Carbonsink’s in-depth series on COP27 for EticaNews
One of the key issues that world leaders are addressing these days at COP27 is the definition and improvement of climate finance instruments, i.e. the system of local, national or transnational financing (drawn from public and private sources) to support mitigation and adaptation actions to tackle climate change. Given the importance of financial support for the implementation of climate action, making progress on climate finance is necessary to give any resolution emerging from the negotiations robustness. The Kyoto Protocol and the Paris Agreement require financial assistance from countries with more developed economies to more vulnerable economies. Many systems and structures have been created to facilitate and augment this flow, but to date great challenges remain over the sources of these resources, the architecture to channel them to where they are most needed, and the political agreement to decide their allocation.
According to the latest report by the Climate Policy Initiative (Cpi), global climate finance has almost doubled in the last decade, with a cumulative commitment of $4.8 trillion between 2011 and 2020. Despite the progress, Cpi estimates that current flows are insufficient to sustain a global temperature warming scenario within the 1.5°C target of the Paris Agreement. To avoid the worst impacts of climate change, it is estimated that at least USD 4.3 trillion in annual financial flows are needed by 2030 . Although the figure may seem out of proportion, many world leaders and economists attending COP27, such as John Kerry and Jeffrey Sachs, pointed out that, in reality, if there were more political consensus, finding the budget would not be impossible. Indeed, the amount of money that finance can make available to combat climate change is potentially gigantic. The report Banking on climate chaos reminds us, for example, that from 2015 to 2021 the 60 largest banks in the world spent $4.6 trillion on fossil fuel finance alone.
CLIMATE FINANCE TOOLKIT
To ensure that climate finance responds to actual needs, it is crucial that there is coordination between the instruments and actors using them, in order to improve the very architecture on which these capital flows move. Collaboration between the public and private sectors, the encouragement of long-term strategic investments and the definition of systems that guarantee the principle of ‘common but individual capacity-based responsibilities’ are just some of the priorities discussed at COP27 in recent days.
The public sector accounted for 51% of the climate finance tracked by the Climate Policy Initiative for 2019-2020, with USD 321 billion coming from Development Finance Institutions, multilateral funds and state financial institutions. With regard to the promises made by countries in the context of the COP15 in Copenhagen in 2009, however, the latest OECD projections indicate that rich countries will fall short of the $100 billion per year in funding promised until 2023 to support emerging economies to manage the effects of climate change and switch to renewable energy. These days, technical negotiations on the definition of the new global climate finance target in force from 2025 have begun in Egypt.
Despite this delay, several countries have announced new climate finance commitments in recent days, including Italy with its new EUR 840 million climate fund for the development of clean technologies and adaptation to climate change in developing countries. Some progress was made with regard to funding for strategies to support countries suffering severe loss and damage due to climate change, with investments by countries such as Austria, Belgium, Denmark, Germany and Scotland. Multilateral institutions also announced climate commitments, such as the European Investment Bank, which promised to devote more than 50 per cent of its financial capacity to climate projects by 2025, and to activate climate investments of USD 1 trillion by 2030.
Another significant node in the climate finance infrastructure is the use of debt. While support from international finance to incentivise developing countries to implement climate policies is crucial, it requires a reduction in investment risks and consequent costs. According to Cpi, concessional finance (i.e. at below-market rates) accounted for 16% of total climate finance in the decade 2011-20, while debt remained the main instrument of climate finance. While concessional finance is increasing, with volumes almost tripling between 2011 and 2020, its relative share of the total remains below 5%. Subsidised financing is crucial for managing the risks and uncertainties associated with emerging technologies and markets. For this reason, there are discussions on how to adapt the climate finance infrastructure to make it more accessible to developing countries, e.g. by including instruments such as green bonds in the portfolios of multilateral development banks, or by developing more efficient results-based-finance mechanisms.
Investment risk management is also crucial with regard to private financing. OECD data show that most private climate investments have been mobilised in middle-income countries with low risk profiles. Moreover, although private sector investments are increasing ($310 billion for 2019/20 according to the Climate Policy Initiative) they are not yet travelling at the scale and speed needed for the transition. Finding a way to lower risks and create an enabling environment for mobilising private funds is another item on the COP27 agendas.
VOLUNTARY CARBON MARKET
Another tool that is already catalysing funding to developing countries is the voluntary market for carbon credits, generated by projects that reduce or remove emissions to the atmosphere, with positive impacts on climate, communities and biodiversity. Ieta estimates that trading carbon credits could reduce the costs of implementing Nationally Determined Contributions by more than half, to $250 billion by 2030, facilitating the removal of 50 per cent more emissions at no additional cost. Carbon markets are a very important tool to achieve global climate goals, particularly in the short and medium term. Crucial to the climate negotiations is the improvement of the regulatory and administrative infrastructure of the carbon market (the now famous Paris Article 6) to enable developing countries to generate and trade high quality credits to meet their climate targets and facilitate the transition to a low-emission economy.
Article originally published in EticaNews here
