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What Does the Paris Agreement Do for Finance?

Delivering on the new Paris Agreement requires countries to effectively implement their national climate plans, as well as increase their ambition over time. Achieving both of these goals requires a key item—finance.

So what did the Paris deal deliver in this regard?

1) A clear signal to shift trillions

One of the core aims of the Paris Agreement is to make all financial flows consistent with a pathway towards low-emissions, climate-resilient development. This is the first time countries have collectively agreed to this and, coupled with the goal to keep global warming below 2 degrees C (3.6 degrees F) and to pursue efforts to limit it to 1.5 degrees C, the Agreement sends a strong signal that all finance—both public and private—needs to be directed towards the climate challenge.

Numerous investor commitments in the lead-up to and during the Paris talks showed that there is a strong and growing momentum towards this shift. In the coming months and years, the challenge is to match these commitments to invest in climate solutions with countries’ ambitious national climate and development plans that urgently require financing. Aligning finance with the Agreement also requires moving investments out of sectors and activities that drive climate change, such as fossil fuels, which are incompatible with achieving the temperature goals.

2) A recognition that we need more public funding, and more funders

The Agreement reaffirms that developed countries must continue to provide public funding for developing countries to mitigate and adapt to climate change, while also encouraging other countries to provide support on a voluntary basis. A number of developing countries have already elected to contribute climate finance, with nine making contributions to the Green Climate Fund. The Agreement recognizes this and encourages other countries to join in. Already, Brazil’s President Dilma Rousseff said the country is considering contributing climate finance, joining other emerging economies like China, which pledged to provide $3.1 billion over three years.

Public finance is especially vital for activities where it is difficult to attract private investment, such as adaptation, which has historically lagged behind mitigation in terms of funding. While the Agreement fell short of quantifying adaptation finance goals, countries agreed to balance overall public climate finance flows between adaptation and mitigation. Developed countries also committed to significantly increase support for adaptation before 2020. Lastly, countries agreed that the Adaptation Fund, created under the Kyoto Protocol, could play a role in implementing the Paris Agreement. The Fund has been particularly valued by developing countries since it allows national institutions to access finance directly, without going through an international entity.

3) A commitment to continue mobilizing $100 billion a year, with a new goal on the horizon

Developed countries had already committed to mobilize $100 billion a year in climate finance by 2020, and in Paris, they agreed to continue mobilizing finance at this level until 2025. Significantly, all countries agreed to contribute to the global effort to mobilize finance beyond previous efforts, with developed countries taking the lead. Finance will also be part of the collective review of nations’ progress every five years. These elements provide some indication that climate finance will continue to grow over time, but there are outstanding questions about how this will happen. Prior to 2025, governments agreed to set a new, higher collective goal for finance, though it is unclear when this goal will be decided, what time period it will cover, and which countries will be responsible for meeting it. Finally, in recognition of concerns about progress towards the $100 billion goal, developed countries are urged to come up with a “concrete roadmap.”

4) Better reporting

The Paris Agreement marks a step forward in reporting and improving transparency of finance, which is essential to ensure accountability and avoid “double-counting.” Developed countries committed to continue reporting every two years on finance they have provided and mobilized, but also to start reporting on public funding they intend to provide in following years. Other countries are also encouraged to do this. Next year, countries will commence processes to decide the specific information to be reported, when, and how it will be reviewed, as well as methodologies for determining what should count towards climate finance goals, and how to count it. This is essential for ensuring that, as countries work to meet their goals, the predictability and quality, as well as the quantity of climate finance improves.

The Agreement also encourages developing countries to report on finance received, as well as their needs. This can help improve tracking of funding commitments and set the level of ambition for future climate finance goals.

Next Steps

The Paris Agreement makes significant progress, yet lots of work remains to increase the scale and predictability of finance necessary for achieving the Agreement’s ambitious aims. In particular, countries will need to work together to:

  • Provide a roadmap for how finance will scale up, including future targets, and a process to ensure finance is growing in line with mitigation ambition;
  • Support developing countries to accurately determine future finance needs, and ensure funds are used effectively; and
  • Track progress on pledges announced in Paris, including by agreeing on information to be included in regular reporting and developing clearer accounting processes.

 There is much to do!

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