The thorny issue of climate finance

The next installment of UN climate talks, COP26, will be held in Glasgow, UK, from 31 October–12 November following a year’s delay. It is undoubtedly the most important climate meeting since the Paris Agreement, signed in 2015. Several defining issues are on the table and must be agreed, or at least significant progress must be made. Countries, or Parties in UNFCCC parlor, need to:

• submit their revised, more ambitious, Nationally Determined Contributions (NDCs)

• finalise the rulebook which governs the implementation of the Paris Agreement, most critically Article 6

• and make more ambitious commitments on climate finance.

In this blog we examine the last of these issues: climate finance. As with most decisions related to the UNFCCC, things are far from clear and dependent on outcomes in other parts of the climate agreement. Let’s start with what we know.

At COP15 in Copenhagen in 2009, developed countries committed to a collective goal of mobilising USD100 billion per year by 2020 for climate action in developing countries. Current estimates by the OECD1 indicate that USD79.6 billion was mobilized in 2019. Dissecting this figure further, mitigation represents two-thirds of the total climate finance, driven primarily by finance for renewable energy and sustainable transport, while adaptation finance still lags far behind, accounting for around 20%. This finance goal has been central to the climate accords since 2009, providing an important symbol of trust between developing and developed countries. A USD20 billion shortfall is clearly not good enough and threatens the already fragile relationships between so-called developed and developing countries. So critical is this issue, that many developing countries are linking the provision of finance to the success of COP26. What is clear, that to rebuild trust, developing countries must receive assurances that this target will be met. To this end, there have been some recent positive developments with the European Union – the largest contributor of climate finance – committing to further increase its contribution, while the US has announced it will double its current commitment for a total of USD11.4 billion a year by 2024. Germany and Canada have been tasked with devising a plan to plug the gap ahead of COP26.

Not only are Parties expected to find a way to plug this gap, but they are also required to set more ambitious targets, as negotiations are due to start on the next finance goal beyond 2025. This should include finance for loss and damage, enshrined in Article 8 of the Paris Agreement, which is critically important to countries such as Vietnam, which are highly impacted by climate change. The topic has been politically charged and intentionally separated from finance discussions. There is therefore no dedicated facility to channel funds for this purpose.  Also, the outcome of discussions on Article 6, which decides rules on how countries can reduce their emissions using international carbon markets, will have implications on the potential for countries such as Vietnam to receive investment to offset more expensive emission reductions from developed countries. Finalising these rules is a key agenda item for COP26, though it remains one of the hardest issues to reach agreement on.

Let us hope COP 26 forges a new consensus about the necessary climate finance needed to achieve global carbon neutrality by mid-century. This will require a fundamental shift in the finance system and a massive injection of public and private finance. The outcomes of COP26 remain critical to developing countries such as Vietnam, and their efforts to transform to low emission, climate resilient economies.

Written by: Richard McNally, Dutch Fund for Climate and Development (DFCD) Advisor.