Four Climate Finance Discussions to Watch at COP27

Climate finance is set to be a key issue at the 27th UN Climate Conference of the parties (COP27), with the Egyptian hosts raising it in four of their five targets alongside emphasising a shift from pledging to implementation of commitments.

In this blog, we highlight four areas to look out for on climate finance which could have important implications for development.

1.  A loss and damage finance facility

Loss and damage—the term used to describe the negative impacts of climate change that are not avoided by mitigation or adaptation—has long been a priority for developing countries. It is clear to us that developing countries are owed significant sums for the damage done to the climate by industrialised countries. Indeed, last year we estimated the value of the damage already locked in at some $34 trillion in total, of which OECD countries are responsible for some 45 percent (around $11 thousand per capita).

Denmark recently followed Scotland’s $1.5m commitment at COP26 by making available some $13m of funding devoted to loss and damage arising from climate impacts. These are small amounts but this is the first time that a central government has funded this area—which has so far been avoided by developed countries as it acknowledges responsibility for climate’s impacts. Advocates are hoping that this adds momentum at COP27 for more developed countries to accept responsibility, and to make progress on a financing facility to complement the existing ‘Santiago’ network which only provides technical assistance.

Acknowledging responsibility for climate impacts is important, though developing countries may need to be careful what they wish for on finance: with new financial commitments for loss and damage, it will be hard to ensure the money is additional. It is more likely than not that it will come from existing, strained aid budgets, reallocated from other areas such as education, health, and infrastructure.Finance being earmarked towards a specific purpose or via a particular facility may ultimately make it more difficult for recipients to access. So, whilst this progress is to be welcomed, negotiators will want to ensure that finance for loss and damage is additional, and should also feed into discussions on the New Collective Quantified Goal post-2025 (see no4).

2. Delivering on $100bn in spite of fiscal pressures and debt

Last year, the developed countries responsible for the $100bn target missed in 2020, committed to a delivery plan to fulfil the commitment by 2023. The EU and other providers remain bullish on this timeline. If the target isl indeed to be met, it seems that much of the $17bn shortfall will be delivered by the World Bank and other multilateral development banks (MDBs) . Indeed, developed countries’ progress update on the $100bn suggests the World Bank will spend $31.7bn on climate finance to lower- and middle-income countries in 2022, some 36 per cent ($8bn) above what the delivery plan anticipated a year ago. Still, given that countries’ bilateral climate finance has primarily been drawn from aid budgets (with Official Development Assistance, ODA, accounting for 82 percent of bilateral climate finance reported to the UNFCCC), there are several countries whose planned contributions to the target must be in doubt. This is particularly relevant for the UK, given its insistence on funding Ukrainian and other refugees from existing ODA budgets.

Last week, Canadian and German Climate Ministers published a climate finance delivery plan progress update on behalf of developed countries. That steered clear of a formal quantified update, but reported that “governments reconfirmed the climate finance numbers they shared with us last year… and some further increases” and suggested the target will be met in 2023 through 2025.  The opaqueness of reporting on public climate (and especially adaptation) finance continues to hinder the accountability of countries; and there’s no mention in the report of plans to catch up with the shortfall of finance in the three years between 2020 and 2022. The updated progress report does though helpfully acknowledge doubts as to the effectiveness of countries’ strategies for mobilising private climate finance.

The quality of climate finance also needs attention. The foreword to the update from Canada and Germany called for action in four areas: transparency on adaptation, enhanced access (in line with the principles and recommendations of the Access to Climate Finance Taskforce which CGD supported last year); more MDB climate focus; and unlocking private finance. These are helpful calls and the report also notes the heavy reliance on loan financing which risks aggravating an already difficult debt situation in many countries.

Developing countries will (rightly) be sceptical of these pledges to scale up climate finance where disbursements have lagged commitments and where there are substantial issues over the quality of the finance (more to come from us on this soon). This distrust will likely continue to undermine ambition in developing countries' own commitments on emissions reductions.

3. Bridgetown and leveraging existing capital in the international system

At last month’s annual meetings of the IMF and World Bank, there seems to have been a significant shift in support for the idea that the MDBs should use their balance sheets more effectively and significantly step up financing  to tackle climate change and its impacts.

A G20 panel report laid out a series of steps that the MDBs—especially the World Bank—could take to unlock hundreds of billions in new financing. This seems like the only plausible approach to generating new funding in the short term to tackle the climate crisis. CGD colleagues have even called for the World Bank to add combating climate change to its mandate, alongside its twin goals of ending extreme poverty and promoting shared prosperity.

The “Bridgetown agenda” has been put forward by a coalition of middle-income countries and social advocates to advocate a faster response to the climate crisis. Barbados' Prime Minister Mia Motley has spearheaded the call to action focused on providing emergency liquidity, expanding multilateral lendings and activating private savings for climate mitigation and disaster response. Lower income countries are not well represented in the Bridgetown agenda, and they may seek to influence it at COP27, or build on the model.

There’s little formal focus on the international finance system in the UN’s conference, though G20 leaders will have a say and meet at the same time as COP.

4. New Collective Quantified Goal for climate finance

The 2015 Paris Agreement committed parties to develop a New Collective Quantified Goal (NCQG) for climate finance which will build on the current $100bn per year commitment and will take effect from 2025. This is currently being worked on at an official level through a series of Technical Expert Dialogues, and the first high-level ministerial dialogue on the NCQG is also due to take place in the first week of the conference.

The default position—of a higher number but with the design of the target unchanged—would be a disaster for both climate and development. The existing $100bn target has not led to significant new and additional resources, and has instead led to rebadging or re-focussing aid budgets over the past decade. Negotiators must signal they are open to approaches that better recognise that climate and development finance goals need to be coherent.

Furthermore, the structure of the current goal is badly flawed: there is a greater focus on mitigation than adaptation, a tendency towards loans rather than grants, and significant barriers to access—a point already raised at the Technical Expert Dialogues. The process for the new goal is the opportunity to do better, and ensuring the additionality of finance should be the priority. We’ve submitted evidence to the UNFCCC and will be sharing ideas in the coming weeks and months.

Development and climate finance coherence and trust

A common theme through these four areas is the importance of coherence between climate and development finance; and something CGD will be emphasising at COP27. Do connect with us if you’ll be there.

But the key commodity may be trust—an agreement that relies on 194 parties voluntarily taking action must see action taken in good faith. For developed countries in particular, COP27 is a chance to rebuild trust but - as the Egyptian presidency has emphasised - this must be with actions, and not words.

We’re grateful for comments from Mark Plant on an earlier draft of this blog.