Climate change is a global problem that requires a response from all countries around the world, and climate finance is a key | Image source: pexels.com
Introduction
Recently, a violent volcanic eruption occurred in the South Pacific island nation of Tonga, which attracted much attention from the island nation of only 100,000 people. In fact, for a longer period of time, Tonga's natural threats as a member of the Alliance of Small Island States came more from climate change.
Small island states, far from modern industry, suffer from the negative impacts of greenhouse gases triggered by current industrial activities on the global climate system, including warming, rising sea levels, frequent extreme weather, and so on. In global climate negotiations, their voices are often not given the attention they deserve, and the funds to help them improve climate resilience are slow to be implemented.
Written by | Zhang Jin
Editor-in-charge | Feng Hao
● ● ●
The "window of opportunity" to address climate change is narrowing.
According to the Sixth Assessment Report of the United Nations Intergovernmental Panel on Climate Change (IPCC), the Earth's average temperature is already about 1.1 degrees above pre-industrial levels. Under existing trends, the world could cross the threshold of 1.5 degrees in the next two decades and 2 degrees in the early second half of the century.
Climate change is a global issue that requires a response from all countries around the world, and climate finance is key to it [1].
01
Where
The so-called "climate finance", according to the Definition of the World Bank, includes all investment and financing activities for low-carbon transition and climate adaptation [1]. Funding can come from public finances or private capital, and flows may be local, domestic, but in a general context, we emphasize the cross-border supporting nature of climate finance, that is, the transfer from developed to developing countries. Among them, "$100 billion" is an oft-to-be figure.
So where does this climate funding target come from?
As early as the early 1990s, countries around the world have exchanged and cooperated to reduce greenhouse gas emissions and cope with climate change. The Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change is the main platform for international climate negotiations [2].
In 1992, the United Nations Framework Convention on Climate Change (UNFCCC) became the world's first international convention to control greenhouse gas emissions and mitigate the adverse effects of climate change, which is the basic framework and legal basis for international cooperation. It establishes the basic principle of "common but differentiated responsibilities" and, referring to the IPCC First Assessment Report [3], states that the ultimate goal of the Convention is to stabilize greenhouse gas concentrations at "levels that prevent dangerous (anthropogenic) disturbances to the climate system" [4].
However, due to the ambiguity of the objective, there was a delay in reaching a consensus on how to implement the objective for a long time thereafter.
Politicians have been debating which countries are more responsible for climate change. Developed countries often use annual carbon dioxide emissions as a standard to accuse developing countries such as China and India of emitting more carbon dioxide; developing countries believe that developed countries have cumulatively emitted more greenhouse gases and should bear more responsibility considering historical emissions.
In 1997, the Kyoto Protocol further provided the initial and most direct interpretation of "common but differentiated responsibilities" – requiring "all developed countries to reduce emissions of six greenhouse gases, including carbon dioxide, by 5.2% less than in 1990", and set quantitative targets for countries, while developing countries do not have legally binding greenhouse gas control obligations [5].
At the same time, three flexible implementation mechanisms, such as "emission trading", "joint implementation" and "clean development mechanism", have been set up to encourage developed countries to exchange capital and technology for emission space.
However, later practice proved that the Kyoto Protocol was in reality a weak, inefficient, and obviously flawed attempt [6].
In 2010, at the Cancún Climate Conference (COP16), developed country Parties committed themselves to "pledge to collectively mobilize a target of US$ 100 billion per year by 2020 to meet the needs of developing country Parties in terms of meaningful mitigation actions and transparency in implementation" [7].
The 2015 Paris Agreement once again clarified the commitment of developed countries to financial and technical support, and clarified it in legal form. This is the cornerstone of international climate finance and the basis for international climate action agreements and cooperation [8].
02
Progress is worrying
However, the actions of developed countries until 2020 are not satisfactory.
Up to now, the actual funding provided by developed countries is far from the target.
According to the Organisation for Economic Co-operation and Development (OECD), climate finance provided by developed countries has fallen far short of the $100 billion target over the past six years [9]. This target is also expected to be met by 2022 or 2023 if countries adhere to their latest climate funding commitments set out at the Glasgow Climate Conference (COP26) in 2021 [10].
COP26 New Climate Finance Commitments for Countries | Sources[11]
These new climate finance commitments look encouraging. But in reality, apart from the need for climate finance, there is little agreement on how to spend it, who should receive it, how to ensure that it is used effectively, and even how it should be measured and what should be counted as climate finance [12].
Differences are mainly reflected in the following three aspects -
First, there's the question of what should be counted as climate finance.
The World Bank defines climate finance as "local, national, or transnational financing – from public, private, and alternative sources of financing – designed to support mitigation and adaptation actions to address climate change" [1], but there is no uniform definition of what kind of financing can be counted as "climate finance".
The Green Climate Fund's statistics divide climate funds into grants, loans, equity, guarantees, and other types by category of financial instruments. Overall, developing countries prefer unbound contributions, while developed countries prefer restricted lending.
Currently, the more comprehensive statistics on climate finance are mainly derived from the OECD. In the OECD annual report on climate finance, the financial resources "mobilized" by donor countries from public and private sources broadly include grants, loans and export finance credits. But even by that standard, the total amount of climate finance in 2019 was only $79.6 billion, nearly $20 billion from the $100 billion target. In the four years from 2016 to 2019, the total amount was US$58.5 billion, US$71.1 billion, US$78.4 billion, and US$79.5 billion, respectively [14]. There is a gap between the target and the target every year, and the gap is not small.
Oxfam Hong Kong, an international aid charity, estimates that public climate financing in 2017-2018 was only US$19 billion to US$22.5 billion, or about one-third of the OECD estimate, once loans are not included [15].
This disagreement was also reflected during COP26. At the Fourth High-level Ministerial Dialogue on Long-term Climate Finance on 3 November 2021, developing countries emphasized the importance of adequate, predictable, accessible and fully transparent grant finance, while developed countries emphasized mobilizing social capital for financing, credit and other means.
The paradox here is that there are no strings attached to grant funds; and social capital is generally given by foundations, charitable organizations, banks, etc. through financing, credit, etc., which means that the donor needs to pay additional interest, and even take into account the goal of profit.
During COP26, small island States represented by Grenada, Antigua and Barbuda [16] also wanted to provide additional funding for "loss and destruction" to effectively compensate for the damage caused by industrial greenhouse gas emissions over the past 200 years. But from the final text of the negotiations, the Glasgow Declaration, the developed countries have not accepted any expression (or even implication) of commitment to damage that could amount to trillions of dollars.
Second, about who will pay. Although developed countries collectively agreed on the $100 billion target, they did not reach a formal agreement on how much they should pay.
The World Resources Institute (WRI) estimates that the United States should contribute 40-47 percent of the $100 billion, but from 2016 to 2018, its average annual contribution was only about $7.6 billion; Australia, Canada and Greece are also far from what they should have contributed. Although Japan and France provided more funds than their share due, almost all of them were provided in the form of loan repayments, not grants [17].
Overall, since there is currently no special formula for calculating fair share, it is difficult to specify who in developed countries should bear how much responsibility. The latest research from the Overseas Development Institute (ODI), a British think tank, shows that the United States is seriously lagging behind [18].
Finally, with regard to the use of funds, whether they are for mitigation or adaptation.
Under the Paris Agreement, climate finance aims to support mitigation and adaptation actions to combat climate change.
Mitigation refers to drastic reductions in fossil energy use to mitigate carbon dioxide emissions, and Adaptation refers to actively responding to the disasters caused by climate change in order to maximize or reduce human damage [19]. Climate mitigation projects require large-scale investment in renewable energy, new energy, new infrastructure construction, etc., to directly reduce carbon dioxide emissions; climate adaptation projects also require a large number of financial resources to enhance the resilience of countries or cities to climate disasters.
Developing countries need US$ 70 billion a year to cover the cost of adaptation, and this figure will reach US$ 140 billion to US$ 300 billion by 2030 [20]. Of the climate finance in 2019, only $20 billion was spent on adaptation, less than half of mitigation project funding. Similar figures are presented in the Green Climate Fund's project tracker – as of now, climate funding totals US$37.1 billion, with 62% of funding for mitigation and only 38% due to adaptation [21]. Obviously, this will further weaken the enthusiasm of most developing countries and poor countries to participate in global climate action.
The Glasgow UNFCCC states that "developed country Parties are urged to double their funding to support climate change adaptation in developing country Parties by 2025 at 2019 levels", but no clear action plan has yet been developed [22].
Developed countries prefer mitigation projects, not only because the results of such projects are quantifiable, but also because developed countries have a greater demand for "absolute reductions in greenhouse gas emissions" than in developing countries.
Developed countries have completed the process of industrialization, the development of their own economies can basically be decoupled from fossil energy, high-energy industries, etc., so they prefer funds to be used to comprehensively reduce carbon dioxide, so as to reduce the threat of temperature rise in their countries; but the economic foundation of developing countries is weak, and they also need to find a balance between their own economic development and greenhouse gas emission reduction, so developing countries need to adapt to funds.
Another reason for the imbalance between mitigation and adaptation is that climate finance is increasingly being provided in the form of loans rather than grants. As previously analyzed, because projects to adapt to climate change have little way to bring profits – building strong houses for the poorest countries will not bring enough financial returns. There is a fundamental contradiction between the needs of developed and developing countries, which has led to a large amount of climate financing currently being invested in middle-income developing countries, to mitigation projects with a return on investment such as new energy vehicles and solar power generation, rather than to the most vulnerable and poorest communities.
03
New opportunities
The COVID-19 pandemic that began in 2019 has dramatically changed the context of international climate finance. It led to the most devastating humanitarian and economic crisis since the Second World War, with particular repercussions for emerging market and developing economies.
As of September 2020, 54% of low-income countries are considered to be at high risk of debt distress or debt distress, a trend that is likely to continue [23]. The pandemic has also exacerbated debt pressures in many climate-fragile middle-income countries.
The world needs to tackle both COVID-19 and climate change, greatly compressing the space available for climate finance. The focus of fiscal spending on areas such as public health makes the medium- and long-term outlook for climate finance more uncertain [24].
But it's not so pessimistic, and new opportunities are in place. The post-COVID-19 economic recovery faces rapid and massive restructuring, providing a rare opportunity for climate action. As can be seen from the recovery plans of various countries, accelerating the transition to low-carbon and climate-resilient infrastructure, taking into account economic recovery and climate change response, has become a policy consensus of all countries. This will require a fundamental shift in the entire financial system, as well as a substantial increase in private financing.
According to the Green Climate Fund, the global private sector manages more than $210 trillion in assets, but only a small fraction of them are earmarked for climate investment [27], and there is an urgent need to mobilize this part of the fund to participate in the fight against climate change.
For now, significant private sector investment is still flowing into traditional high-carbon sectors, while projects for adaptation or transformation are being left out in the cold [25]. In addition, private funding remains highly sectorally and geographically concentrated in developed countries [26].
There are many ways in which you can improve. For example, establish a better regulatory framework for environmental, social and governance investments to encourage and enhance investor confidence; strengthen the disclosure of climate risk and vulnerability data to clarify the direction of environmental, social and governance investments; enhance the transparency of third-party climate fund management organizations, improve management efficiency, and provide a reliable platform for private funds to invest in climate change, among others.
There is only one consensus that needs to be popularized as soon as possible: for private investment, climate change must be considered in every future.
“
About the Author
Jin Zhang is a PhD student at the School of Public Policy and Management of Tsinghua University and a Distinguished Associate Researcher at the Research Center for Energy- Environment and Economy of Zhengzhou University
”
References and notes in the text:
1. https://www.greenclimate.fund/about
2. COP is the abbreviation of "Conference of the Parties" and its full name is the Conference of the Parties to the United Nations Framework Convention on Climate Change. The United Nations Framework Convention on Climate Change (UNFCC) is the world's first international convention aimed at controlling greenhouse gas emissions and mitigating the adverse effects of climate change on humanity, establishing the basic framework for international cooperation on climate change. Since the Treaty entered into force in 1994, a COP has been held annually to assess progress and mechanisms in the implementation of the Convention and to discuss how to move forward.
3. https://www.ipcc.ch/report/climate-change-the-ipcc-1990-and-1992-assessments/
4. https://unfccc.int/process-and-meetings/the-convention/what-is-the-united-nations-framework-convention-on-climate-change
5. http://www.npc.gov.cn/zgrdw/npc/zxft/zxft8/2009-08/24/content_1515035.htm
6. https://carbonmarketwatch.org/2017/04/18/press-statement/
7. https://unfccc.int/sites/default/files/resource/docs/2010/cop16/eng/07a01.pdf
8. Independent Expert Group on Climate Finance. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance (Independent Expert Group on Climate Finance, 2020).
9. OECD (2021), Forward-looking Scenarios of Climate Finance Provided and Mobilised by Developed Countries in 2021-2025: Technical Note, Climate Finance and the USD 100 Billion Goal, OECD Publishing, Paris, https://doi.org/10.1787/a53aac3b-en.
10. https://www.ft.com/content/d9e832b7-525b-470b-89db-6275853315dd#7637025
11. https://www.bbc.com/news/57975275
12. https://www.washingtonpost.com/climate-environment/interactive/2021/glasgow-climate-pact-full-text-cop26/
13. https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance
14. OECD (2021), Forward-looking Scenarios of Climate Finance Provided and Mobilised by Developed Countries in 2021-2025: Technical Note, Climate Finance and the USD 100 Billion Goal, OECD Publishing, Paris, https://doi.org/10.1787/a53aac3b-en.
15. Carty, T., Kowalzig J. & Zagema, B. Climate Finance Shadow Report 2020 (Oxfam, 2020).
16. Grenada: Calls for concrete steps to achieve the collective goal of "by 2025", which is particularly important for small island developing States in terms of adaptation and loss and damage. In terms of adaptation, the main obstacle is the lack of funding, so the size and scope of funding sources need to be determined. The emphasis on earmarked funds for loss and damage is no longer a theoretical discussion, but is now a practical need. Antigua and Barbuda: The $100 billion target is a "tough test" of whether rich countries are serious about climate change. Because of the profligacy of these developed countries, we are not asking for handouts, but for compensation for the losses, and those who emit this carbon and cause climate events should pay the price.
17. Bos, J. & Thwaites, J. A Breakdown of Developed Countries’ Public Climate Finance Contributions Towards the $100 Billion Goal (World Resources Institute, 2021).
18. Colenbrander, S., Cao, Y., Pettinotti, L. and Quevedo, A. (2021) A fair share of climate finance? Apportioning responsibility for the $100 billion climate finance goal. ODI Working Paper. London: ODI (www.odi.org/en/publications/a-fair-share-of-climate-finance-apportioningresponsibility-for-the-100-billion-climate-finance-goal).
19. https://www.imf.org/external/pubs/ft/fandd/2021/09/climate-change-what-is-mitigation-and-adaptation-behsudi-basics.htm
20. United Nations Environment Programme. Adaptation Gap Report 2020 (UNEP, 2020).
21. https://www.greenclimate.fund/projects/dashboard #
22. https://www.bbc.com/news/57975275
23. Independent Expert Group on Climate Finance. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance (Independent Expert Group on Climate Finance, 2020).
24. Naran, B. et al. Global Landscape of Climate Finance 2021 (Climate Policy Initiative, 2021).
25. The world's 60 largest commercial and investment banks invested a total of $3.8 trillion in fossil fuels between 2016 and 2020, a figure that is expected to increase. https://media.business-humanrights.org/media/documents/Banking-on-Climate-Chaos-2021.pdf
26. Independent Expert Group on Climate Finance. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance (Independent Expert Group on Climate Finance, 2020).
27. https://www.greenclimate.fund/sectors/private
Plate editing | Lucas