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Why definition of climate finance remains a major bone of contention at COP27 talks

The interest in keeping the definition of climate finance ambiguous maintains the status quo, where a majority of loans can pass off as climate finance, say experts.  

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New Delhi: During a high-level ministerial dialogue at the COP27 climate summit, IMF managing director struck at the heart of the vexed question of climate finance for years — its definition.

The 27th edition of the United Nations-Conference of Parties began on November 6 in Egypt’s Sharm El-Sheikh.

 “We have to agree on a common definition of what constitutes climate finance. I have been in so many meetings in which we argue about what is being contributed by whom,” Kristalina Georgieva, IMF managing director, told a group of ministers from across the world during a high-level ministerial dialogue, Wednesday. Any new climate finance targets must be “clear on the methodology of how we calculate climate finance mobilised, provided, and received,” she added. 

What is climate finance

Broadly speaking, climate finance is money used by countries to drive down greenhouse gas emissions and adapt to the effects of climate change. Rich, developed nations that have the means are obligated to provide finance for emerging economies to transition away from fossil fuels, under the United Nations Framework Convention on Climate Change. 

But tussle over what constitutes climate finance have continued over the decades, even as developed countries have pledged – and failed – to deliver adequate finance for poorer ones, who are now having to deal with the cascading effects of climate change. Developed countries pledged, in 2009, to deliver $100 billion in climate finance by 2020 and for every year till 2025, but are unlikely to do so before 2023. 

The bone of contention is the type of finance that developing countries need, versus the type of finance that is ultimately delivered. Loans and non-concessionary forms of finance make up a bulk of what has been mobilized so far, several analyses show. Emerging reports say this can push poor countries, already facing the brunt of climate change, further into debt.

At the COP27, developing country blocks – including India – will push for a definition of climate finance that speaks to their needs. Parallelly, there are challenges with how the true amount of finance needed to tackle the changing climate – which goes into the trillions – can be delivered in the future. 

Negotiations on finance will be the most pressing this COP, experts have said, given finance is the foremost means to achieving climate goals that aim to limit global warming. As a developing country negotiator told ThePrint –  “discussions will be far from easy.”

Also Read: At COP27, India to push for concrete action on climate finance, ‘loss & damage facility’

A lack of definition

Developing countries, including India, have said climate finance should be “based on the principles of equity and common but differentiated responsibility and respective capabilities,” which means richer countries, who have emitted without constraints in the past, should provide finance to emerging economies that are still developing.  

India made an official submission to the UNFCCC to the same effect, saying climate finance should include public finance, flow exclusively from developed to developing countries, and come “on a grant or concessional basis.”

The U.S made a submission that diverges significantly, saying climate finance should be open ended and that its definition “should not impose constraints on the breadth of sources, instruments, or channels employed.” 

The interest in keeping the definition of climate finance ambiguous maintains the status quo, experts told ThePrint, where a majority of loans can pass off as climate finance.  

“Industrialized countries believe that so long as the source is from a developed country, everything counts. Which means there is no concessionality, additionality, you should only factor in finance flows of that origin and that’s enough,” said Dipak Dasgupta, Distinguished Fellow at The Energy and Resources Institute and former negotiator for India. 

“Anything that we do on mitigation actions that are more expensive for us to do, is for a global public good, because we didn’t contribute to the problem to start off with. The question is, if there was no concessionality involved, then we are actually paying for everything?” he added.

$100 billion goal: Who owes what?

A lack of definition also makes calculating climate finance flows challenging, a recent report by the UNFCCC’s Standing Committee on Finance noted. With no consensus, several bodies report different values for how much finance has been mobilized, provided, and received. 

According to the highest projections by the Organisation for Economic Co-operation and Development (OECD), developed countries have only mobilized and provided $83.3 billion as of 2020 – still $16.6 billion short of the goal. A report by Oxfam says this number could be even lower, with just $21-24.5 billion mobilized when excluding loans and non grant based instruments, for example. 

“By default, everyone gravitates to the OECD number, but that doesn’t necessarily mean the OECD’s number is correct. In the absence of a commonly agreed accounting methodology and definition of climate finance, you will always have this problem,” said a member of the UNFCCC Standing Committee, adding, “In the case of the $100 billion, no matter what methodology you follow, developed countries have failed to meet this commitment.”

A recent analysis of the shortfall in the promised $100 billion by think-tank Overseas Development Institute found that the U.S.’s share is the highest.

In 2020, the U.S. should have provided $43.48 billion towards the goal, commensurate with its gross national income, cumulative territorial emissions since 1990, and population size. But according to the analysis, the US provided just 5 per cent of this amount. Other laggards include Australia, Canada, Italy and Spain. 

According to the analysis, only seven countries provided and mobilised their fair share of climate finance in 2020: Sweden, France, Norway, Japan, the Netherlands, Germany and Denmark. 

Joe Thwaites, international climate finance advocate with the U.S. based Natural Resources Defense Council told ThePrint finance is mobilized by specific projects and programmes, and so financial flows to developing countries are based on “which country those projects and programmes are in.”

A Climate Delivery Plan presented at the COP26 last year said the $100 billion goal could be fulfilled by 2023. 

The Standing Committee on Finance, however, compared the projections of the Climate Delivery Plan with the OECD’s numbers, and found that, going by the latter’s progress, public and private finance would each need to increase by over 20 per cent to cross $100 billion by 2023. 

Also Read: Nearly 90% of Jan-Sept days saw extreme weather events in some part of India, says new report

A new goal on finance

The $100 billion goal is set to be replaced by a New Collective Quantified Goal (NCQG) on climate finance from 2025 onwards, the terms of which are being negotiated. 

Countries are mulling what shape the goal should take as well as its sum. Last year, India along with other developing countries demanded the new goal be upwards of $1.3 trillion annually. 

Developed countries are opposed to quantifying the amount of money that might make up this goal, and are trying to get developing countries like India and China to contribute to climate finance, which undermines the UNFCCC, negotiators have said

 “We will see how the discussion goes, but developed countries are likely to push their obligations to the private sector and to developing countries,” an observer from the global south said. 

At the same high-level segment on the NCQG in which Georgieva spoke, U.S. special climate envoy John Kerry said “no government in the world” had the money to pay the trillions needed for developing countries to reduce emissions and adapt to climate change. 

“The trillions are in the private sector. They need bankable deals. We need to de-risk and need concessionary funding, but governments don’t have it,” he said.

So far, multilateral development banks (MDBs) have played a significant role in raising public finance for climate needs, but haven’t been able to successfully leverage private investments, several experts say. 

“Equity, grants and concessionary loans work best in scaling up private investments, though the majority of capital provided by MDB’s has been in the form of investment loans. MDB’s have been risk-averse investors when they should be providing risk capital for crowding-in private capital,” said Shantanu Srivastava, an energy and finance enthusiast at the Institute for Energy Economics and Financial Analysis. “MDB’s are also restricted in their balance sheet size. In 2021, MBD’s provide US$ 82 billion towards climate finance initiatives globally, which is minuscule compared to the global capital needs for the energy transition,” he added. 

Apart from the scarcity of climate finance, finance flows overwhelmingly towards mitigation activities focussed on reducing emissions, as opposed to adaptation activities, which are gaining in urgency for developing countries. This is because investments in adaptation activities are considered high risk.

According to Thwaites, the private sector isn’t the panacea for raising climate finance needs, because governments – particularly in developed countries – have the tools to mobilise this money. 

“MDBs often talk about turning climate finance from billions to trillions, but that’s just not happening. Right now, the strategies are all about incentives, subsidies, derisking, and using public money. While that does have a role to play, we need to see regulatory reform and policy change. Governments have the tools to take a firmer line, like taxing, which they can come in and do,” he said. 

(Edited by Anumeha Saxena)

Also Read: Heatwave in India this year was 30 times more likely due to climate change, Lancet study says


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