Updated 15 January 2024
When the COP27 summit concluded in 2022, one of its few meaningful accomplishments was the adoption of a historic ‘Loss and Damage’ Fund. After 30 years of climate talks, this first-of-its-kind fund will allow developing countries to finally receive financial support from developed ones to pay for climate change damages, adaptation, and low-carbon development. For countries who did little to cause the climate crisis, but could face climate costs of US$580 billion annually by 2030 without sufficient mitigation and adaptation action, this is a potential lifeline.
However, the real-world effectiveness of the fund remains to be seen, with details of its governance and financing still to be worked out at COP28*. Moreover, the length of time it took to achieve this is reflective of a longstanding lack of priority placed on providing vital climate finance to developing countries.
In 2009, developed countries pledged to provide developing ones with US$100 billion per year in climate finance by 2020. By the time 2020 arrived however, just US$83.3 billion was provided for that year alone. This figure might seem significant (if not quite on target), until you realise that of this money, only US$21-24 billion was spent specifically on climate adaptation and mitigation. Additionally, only 2.9% of climate finance identifies gender equality as a principal objective, despite women often being disproportionately worse affected by climate change than men.
All in all, this means that climate finance isn’t being paid as promised, and mostly isn’t going towards climate action or the people most vulnerable to climate change. So, what makes modern climate finance so inefficient?
Reported Finance ≠ Actual Benefits
Despite how much developed countries and other contributors report giving to climate mitigation or adaptation projects, these amounts seldom reflect proportionate results on the ground. This is because current rules allow for climate finance to be reported at face value rather than by actual climate benefits, which may not be that significant if climate change only forms part of a project’s objectives. Determining climate benefits is further complicated by a lack of detailed project-level reporting on how or even if finance is allocated to achieve climate goals.
Moreover, most reporting is based on the overly generous Rio Marker System, which allows for 40-50% of a project’s budget to be listed as climate finance, regardless of whether that money is meant for climate-related objectives or is even sufficient to meet them. These lax rules also allow developed countries to decide what proportion of their contributed finance to a project is reported as climate related, leading to widespread overreporting. According to a recent Oxfam report, the actual amount of bilateral climate finance for 2019-2020 was 30% lower than reported.
Loans
Countries already struggling with debt shouldn’t be burdened with more to pay for the costs of climate change. But despite hopes in 2009 that most climate payments would be grants or other concessional finance, instead the vast majority are loans, which made up over 70% of climate finance in 2019-2020. Of these, a large and growing proportion are non-concessional loans, while concessional loans have remained at roughly the same volumes between 2017-2018 and 2019-2020.
Developing countries already spend more on debt payment than on most vital services like healthcare, basic infrastructure and climate action. Thus, having to take out costly loans for climate damages –Mozambique had to borrow US$118 million following Cyclone Kenneth in 2019– decreases their financial capacity for climate change adaptation, particularly as these damages become more frequent and intense over time. Ironically, most adaptation measures for at-risk communities –like protecting food and water security– don’t even receive loan money as they don’t generate sufficient financial returns to attract investors.
Loan repayments are also highly influenced by changes in interest rates on the global capital markets. So if interest rates increase during a loan’s repayment maturity, borrowers have to pay back even more than if interest rates remained the same.
More for Mitigation. Less for Adaptation
Although signatories to the Paris Agreement agreed on equal payments for climate adaptation and mitigation, so far, the latter has received far more than the former. Of the US$66.3 billion in reported climate finance for 2019-2020, 59% went to mitigation while just 33% went to adaptation. While adaptation finance has incrementally increased since 2015, it is still far short of the US$160-340 billion per year required by 2030 to meet global needs.
The main reason for this is because while mitigation strategies –like building renewable energy infrastructure– are usually linked to revenue generating activities, adaptation strategies –like improving disaster preparedness– typically generate little or no financial returns. Additionally, the benefits and costs of investing (or not) in adaptation measures are difficult to quantify financially, making them even less attractive to investors.
Pay for the Climate, Steal from the Poor
One of the key agreements about climate finance is that it should not detract from money for other development and humanitarian objectives, as this will inevitably leave poor communities more vulnerable to climate disasters. Yet since 2009, a growing proportion of climate finance has been reallocated from developed countries’ Official Development Assistance (ODA) budgets, instead of from new sources.
Conversely, the total net ODA of developed countries has remained stagnant for the past decade, leading to ever-smaller budgets for non-climate development objectives as ever-greater shares of ODA money are used as climate finance. Consequently, a shocking 2022 report on the UN Sustainable Development Goals (SDGs) –which ODA is vital for meeting– found that progress on many has now reversed due to a lack of finance.
Fixing Climate Finance
The shortcomings of modern climate finance don’t just affect developing countries. Ultimately, we all need an efficient, functional climate finance system to accelerate climate action to levels necessary to safeguard our planet. But, as the failure of the ‘US$100-billion-per-year-by 2020’ goal shows, the current system is too encumbered by faulty reporting, excessive loans, bad sourcing practices and insufficient adaptation funding to fulfill this purpose.
Luckily, an opportunity has arisen to resolve this, as the UN Framework Convention on Climate Change (UNFCCC) is now negotiating a New Collective Quantified Goal (NCQG) that will set the tone for climate finance from 2025 onwards. During this negotiation period, it is imperative that the following recommendations be adopted to address the systemic issues that have hindered climate finance thus far:
- Go above and beyond the US$100 billion per year goal
The most pressing priority should be to deliver on the overdue US$100 billion per year goal each year between now and 2025. If that goal is missed in any given year, developed countries must make up the deficit through increased payments later on. Moreover, US$100 billion per year should only be a baseline value, and new goals must be adaptable and needs-based to respond to the significantly higher financial needs of many developing countries’ climate plans. - More Transparent Reporting
Climate finance contributors should no longer simply report their contributions at face value, but instead provide detailed reports of each project they give to. These should include details on what proportion of a project’s objectives are climate relevant, what proportion of contributed finance is specifically used to support mitigation or adaptation (or address loss and damage), and how exactly that finance is used to meet climate goals. - Prioritise Locally led Solutions and Gender Equality
To further ensure that climate finance gets where it needs to, more funding should be directed towards locally led climate action, and records should be kept of the amount and use of spending on a local level. Climate finance contributors must also make gender equality a central objective of their projects and ensure that they are able to meet the differing needs of men and women in response to climate change. - More Grants and Adaptation Finance. Less Loans
Developed countries must significantly increase the amounts they give in adaptation finance (Denmark is already aiming to spend 60% of its climate finance on adaptation) and must provide climate finance primarily as grants to stop adding to developing countries’ debts. Loans and other non-concessional finance should no longer be counted as climate finance. - Make Polluters Pay, not the Poor
Instead of being taken from ODA budgets, climate finance should be sourced by charging those most responsible for the climate crisis, via a shipping emissions levy, wealth tax, or excess fossil fuel profits tax. Developed countries should also prioritise giving at least as much in non-climate development aid as they do in climate finance.
As for the Loss and Damage Fund, much still needs to be decided to determine its effectiveness. In particular, it must assure continual loss and damage payments to developing countries (most of the pledges made to it so far are one-offs). But if managed correctly, it could herald a new age of co-operation and goodwill between the developed and developing world, building the international trust and relationships we will all need to survive this era of climate change.
*At the formal agreement of the Loss and Damage fund at COP28 in December 2023, developed countries pledged a total of US$700 million. This is the equivalent of less than 0.2% of the estimated $400 billion per year (and rising) needed by developing countries to pay for climate mitigation and adaptation.
Author: Thomas Gomersall, Seneca Impact Advisors
For more information, please contact info@senecaimpact.earth
