Climate Finance: How to Unblock the NCQG

Negotiations on a new climate finance goal are stuck. There has been little progress on the two biggest issues: how big should the goal be, and who should pay. This matters. COP29—the last before countries commit to new targets for cutting greenhouse gas emissions in updated Nationally Determined Contributions due to be submitted by February 2025—has long been billed “the finance COP.” Failure to agree the new collective quantified goal on climate finance (NCQG) risks weakening those targets and undermining our chances of limiting dangerous climate change.

The positions of developed and developing countries remain entrenched and far apart, and a deal hangs in the balance. Developed countries have so far refused to commit any additional money beyond the existing $100bn/year goal, insisting that the world has changed since the original group of contributors—23 developed countries (the “Annex II” countries) that were members of the OECD in 1992— was first agreed. They argue that new donors should first be added to this group, and emphasise the role that private finance has to play. Developing countries, meanwhile, insist that both legal and moral responsibility lies with developed countries, and that the current goal is woefully inadequate.

Both sides have a point. The world has indeed changed dramatically since 1992: over 40 percent of all greenhouse gas (GHG) emissions have been produced in the past 30 years, with two-thirds coming from developing countries. Annex II countries now account for just 37 percent of all GHG emissions since 1850, and the case for expanding the contributor base is strong. Yet the current climate finance goal falls well short of all assessments of need, or indeed of justice, and developed countries will still need to take the lead. But neither side seems ready to compromise. 

This blog summarises some of the debate, and makes six proposals to help unblock the negotiations.

How big should the NCQG be?

Developing countries have called for a substantial scaling up of climate finance. For example, the African Group of Negotiators call for developed countries to mobilize $1.3 trillion per year by 2030, the Arab Group for $1.1 trillion per year 2025-29 (with at least $US441 billion per year provided as public finance), while AOSIS and AILAC seek at least a trillion in new and additional grant equivalent climate finance per year through to 2035. 

But however well justified such calls might be, political realities suggest this isn’t going to happen. Existing aid budgets are under pressure, and the failure of the COP16 biodiversity summit does not bode well.  The results of the US elections are likely to have additional implications. That said, CGD colleagues have shown that economic growth and inflation alone would allow for at least a doubling  of the current $100bn goal by 2035, without any additional fiscal effort at all. Other analysis suggests that further multilateral development bank reforms, innovative sources and higher private finance mobilisation rates could raise substantially higher sums, even without expanding the contributor base. However, we need to avoid unrealistic assumptions for a new goal to be credible and additional to existing ODA commitments.

Expanding the contributor base?

Several different approaches have been proposed for assessing whether the group of contributing countries should be expanded, and what their “fair share” of any future goal should be. 

Our own model multiplies data on cumulative aggregate emissions and per capita income (or cumulative per capita emissions, per capita income, and population in its full form) for all countries to derive climate finance “fair shares.” So, two countries with the same aggregate cumulative emissions would have fair shares in proportion to their per capita income level. That seemed to us a pretty good way of reflecting the principle of “Common But Differentiated Responsibilities and Respective Capabilities” (CBDR-RC) that underpins the UNFCCC and Paris Agreement. We tested this with a variety of different measures of emissions, cut-off dates (including going back to 1900), and income, and found the fair share of “non-traditional” donors (beyond the Annex II countries that currently have formal responsibility to provide climate finance) to be consistently in the 20-30 percent range. China, Russia, South Korea, Saudi Arabia, Taiwan, Poland, the United Arab Emirates, and Mexico consistently featured in the top 20, and their share is projected to rise in future. Crucially, in no scenario did the combined share of the world’s poorest and most vulnerable countries (comprising all low and lower-middle income countries, small island developing states and least developed countries (LICs, LMICs, SIDS and LDCs), over 100 countries in total) exceed 2 percent, providing a strong argument that they be exempted from any responsibility to provide climate finance.

A number of other approaches have been explored. ODI use thresholds for cumulative per capita emissions and current per capita income to identify potential new contributors, while Pauw et al also consider a wider set of qualitative measures and commitments. WRI use a range of emissions and income metrics and include an option that combines both aggregate and per capita cumulative emissions. Charles Kenny looks just at the extent to which a country’s cumulative per capita GHG emissions exceeds its share of a global per capita carbon budget. The latter two also yield estimates of the share that new contributors might provide, at least 25 percent in both cases (see Box for details).

In summary, there are a variety of different models and approaches which produce some similar, and some different results, and there probably isn’t a single right answer. But they can at least inform what is inevitably an intensely political process.

Latest NCQG proposals and a possible way forward

The latest draft NCQG text proposals suggest there is still all to play for. All options for the size of the NCQG are still on the table, from a floor of $100bn per year to a total of $2 trillion per year in grant equivalent terms. But the draft text also includes some suggested criteria for expanding the contributor base that include a combination of thresholds for per capita income (in PPP$ terms that better reflect differences in purchasing power), cumulative GHG emissions, and cumulative per capita GHG emissions. Any country meeting just one of these criteria would become contributors. A set of exemption criteria are also proposed:

50.  [Parties that meet one of the criteria listed below contribute to the goal:
(a) GNI per capita more than USD 52,000 in purchasing power parity;
(b) Among the top 10 emitters based on cumulative greenhouse gas emissions, with more than USD [20,000][22,000] GNI per capita in purchasing power parity;
(c) Cumulative and current emissions per capita of at least 250 tonnes of carbon dioxide equivalent and USD 40,000 GNI per capita in purchasing power parity];

51.  [Parties excluded from the criteria listed above may be:
(a) Parties classified as a low-income country with a risk of external debt distress;
(b) LDCs or SIDS, with a Human Development Index value lower than 0.9;
(c) Parties in fragile or conflict-affected situations.]

These criteria look sound—they capture the three key variables, namely, cumulative aggregate emissions, cumulative emissions per head, and per capita income.  It is important too that a country contributes if it meets any of the three criteria.

Results are sensitive to specific thresholds, and indeed to the choice of cut-off date and data source for calculating emissions and the year for assessing per capita income (all unspecified in current text), but I estimate that current proposals could cover 20-30 non-Annex II countries including (regardless of cut-off date or data source):

• China, 
• the key Gulf states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), 
• South Korea, 
• Singapore, 
• Israel, 
• Russia, and 
• Most remaining European countries. 

These cover most if not all of the key countries identified by the analysis above. It is notable however that, with the current proposed thresholds, it is the third criterion that is almost entirely driving these results, with older emissions cut-off dates (covering the period since 1850 rather than 1990) capturing more countries. In fact, China is the only country covered by the second criterion that is not already captured by the third. The first criterion captures a few Annex II countries (notably France, Norway, Portugal, Spain and Switzerland) that might escape the third criterion according to some emissions data sources with 1990 cut-off dates (though France, Portugal and Spain might not meet any of the three criteria if the PPP$ per capita income threshold is based on a 2017-22 average, as per WRI’s model!). That could change however if the thresholds were varied. For example, Argentina, Kazakhstan, and Mexico could all be added if the second criterion was amended to cover the top 20 emitting countries, while lowering the income threshold in the first criterion would reduce the risk of excluding any Annex II countries. It remains important that inclusion be based on a country meeting any one, not all of the suggested criteria.

The proposed exemption criteria (covering low-income countries at high risk of debt distress, LDCs and SIDS with a Human Development Index lower than 0.9, and countries in fragile or conflicted affected situations) appear to make little difference, primarily because the inclusion criteria and thresholds are still quite restricted. And apart from urging the establishment of a burden sharing arrangement amongst developed country Parties, there are no proposals regarding the scale or share of contribution coming from new contributors. 

Applying these criteria to our own fair shares model and adding up the individual country shares would yield a total non-Annex II contribution of about 20 percent.

Unblocking progress 

Whether these criteria will survive the negotiation process remains to be seen. But here are some suggestions for a possible way forward that may help restore trust and break the logjam, delivering both a more ambitious goal and an expanded contributor base in a way that is fair to all parties:

Include a specific public finance target

While there is a case for incorporating wider sources of finance in an overarching NCQG, the record of mobilising private finance is weak and the focus of attention should be on public finance, which accounted for $92 billion (79 percent) of the $115.9 billion provided in 2022. This is what developing countries are most interested in. Developed countries should start here to help rebuild trust, and the NCQG text should include an explicit public finance target.

Developed countries should commit now to at least double by 2030

We’ve shown that doubling by 2035 can be achieved without any additional fiscal effort. Economic growth and inflation will take care of that. Developed (Annex II) countries could commit to that today. But they could, and should, go further. Doubling by 2030 could be achieved with relatively modest extra effort—around an extra 0.02 percent of Gross National Income—without compromising other development spend. Committing to that, today, as a floor, would go even further to rebuild trust and kickstart the negotiations.

Richer, high emitting developing countries should also commit to contribute

The case for an expansion of the contributor base is very strong. The  proposed NCQG criteria appear to capture the countries that matter and may provide a neat solution to the arguments about metrics. However, per capita income and emissions thresholds should be lowered, and the number of top emitters increased, in order to include more contributors (and avoid excluding some Annex II countries), while the exemption criteria should be expanded to exclude a wider set of the poorest, more vulnerable countries. 

“Buy one get one free”: link additional support to developing country contributions 

None of this will be easy. To incentivise greater ambition and some expansion of the contributor base once a (higher) floor has been agreed, how about a deal in which Annex II countries match every dollar committed by non-Annex II countries with an additional dollar? A cap could be applied if Annex II countries were nervous about being bounced into unaffordable commitments. Or a deal could be structured differently so that developing country contributions kick in earlier but are matched by larger multiples from developed countries.

Include a commitment in grant equivalent terms

 A key problem with the existing goal is that it does not differentiate between grants and loans, and thus exaggerates the value of climate finance provided and makes comparison between donors difficult. OXFAM estimate that the ‘grant equivalent’ value of public climate finance provided in 2019-20 was only 35 percent of the total reported (higher for bilaterals than multilaterals), ranging from 11 (France) to 100 percent (UK, Netherlands, Switzerland, Denmark, and the European Commission) for individual donors. The NCQG text should include a goal for public finance in grant equivalent terms. This would reduce incentives to meet targets through ever less concessional support, address developing country demands to see more assistance in the form of grants, and allow fairer comparison between donors.

Agree principles for burden sharing

Many developing countries have called for a more explicit burden sharing arrangement to improve transparency and accountability for meeting any agreed target. This is to be supported. For the NCQG, agreement to principles and metrics underpinning them (building on the models mentioned above) may be as far as it is possible to go at COP29. But that would still be progress. Ensuring that commitments (and, more importantly, provision) are assessed on a like for like basis will be key, grant equivalence being just one aspect of this. Ideally, any burden-sharing model should cover all contributors, although a collective commitment from new contributors may be sufficient at this stage. It will however be important to acknowledge and quantify existing provision (in grant equivalent terms), as our analysis of Chinese climate finance has shown. 

In conclusion

Reaching agreement on the NCQG will be both important but difficult. Developed countries must do more. But absolving the growing number of large, rich, heavily polluting ‘developing’ countries of responsibility is also unfair to the poorest. When it comes to climate finance, old categorisations of developed and developing are no longer fit for purpose. 

Here’s hoping for a breakthrough at COP29.