COP 25: Banking on Finance

The 25th annual Conference of Parties (COP 25) to the United Nations Framework Convention on Climate Change (UNFCCC) began on 2nd December. The Paris climate agreement under the UNFCCC has two mechanisms to address the global climate challenge. First, each country must submit a nationally determined contribution (NDC) of the climate actions that it intends to achieve in the medium run. Second, NDCs must be reviewed through a global stock-take and be updated every five years, to increase the ambition of these actions over time.

While ambitious climate action could deliver significant socio-economic benefits, implementing these NDCs requires significant levels of financing and investment. In 2009, developed countries committed to provide developing countries with “scaled up, new and additional, predictable and adequate funding” with a target of mobilizing USD 100 billion per year by 2020 from a “wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance”. Furthermore, governments committed to establish the Green Climate Fund, through which “a significant portion of this financing should flow”. In 2015, developed countries agreed to continue mobilizing USD 100 billion a year until 2025, and governments agreed to set a new collective mobilization goal beyond 2025, which would represent a progression beyond the existing goal. The UNFCCC’s Standing Committee on Finance (SCF) is commissioned to produce a report on developing countries’ climate finance needs every four years, starting in 2020.

At COP 25, discussions around the financing of climate action are expected to revolve around three key areas:

1. The amounts of financing

Financial commitments towards climate action are on an upward trend. At COP 24, new commitments to the Adaptation Fund totaled a record USD 129 million. Pledges to the Green Climate Fund (GCF) during the 2019 replenishment totaled USD 9.8 billion. The SCF’s biennial assessment finds that total climate finance flows increased by 17% in 2016 compared with 2014, to USD 681 billion. Of this, public climate finance from developed to developing countries reached about USD 56 billion.

However, these amounts are not at all sufficient – for context, global annual fossil fuel subsidies together with their externalities total about USD 5.3 trillion, while development undertakings such as the USD 8 trillion Belt and Road Initiative could render the Paris Agreement goals unreachable if they follow a high-carbon development path. Further, not all the trends are encouraging; for instance, the current US administration has stopped further funding for the GCF. An AdaptationWatch report found that of over 5000 adaptation projects supported by OECD countries, with a combined value of USD 10.1 billion, three-quarters lacked a clear connection to addressing vulnerability to climate change.

Although countries agreed at COP 24 last year to initiate formal discussions on the new post-2025 mobilization goal in 2020, countries such as India believe that a decision to initiate deliberations is weaker than a decision to start the process of setting this goal. Developed countries need to demonstrate more ambition in delivering on current climate finance goals, while kicking off the process towards setting revised climate finance targets.

2. The definitions and reporting of climate finance

A key enabler to the effective provision of finance is its proper tracking and reporting. An important sticking point revolves around what specifically constitutes climate finance. Extensive research exists on approaches to defining what counts as climate finance and how to estimate mobilization. Under the new reporting rules at COP 24, developed countries are now required to report on their finance support with more granularity – this will increase transparency and enable developing country stakeholders to derive their own estimates of valid climate finance. For planning purposes, developed countries are requested to communicate their projected future finance provision every two years, while developing countries can use a new framework to report on funding they need and have received.

However, some important provisions in reporting remain optional and will require continued scrutiny. Although countries have begun developing standardized tables to track the finance provided, mobilized, needed and received by countries, it is important that discussions at COP 25 focus on further developing these reporting tables. As asserted by an earlier Indian Government discussion paper, reporting processes should incorporate proper verification mechanisms and should be developed in consultation with developing countries. A two-year lag in reporting also limits the ability to properly verify the flows of climate finance. Similarly, concerns exist about the accounting of financial instruments such as market-rate loans and export credits towards developed country commitments, and reporting requirements around the projected financing provisions remain weak.

Most importantly, there still doesn’t exist an operational definition of what counts as “climate finance” or “new and additional”. Clarifying these definitional and accounting issues in a consultative way, with an eye on post-2025 actions, would go a long way towards increasing trust and scaling up collective action.

3. The market mechanism

Article 6 of the Paris Agreement established a market mechanism to contribute to emissions mitigation and offered countries the opportunity to voluntarily cooperate with one another in implementing their NDCs and thereby internationally transfer mitigation outcomes. Initial research indicates that the resulting economic efficiencies could reduce the total cost of implementing NDCs by USD 250 billion per year by 2030 at no additional cost, though other sources estimate the cost of implementing developing country NDCs at USD 4 trillion.

Article 6 offers countries the opportunity to generate new streams of climate finance. The Paris Agreement states that a share of proceeds from the new market mechanism will go to support adaptation in developing countries. This revenue stream will likely be directed to the Adaptation Fund. Key topics of discussion relate to the size of this share, and whether it should be applied to all mechanisms created under Article 6, or only some. However, the accounting framework for this mechanism must be carefully developed. This involves ensuring that actions are not double-counted and are supplementary to domestic mitigation efforts, a complex issue that will require consideration of many of the topics mentioned above. Other challenges include considering the role of the private sector in the market mechanism and defining how mitigation results can be brought to market. With adaptation finance – arguably more important to developing countries – lagging far behind mitigation finance, an important area of focus at COP25 will be to determine the share of proceeds that are allocated to the Adaptation Fund.

COP 25 was speedily relocated to Madrid, Spain, after Chile was forced to pull out. With the conference in full swing, observers are keen to note whether the debates on the financing of climate action will be addressed with the same levels of urgency.