Why climate finance is a big deal, and where negotiations have reached at Glasgow COP26

COP26 is looking to settle a new climate finance goal under Paris deal. But how much funding developing nations will get to tackle climate change is stuck in negotiations.

A climate change mural on an archway near to the SEC (Scottish Event Campus), the location for the upcoming COP26 climate talks in Glasgow | Photo: Ian Forsyth/Bloomberg

New Delhi: One of the most contested issues being negotiated at the COP26 in Glasgow is climate finance — funds that will help developing countries cope with climate change. 

Climate finance has been a subject for debate for years, but it has acquired a particular significance this year as the 26th Conference of Parties is where matters relating to a new climate finance goal, under the 2015 Paris Agreement, will be settled. 

The new goal will define how money will be raised and transferred to developing countries after 2025, to reduce or remove emissions (mitigation) and adapt to the changing climate (adaptation). 

Discussions have been anything but straightforward, since developed countries have failed to deliver on their past promises of raising climate finance. As climate change worsens, costs of preventing and coping with it will only mount, and so developing countries argue that the corpus of climate finance should grow.

Apart from mitigation and adaptation, developing countries have said climate finance should also cover loss and damage due to climate change, an aspect that developed countries are hesitant to commit to.

Here’s a look at what climate finance is, how it works, and why it’s become such a hot topic.

The $100 billion goal

In 2009, during the 15th COP, it was decided that high income, developed countries would mobilise $100 billion for developing nations to cope with mitigation and adaptation by 2020. This was done in the spirit of “common but differentiated responsibility and respective capabilities”, which recognises the needs and abilities of different countries.

This commitment was reaffirmed during the COP21 in 2015, when the Paris Agreement was signed, and extended till 2025.

But developed countries have had a poor track record when it comes to raising this money. These funds have been tracked by the Organisation for Economic Co-operation and Development (OECD), an intergovernmental organisation of 38 developed countries. 

The OECD maps money that is transferred in four ways: Bilaterally, multilaterally, export credits (government financial support given to foreign buyers), and private investments mobilised by public finance. 

Data shows that till 2019, only $79 billion had been mobilised — an increase of just 2 per cent compared to 2018. 

These countries were supposed to have raised $100 billion by 2020, but recently admitted that they will be unlikely to do so before 2023 — three years after the original deadline.

The OECD and the $100-billion goal have been criticised by developing countries over the years for a number of reasons. 

“One criticism is that a large portion of the reported figures represent commitments and not disbursed flows. Another is that these flows are not entirely new and additional; existing development finance reclassified as climate finance accounts for a portion of the reported figures,” said Arjun Dutt, programme lead at the non-profit Council for Energy, Environment, and Water.

“Also, the reported figures contain a small fraction of concessional finance in the form of grants and soft loans,” Dutt added.

There are also concerns that this finance isn’t being counted in addition to existing green finance, which could mean it’s being counted twice. Developing countries have also said the OECD isn’t a neutral enough body to be tracking finance, since it is made up of developed countries who are self-reporting. 

Lorena Gonzales, senior associate at the non-profit World Resources Institute, noted “two main things developing countries criticise when it comes to the $100 billion goal”.

“One is that there is an imbalance when it comes to mitigation versus adaptation funding, with mitigation getting a larger share… There are also serious concerns about the quality of the finance,” she said.

According to the OECD, 50.8 per cent of funds in 2019 were for mitigation purposes — for example, investments into renewable energy — while only 20.1 per cent were for adaptation. Adaptation activities, like setting up early warning systems and building more resilient infrastructure, are considered less profitable than mitigation activities, which are technology heavy.

Further, a substantial chunk of this finance came in the form of loans, with just 19 per cent as grants. These loans are pushing poorer, low income countries into debt, the Guardian reported.

Money flows to larger economies where investments can make profits, Dutt explained. India, for instance, has been among the biggest recipients of climate finance because wind and solar energy are regarded as commercially viable investments.

“Private capital generally flows to commercially viable investment opportunities. This may not be true of investments in market segments where technology performance track records or business models are not well established, such as off-grid renewables, storage, and the vast majority of adaptation activities,” said Dutt.

“Risks are also high for investments in a number of underdeveloped countries. Public capital can be used to underwrite investment risks through instruments such as guarantees and thereby mobilise many multiples in private capital flows. Such a catalytic role is also the most efficient use of scarce public capital,” he added.

Lastly, the $100 billion figure was arrived at without any scientific reasoning, or clear understanding of how much mitigation and adaptation will cost.

A United Nations Framework Convention on Climate Change (UNFCCC) standing committee on finance report last month said countries would need between $5.8-5.9 trillion by 2030 to meet 40 per cent of their climate goals under the Paris Agreement.

Climate finance negotiations at COP26

At the COP26 negotiations, developing countries have said they need much more than $100 billion in climate finance, and have emphasised that developed countries must, at the very least, reach this goal as soon as possible.

More significantly, negotiations are focussed on what shape the new collective quantified goal on climate finance — to kick in after 2025 — will look like. ThePrint reported earlier that developing countries are pushing to create a roadmap of this goal as soon as possible, so that there are no delays in its implementation, but developing countries are resisting these attempts.

India, along with the African Group of countries, has asked for at least $1.3 trillion a year in climate finance, but countries like Australia, Norway, and the EU don’t want to settle on a figure.

There has also been a call by developing countries, particularly small island states, for loss and damage finance. Loss and damage happens when the effects of climate change are so catastrophic that countries simply cannot adapt to it. The rationale is that developed countries should pay for the climate change impacts being borne by countries that aren’t responsible for global warming, but are extremely vulnerable to it.

A draft of the COP26’s cover decision, which sets the tone for current and future negotiations, includes a section on loss and damage for the first time. But climate activists say there need to be more provisions.

(Edited by Amit Upadhyaya)