to COP27 in 2022, found that in 2019-2020, mitigation received 57 percent of bilateral climate finance, 37 percent of multilateral climate fund, and 62 percent of climate finance from MDBs, compared to adaptation that received 28 percent, 19 percent and 36 percent, respectively.

In its latest report, the OECD stated that in 2021, mitigation finance accounted for 60 percent of the provided and mobilised climate finance, while adaptation accounted for 27 percent. In 2021, adaptation finance was 14 percent less compared to 2020.

Assessments by civil society groups and think tanks, such as Oxfam and CARE, confirm the lack of balance between mitigation and adaptation. In its assessment of delivery of the 100 billion U.S. dollars in 2019-2020, Oxfam finds that 33 percent of public climate finance was for adaptation compared to 59 percent for mitigation. A recent analysis of the proposed climate finance commitments of 26 developed countries shows an imbalance between mitigation and adaption.

The imbalance in allocation between adaptation and mitigation reflects the way in which negotiations have dealt with these issues. Rich industrialised and developed countries have been more focused on mitigation or emission reduction, while adaptation or adjusting to the impacts of climate change have been more the concern of the developing world.

The question of balanced spending between mitigation and adaptation was finally settled at COP21 in the Paris Agreement. In subsequent years, there has been an acceptance of the need to step up financing for adaptation. The commitment made by developed countries at COP26 in Glasgow to double adaptation finance by 2025 marks a notional change.

Where does the money come from?

The 100 billion U.S. dollars can come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources.

The OECD reporting, which serves as the basis for counting progress towards meeting the pledge, provides figures for bilateral finance, multilateral finance (including finance routed through the multilateral banks), export credit and private finance.

The recent OECD report shows that bilateral  and multilateral public finances comprise the bulk of funds. Since 2017, multilateral public finances (including funds attributed to developed countries) form the biggest share of the 100 billion U.S. dollars.

Private climate finance remains "stubbornly low" according to the OECD, as the amount mobilised for the 100 billion target has not increased since 2017, although public climate finance has increased significantly in the same period. “Private finance from a range of commercial actors in developed and developing countries is critical to closing the financing gap for investments in climate action, notably in clean energy systems, agriculture, forestry, land-use, adaptation, and resilience,” said Mathias Cormann, OECD secretary-general, adding that there is “considerable scope to improve the effectiveness of public climate finance in mobilising private finance.”

What are some of the main criticisms of how the pledge is implemented?

Developed countries have relied on the OECD to keep track of their progress towards meeting the 100 billion U.S. dollar pledge. The OECD reporting has been criticised by civil society organisations and developing countries for over-stating the actual contributions of developing countries.

Every year, Oxfam publishes a shadow report that analyses the OECD report and tries to establish what the organisation sees as the actual value of the climate finance delivered by developed countries. Other civil society organisations and think tanks have also analysed the committed and delivered pledges, looking at specific aspects, such as the imbalance between finance for mitigation and adaptation, identifying the share of reclassified development assistance. There have been critiques by developing country governments as well. The government of India published a discussion paper in 2015 questioning the accounting methods used by developed countries resulting in overestimation of the real financial flows to developing countries.

The issues raised are:

  • Counting loans, grants and mobilised private funds at face value: A grant (the recipient does not return the money to the donor) is seen to have equal value to a loan (even at a concessional rate, the recipient is required to pay back the donor) or export credit and mobilised private funds, which have a commercial orientation;
  • Counting finance that is not climate-relevant;
  • Applying non-transparent and inconsistent methodologies to count mobilised private finance, resulting in overstating finance volumes;
  • Difficulty to determine whether the pledged climate finance is new and additional;
  • Predominance of mitigation over adaptation;
  • Shortfalls in the quality and composition of finance (more loans than grants).

How has this pledge influenced the relations between high-income and low and middle-income countries?

Climate finance is frequently presented as a matter of equity, with developed nations seen as having a responsibility to assist developing ones in tackling the challenges of climate change. They caused it and they also have a greater economic capacity to deal with it. Under the UNFCCC, a small group of 23 countries are obliged to provide climate finance. This was based on the membership of the OECD when the UNFCCC was set up in the early 1990s, meaning it does not include countries that are now relevant in emissions and economic growth, such as China. 

Developing countries regularly criticise rich nations’ failure to meet the 100 billion U.S. dollar finance pledge, claiming the real finance needs are actually much higher. The Intergovernmental Panel on Climate Change (IPCC) estimated that developing countries need between 2 and 3 trillion U.S. dollars every year. Developing countries also ask for more grants and lower interest rates on loans so that climate finance does not lead to more debt. Led by Barbados, a country highly vulnerable to the climate crisis, the Bridgetown Initiative is a recently launched action plan to reform the financial system to better respond to the climate crisis. 

 

What will happen at COP28 on climate finance?

Climate negotiators are tasked with working out the elements of the finance goal after 2025 -- the so-called Collective Quantified Goal (NCQG). It will be “collective” as it will require joint efforts from developed and developing countries to mobilise and deliver the funds, and “quantified” as it will determine the needs of developing countries based on science-based assessments. Negotiations started at COP26, when countries created a work programme to conduct technical expert dialogues, prepare annual reports and hold consultations with stakeholders. The objective is to have this new finance goal ready by COP29 in 2024. In 2021, developing countries said the fund should provide 1.3 trillion U.S. dollars per year. 

Governments will continue their negotiations on a new climate finance goal at COP28 this year. Discussions related to finance might even affect other areas of the negotiations, as it happened in the UNFCCC intersessional negotiations in June this year. A group of developing countries did not want to include the need to increase mitigation ambition on the agenda unless an item on finance was added. The president of COP28, Sultan Al Jaber, has blamed rich countries for failing to meet the 100 billion U.S. dollar pledge, claiming in his plan for the summit that climate finance should be transformed to mobilise funds to developing countries at unprecedented levels. 

The other big item on the finance agenda at COP28 will be the loss and damage fund. The topic has been controversial for years at the UN climate summits but at COP27 developed and developing countries finally agreed to set up a fund. Loss and damage refer to physical and mental harm that happens to people and places not ready to cope with climate impacts and incapable of adjusting the way they live. The details of the fund, such as where the money will come from and how it will be distributed, have not been settled yet despite a series of committee meetings that occurred throughout the year. Negotiators struck a tentative deal on the issue in November.

All texts created by the Clean Energy Wire are available under a “Creative Commons Attribution 4.0 International Licence (CC BY 4.0)” . They can be copied, shared and made publicly accessible by users so long as they give appropriate credit, provide a link to the license, and indicate if changes were made.

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