16 Nov Prioritising climate finance at COP27
With COP27 now in full swing, the focus remains on what progress global leaders and international businesses will make in meeting critical climate finance targets. Climate finance represents a significant issue at COP27 since developed nations agreed to secure $100 billion annually at COP15 in 2009 by 2020 (now extended to 2025). This annual target has never been reached, and the climate finance gap continues to be an area that needs to be overcome, as more developing nations are struggling to manage the impacts of the climate crisis without additional financial support.
Climate finance refers to using the funding to either reduce emissions (mitigation) or to support people adapt to the impacts of climate change (adaptation). Climate finance allows developed nations to provide developing countries with financial support based on their responsibility for contributing toward climate change in previous years and having a greater capacity to handle the consequences. Often, the countries in need of finance to tackle climate change and those experiencing the most severe consequences.
The initial climate finance commitment originated from the 1992 UN Framework Convention on Climate Change (UNFCCC), stating that developed countries should provide new and additional financial resources to match the costs incurred by developing countries. At COP15 in Copenhagen, several countries agreed to secure $100 billion a year by 2020 to meet the needs of developing countries. At COP21, the Paris Agreement built on this target by setting countries with a new collective goal to take effect in 2025. Despite this commitment, the target has never been reached. Now we’re amid COP27, the UNFCC Standing Committee on Finance released a report on progress towards reaching the target of achieving $100 billion per year to meet the needs of developing countries in mitigating the actions of climate change.
The report concluded that climate finance needs to be increased by over 20% (compared to 2020) if the target is to be achieved next year. In particular, Carbon Brief emphasised that the US had fallen short of its $100 billion climate-finance goal by $32 billion, with the UK falling short by $1.4 billion. The Intergovernmental Panel on Climate Change (IPCC) believes that climate-related investment in developing countries needs to increase by eight times by 2030 if the Paris Agreement limits are achievable. Some industry experts believe that the failure to meet this pledge couple impact the trust between developing and developed nations at a time when collaboration is critical for our climate targets. The UNFCCC Standing Committee on Finance reported that earlier this month, climate finance flows to developing nations from developed nations increased from 6% to 17% between 2019 and 2020, with climate mitigation financing growing.
Climate finance is one of the core issues of COP27 and will be critical to progress at the conference. Existing pledges will need readjusting, and new goals for 2025 will be required. There is also a rising focus on other areas, such as loss and damage, which was critical at COP26. This form of climate finance focuses on specific funding measures to tackle the impacts of climate change, which could include rebuilding infrastructure after major weather events. Despite some hesitancy from certain countries, there is an emphasis on this area within the COP27 agenda, discussing funding arrangements responding to loss and damage related to climate change impacts.
Vulnerable nations, particularly low-lying island states, have raised concerns about action on loss and damage at COP27. Mia Mottley, the PM of Barbados, has called for a global mechanism to support loss and damage funding. Developed countries have been somewhat cautious with funding due to concerns about future liabilities.
While the focus of the climate summit will be on achieving the current targets and implementing new pledges for climate finance, there is pressure to ensure that climate finance plans translate into action. Approximately 71% of public funding for developing countries is loans rather than direct grants. Analysts have emphasised a need to shift from loans to grant-based finance and reduce the debt burden on low-income countries. According to the IMF, approximately 60% of low-income countries are at risk or high risk of significant debt and climate finance in the form of loans will only increase these debts. In small island states, some are highly exposed to climate risks and pay more than eighteen times more for loan repayments than they gain in climate finance.
Jan Kowlazig, the senior advisor at Oxfam, explains that loans are not as applicable for developing nations as the society may not be capable of generating sufficient revenue for a lender without increasing the overall debt levels of that particular country. ‘Debt for climate’ plans are one way to tackle the debt crisis while boosting climate spending, as the creditor provides a partial reduction of debt, and the money can fund climate-focused projects. These plans have been applied in conservation since the 80s after establishing the debt-for-nature swap concept.
Due to the volume required to achieve climate goals, there is a growing recognition that the private sector has a considerable role in maintaining climate finance. John Kerry, US Climate Envoy, has strongly advocated the private sector, stating that no government has enough money to solve the climate crisis. Private sector investment can increase through grants, low-interest loans or loan guarantees to control the potential risks of projects and drive them forward. US Senate recently introduced the Inflation Reduction Act, assigning $370 billion toward climate action and intends to reduce national emissions to 40% below 2005 levels by 2030. The measure proposes to deliver investment via a combination of tax incentives, grants and loan guarantees.
Concerns have risen around using private sector funds to tackle climate change. The private sector traditionally invests to gain a return and is hesitant to invest in regions considered unstable or offering little return on investment. Despite increasing calls for finance to focus on adaptation and loss and damage, private sector investment is likely to go toward mitigation projects like energy and infrastructure projects as they offer a higher potential return.
Earlier this month, a report by the Independent High-Level Expert Group on Climate Finance, chaired by climate economist Lord Stern, stated that the original $1 trillion in external finance required annually by 2030 is likely to increase to over $2 trillion, taking into account mitigation, adaptation and loss and damage. While these numbers are significant, insurance business Swiss Re forecasted in a recent study that current trends suggest rising temperatures could reduce global GDP by nearly 14% or the equivalent of $23 trillion by 2050. Such data should prioritise the actions of government and private businesses towards climate finance. The costs of taking decisive action are high, but the price of inaction for people worldwide will be even higher. COP27 is another opportunity for nations to collaborate and make real commitments toward climate finance.