Financing climate actions in the ‘race to zero’ campaign
A critical step in addressing the climate crisis comes in the form of climate finance that enables climate action in the form of adaptation and mitigation efforts.
At the recently concluded UN Climate Change Conference (COP28), it was observed that Parties to UNFCCC are off track to meet their Paris Agreement goals. Climate finance was the central issue of the conference. Currently, financing climate efforts remains a challenge to the implementation of intended nationally determined contributions (INDCs), which are the climate action plans.
A review of the past efforts to generate climate finance indicates mixed results. An upward trend is achieved in global climate finance flows through a 12% increase in 2019-2020, compared with 2017-2018, accumulating $803 billion per year on average, according to the COP27 Report 2023, which provides a comprehensive appraisal of the conditions of global climate finance. In 2019-2020, the growth in finance flows is seen in the number of mitigation actions in buildings and infrastructure with an increase of $34 billion and in sustainable transport with an increase of $28 billion. Similarly, the investment growth is also registered in adaptation finance with an increase of $20 billion.
In terms of private climate finance, 5% of total private climate finance ($66.8 billion) raised by developed countries was for mitigation actions in the energy sector during the 2016-2020 period. For adaptation actions, private finance was mobilised in targeted industries, mining and construction.
Developed countries mobilised private climate finance totalling about $66.8 billion for the 2016-2020 period meant for developing countries through bilateral and multilateral channels. Of the total funds raised, 44% was raised through direct investment in companies and special purpose vehicles alone. In this section of private climate finance, Multilateral Development Banks (MDBs) raised 57% of the estimated total value which was followed by bilateral and multilateral climate funds.
In 2019 and 2020, the developed countries mobilised climate finance through bilateral and multilateral channels worth $14.4 billion and $13.1 billion respectively. However, the annual average of $13.8 billion indicates a decline of 6% against $14.6 billion in 2017-2018.
In South-South climate finance flows, commitments of non-OECD members of the International Development Finance Club to fund projects in other non-OECD countries declined from their earlier 4.1 billion commitment in 2018 to $1.7 billion and $2.2 billion in 2019 and 2020 respectively. The finance flows through the Asian Infrastructure Investment Bank and the New Development Bank increased. Financing through MDBs from non-Annex II Parties increased from around $9.1 billion in 2017-2018 to an annual average of $11 billion in 2019-2020. However, the Report states a sector-wise decline in investments in renewable energy and sustainable transport to $2.6 billion in 2019-2020 from an annual average of $3.2 billion in 2017-2018.
Several implementation-related issues have been the thorn to positive climate outcomes. Despite the increase in financial flows, the objective of collective mobilisation of $100 billion annually by 2020 to finance meaningful mitigation action in developing countries could not materialise. Similarly, in 2020, transparency on the implementation of these climate projects was not completely achieved. National and regional accredited entities (accreditation done by Green Climate Fund (GCF)) account for more than 50% of all accredited entities, however, they accounted for only 10% of financial outflows in 2019-2020. However, due to their rising number, accreditation to multilateral climate funds rose by 36% in 2019-2020.
Then, there is an imbalance in the finance flows between mitigation and adaptation. In 2020, the share of mitigation on average was 57 per cent ($17.9 billion) of bilateral climate finance, 37% ($1.2 billion) of multilateral climate fund and 62% ($3.6 billion) of MDB climate finance, according to the COP27 Report 2023. On the other hand, the corresponding shares of adaptation finance for the same year were 28% ($9 billion), 19% ($605 million) and 36% ($12.8 billion) respectively. It, thus, shows that mitigation constitutes a major chunk of the climate finance pie in the context of public finance flows from developed to developing countries.
Moreover, developing countries are running short of climate funds, while the relatively small global climate finance flows are not enough to meet their overall needs. In 2019-2020, global climate finance was raised to a total of $803 billion, which constituted only about 31% of the required annual investment to prevent the global temperature rise from above 2 ℃ or to follow a 1.5 ℃ pathway.
Another attention climate stakeholders should pay is to push for ‘sustainable’ climate finance. All of the above discussion risks failure to meet climate stabilisation goals which depends on focusing on sound climate finance. Substantial efforts are needed to integrate finance flows into climate change objectives. Achieving 17 Sustainable Development Goals (SDGs) requires effective governance mechanisms supported by sound policy formulation—reform of fiscal/financial policies and regulations, which then should incorporate climate risks by both public and private actors in the financial sector. Besides, the transition must be fair, just and equitable for all. Public policies should strengthen implementation beginning at the grassroots level, which is stressed by ECOSOC to achieve the targets of the 2030 Agenda.
At the COP28, the UNFCCC Secretariat acknowledges that countries have made momentum but significant progress is needed in key areas of climate finance. According to UNFCCC, 52 developing countries and one developed country have submitted their national adaptation plans (NAPs) to the UNFCCC Secretariat as of November 2023. This year a record of 11 countries submitted their NAPs to UNFCCC. NAPs identify the need to build resilience and capacity against climate disasters and to access climate finance to implement adaptation action. They constitute the main delivery tools to coordinate and drive climate action pathways at the national level.
For this, at the COP28 UNFCCC Parties have agreed to the Global Goal and Adaptation (GGA) and its framework to assess the climate efforts of countries. It brought a basic global understanding of the required adaptation goals to be supported by adequate finance, accessible technology, and capacity-building. The GCF also mobilised a total fund of $12.8 billion in the form of contributions (pledges) from 31 countries. Then, at COP28, Parties agreed to operationalise a new funding arrangement called ‘Fund’ to respond to climate-related loss and damage. The Fund aims to assist vulnerable developing countries through tough economic and non-economic loss and damage due to adverse climate effects.
Pathways to net zero emissions and limiting the global temperature below 1.5℃ would mean continuous improvement through the effective implementation of climate projects aligning with Paris Agreement goals. The global efforts to reduce global greenhouse gas emissions should bring close to 43% cut by 2030, compared to 2019 levels. Thus, UNFCCC appeals to countries to ‘refine’ their NAPs. As many as 142 developing countries, also Parties to UNFCCC, are preparing their NAPs.
On the issue of transparency, the new transparency reporting and review mechanism, developed at the COP28 and to be made available by June 2024, could increase transparency in climate actions in future. To further evolve climate actions, the UNFCCC requires Parties to set a new climate finance goal at the next year’s COP29. Then, at COP30, they essentially have to prepare new INDCs covering finance, adaptation and mitigation through a complete alignment with the 1.5 ℃ limit.
COP28 also decided on the world’s first ‘global stocktake’ to hasten climate action before 2030. It outlines climate actions including enhancement of about thrice the energy capacity from the present level and bringing about thrice the energy efficiency by the end of the decade. By 2025, countries should bring new INDCs incorporating emission reductions in all economic sectors, and inclusion of all greenhouse gases across all categories in alignment with the 1.5℃ temperature limit. Further, they can set a new climate finance goal of raising climate funds keeping the baseline of $100 billion annually to guide their formulation and implementation of national climate plans to be achieved by 2025.
On the implementation front, countries need to improve data coverage on energy efficiency, particularly in the private sector as well as on South-South cooperation. They also have to come up with a solution to the problem of inadequate availability of data on the status of climate actions taken to implement Paris alignment approaches. The imbalance between mitigation and adaptation, as discussed earlier, could be addressed through different approaches to climate financing, for instance, an improvement through the current financial instrument of providing funds through ‘grants’ for public adaptation finance versus ‘loans’ for public mitigation finance. More grants, which is the preferred mode of finance flows for bilateral, multilateral and MDBs, were released for adaptation than loans for mitigation. Multilateral and national efforts should be strengthened to enable enhanced access beyond national and regional financing entities. It can be done through supporting access at the local level. It goes hand in hand to strengthen institutional capacity through access to different funding sources.