CLIMATE FINANCE, EVERY WORD OF THE NCQG COUNTS

While waiting for updates from the COP29 negotiations on the new collective quantified goal for climate finance, we analyze more thoroughly some aspects of the negotiating document produced by last week’s negotiations. In fact, for a good NCQG not only quantity but also quality counts.

Needs of developing countries

The negotiating text identifies the financial needs of developing countries at USD 5000-6900 billion until 2030, based on their Nationally Determined Contributions (NDCs).

Dividing this figure by the 10-15 years to which they refer gives a discounted value of $455-584 billion per year from now until 2030. It must be considered that this figure, as also indicated in the text, is very much underestimated compared to the real needs of the countries. Different sources are in fact much more generous in quantifying them.

Here are some reference numbers:

• $1500 billion per year by 2029 from sources outside developing countries, of which $1200 billion per year in mitigation and adaptation investments and $300 billion for climate change-related economic losses and damages.
• $1000 billion per year by 2030 from external sources for developing countries, except China, to cover a share of the $2400 billion per year needed ($1600 in energy transition, $250 for adaptation and resilience, $250 billion for loss and damage).
• $215-387 billion per year until 2030 only for adaptation in developing countries.

Allocation of resources

The latest report by the Standing Committee on Finance shows that global climate finance increased by 63% in 2021-2022 compared to 2019-2020, reaching $1.3 trillion per year. It was mostly directed at mitigation, particularly on clean energy, transport, buildings and infrastructure. Adaptation finance amounted to only 11% of the total ($63 billion per year), of which $28 billion went to developing countries, as opposed to the $215-387 billion needed annually. This is what the negotiating text refers to when it mentions the need to achieve a balance between finance for mitigation and adaptation in the NCQG.

In addition to a problem with the allocation of resources by objective, there is also an inequality in the distribution of resources between regions. Analysing international climate finance, the results show that, in 2022, it was mostly concentrated in the regions of Latin America-Caribbean (28%) and Central Asia-Eastern Europe (16%); both South Asian and Sub-Saharan African countries received 14% of the resources, while the smallest share (10%) was allocated to the Middle East-North Africa and East Asia regions. 

Figure – Allocation of international climate finance by region in developing countries, except LDCs – graph created by the author based on data from the Global Landscape of Climate Finance 2024 report by CPI

If we consider that financial resources for developing countries except China have been scarce (only 15% of global climate finance), we understand why various delegations insist on the relevance of including in the final NCQG text a reference to equitable regional division. 

Least Developing Countries (LDCs) and Small Islands Developing States (SIDS) are the categories most vulnerable and impacted by the effects of climate change and therefore need special guarantees. Yet only 2.6% of the financial resources went to the former ($33 billion) and just 1% to the latter ($13 billion). In response to the current situation, these countries propose to include in the text a specific wording regarding their needs, and a minimum allocation limit – $220 billion per year for LDCs and $39 billion per year for small island states.

The quality of the resources

More than half of global climate finance in 2021-2022 was in the form of debt instruments, with grants accounting for only 6% of the total. Loans accounted for 59%, of which 88% at market rate and 12% denominational. 

Considering only public finance from developed to developing countries, 69% was in the form of loans and 28% grants. 

Not only are loans the most common instruments, they also have a high rate of non-concessionality. Indeed, in terms of grant-equivalent concessions (meaning the difference between the loan and the repayments made over its term) the $115.9 billion mobilised by developed countries for developing countries in 2022 turn into only $28-35 billion. The request in the negotiating text to calculate the new NCQG in terms of equivalent concessions is thus intended to avoid counting as mobilised resources also the resources that will have to be repaid in the form of debt.

Debt

Due to growing public debt, one in three developing countries spends more on repaying their interest payments than on health, education and climate change.

This situation limits the ability of the most vulnerable countries to develop and to implement ambitious climate policies and adapt to the effects of climate change, further exacerbating the losses and damages they face.

Two main issues threaten to push the situation to the limit. On the one hand, increasingly frequent and intense extreme weather events increase the debt of developing countries, which have few options but to accept high-interest loans for their own reconstruction: hence the importance of adequately funding the Loss and Damage Fund (we discussed it at this link). On the other hand, the current climate finance paradigm, so focused on loans, contributes to creating further debt, rather than providing a way to alleviate it.

If not adequately supported, developing countries may find themselves forced to invest in their own domestic fossil resources to generate income with which to pay back the interest, creating a vicious circle between continued rising temperatures and the increased costs of dealing with them. Possible solutions are proposed in the negotiating text: 

• a general increase in financial resources to meet the needs of developing countries;
• a greater, if not total, presence of financial resources that do not create debt;
• the inclusion of a specific target for loss and damage in the NCQG;
• the introduction of clauses in contracts to allow countries to suspend debt payments for a period of time after an extreme weather event;
• the analysis of the debt condition for the modalities of climate finance disbursement;
• debt cancellation.

Additionality

Article 4.3 of the Convention specifies that developed countries “shall provide new and additional financial resources” to meet the ambition of developing countries. The reference to additionality was later dropped in the Paris Agreement, although Article 9.3 states that the mobilisation of financial resources should represent “a progression beyond previous efforts”. In the negotiating text, there are now proposals to take up the language of the Convention.

As is often the case, there is no accepted definition among Parties of additionality, nor methodologies to calculate it. Generally, additionality is understood as financial resources mobilised beyond previous commitments. The topic is particularly relevant because, according to an analysis conducted by CARE Climate Change, of the $295 billion in climate finance provided between 2011 and 2020, only $20 billion were additional to the global North’s commitment to donate 0.7% per year of their gross national income for the development of the South. Introducing the wording of additionality in the NCQG text is therefore particularly important to ensure that financial resources are new and additional to those needed for the development of the most vulnerable countries.

Access

The current architecture of climate finance is complex. Funds may arrive through a number of different channels, multilateral, bilateral or regional, within or outside the financial mechanism defined by the Convention.

The main channels are: 

• The Global Environment Facility (GEF), a fund established directly in 1991 to assist in protecting the environment and promoting sustainable development. It focuses on six thematic areas: biodiversity, chemicals and waste, climate change (mitigation and adaptation), international waters, land degradation and sustainable forest management. It also administers the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF), which are designed to support developing countries in the definition and implementation of their National Adaptation plan. It is an operating entity of the UNFCCC.
• The Adaptation Fund, under the UNFCCC, focuses on helping developing countries adapt to climate change. With the implementation of Art.6.4, it will receive 5% of the share of proceeds for the sale of emission credits (we talked about this here). 
• The Green Climate Fund (GCF), approved in 2015, supports vulnerable countries for resilient and low-emission development, with a focus on both mitigation and adaptation. It is the largest multilateral fund and is under the UNFCCC. 
• The recent Fund for Responding to Loss and Damage (FRLD), was formalised at COP28 with the objective of helping developing countries particularly vulnerable to the effects of climate change respond to economic and non-economic losses and damages.
• The Climate Investment Funds (CIFs), created in 2008 and administered by the World Bank, manage a number of specific interventions to help in the development of vulnerable countries. Some of the thematic areas are: increasing renewable energy and accelerating the transition away from coal in particularly dependent countries. 
• Multilateral development banks aim to accelerate economic and social progress in developing countries. Many of them have included climate change as a key item on their agenda.
• Bilateral finance, i.e. between two countries, managed through development funds or agencies. 
• Regional channels and funds, set up for national and regional objectives. An example is the Amazon Fund, a Brazilian fund to prevent deforestation in the Amazon.

In addition to the complexity and fragmentation of the financial architecture, a series of issues reduce the access to financial resources for developing countries.

Some of the existing funding mechanisms, such as the Adaptation Fund, the Global Environment Fund and the Green Climate Fund, present considerable complexities in their access procedures: they are highly bureaucratic and decentralised, and are thus unable to capture the needs and demands of communities. Information sessions are almost always in English, a language not easily accessible to indigenous communities, and are often delivered through digital tools, which require technological means that are not always present. Over time, these limitations have mostly favored large organisations who are able to meet the procedural demands of the funds thanks to their resources and means. 

Some financial mechanisms, moreover, require an initial contribution from the applicant organisation, as well as financial guarantees, periodic budgets and audits: small organisations can hardly meet such conditions. This, therefore, further disadvantages smaller and local organisations, which, however, are on the front line in dealing with climate events and need more support.

Current architectures fail to consider the inequalities present in afflicted communities. For example, women are often marginalised within their own communities due to gender-based social norms and lack access to decision-making processes as well as means to strengthen their position or ownership rights to assets or financial resources: therefore, it becomes effectively impossible for them to provide the guarantees to obtain financial resources. 

Moreover, finance tends to be less accessible in high-risk contexts, such as in situations of war, insecurity or more generally fragility, because of the associated high rate of risk. Entire geographical areas, which are already highly vulnerable and would require more attention, are marginalised due to potentially high implementation costs and investment sustainability. A direct access mechanism to local and indigenous communities would increase climate finance.

It is therefore crucial that the final negotiating text reflects language based on the principles and values of human rights, which are core elements of environmental and social protection. The integration of this language translates into real social impacts, generating guarantees for all oppressed communities.

Article by Claudia Concaro, Italian Climate Network delegate to COP29 Baku