Getting a New Climate Finance Deal this Week Hinges on 3 Elements
The big-ticket item at this year’s UN climate summit (COP29) is setting a new finance goal that replaces the collective $100 billion per year developed countries provide and mobilize for climate action in developing nations. But with only a few days left of the conference, it’s still very unclear what the goal will be or how it will compare to the previous target.
Let’s be clear: Negotiators must leave Baku with a strong agreement on international climate finance.
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This matters for trust between developed and developing countries. It matters for supporting the poorest and most vulnerable countries in adapting to climate change — and for all developing countries to get onto a low carbon growth pathway. It matters because of the strong feedback loops between finance and ambition: Greater emissions cuts and adaptation measures will require more finance, while more finance can encourage more ambitious climate action.
And importantly, it matters for all countries’ safety and prosperity — because if developing countries cannot rapidly shift away from fossil fuels and withstand climate disasters, all countries will face even worse impacts.
Negotiators are currently grappling with three issues at the core of the new climate finance agreement: quantity, contributors and quality. Here, we demystify these three essential elements:
How Much Finance?
The Independent High Level Expert Group on Climate Finance puts developing countries’ need for external climate finance at around $1 trillion a year by 2030; $1.3 trillion by 2035. Within the trillion, they estimate around $500 billion needs to be public finance and around $500 billion private finance. A substantial amount of that private finance would need to be mobilized by public finance through instruments like guarantees or co-investments, which make investing in emerging markets and technologies less risky.
A big focus for negotiators at COP29 is the public slice of that pie, together with the private finance leveraged by public funds.
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The current goal — $100 billion a year from 2020-2025 — is made up of public finance (described as “provided”) and private finance mobilized by public finance (described as “mobilized”) from developed countries. This includes bilateral flows from a developed country to a developing one, as well as finance flowing from the Multilateral Development Banks (MDBs) and the much smaller Multilateral Climate Funds (MCFs) to developing nations.
So what could the new goal amount look like?
To increase above the $116 billion of climate finance secured in 2022, the largest lever is multilateral finance. There is already good news here: The MDBs announced last week that they will provide $120 billion and mobilize $65 billion ($185 billion in total) for low- and middle-income countries by 2030, around 60% more than they provided in 2023. Negotiators at COP29 may agree to count all of this funding toward the new climate finance goal, or just the 70% representing funds from developed nations. Combined with a 50% increase in bilateral finance flows, this means international climate finance levels can easily reach $200 billion a year. If negotiators agree that all $185 billion of MDB finance should count toward the new goal and bilateral finance doubles, the level of finance could rise to $300 billion a year.
For countries to go above these levels, the best way would be further MDB reform and innovative financing, such as hybrid capital, which individual shareholders can choose to provide, increasing the lending capacity of MDBs. If this is combined with an assumption that shareholders will inject more capital into MDBs before 2035 — say $60 billion over several years — this could potentially lift total climate finance provided and mobilized by bilateral and multilateral sources to $340 - $450 billion a year, depending on whether or not the full share of the MDB finance is counted.
Significant amounts of new finance could also be raised through solidarity levies or taxes, such as those for the maritime and aviation industries or wealth taxes, which some countries have proposed. A joint statement from the recent G20 Leaders Summit in Brazil expressed support for such a wealth tax. These levies could offer anywhere from $20 billion to hundreds of billions a year.
Who Will Contribute?
While developed countries recognize their responsibility to lead, they argue that other countries with the ability to provide climate finance — some of whom already invest in climate action in developing nations— should also transparently contribute to a new goal, due to their relative wealth and emissions profiles. Some of those contributions could be through multilateral financial institutions.
It is important to developing countries most affected by this that their contribution of climate finance would be considered specifically as South-South finance and would not change their development status.
Will the Finance Be High-Quality?
In addition to how much climate finance is provided — and by whom — the quality of that finance is also an important feature of any new finance deal. The issues here are with access, concessionality, the amount provided for adaptation and debt.
For the poorest, most vulnerable countries, the proportion of finance provided as grants and highly concessional loans (with delayed repayments and low interest rates) is just as important as the overall amount. There can be a trade-off here: The current $100 billion goal was reported at “face value,” counting a $100 million loan for renewables in Mexico or Indonesia that needs to be repaid the same as a $100 million grant for adaptation in Malawi or Tuvalu. The grant is much more valuable to the recipient and costs donors far more. So while a larger goal may look better at face value, it may not be as good for meeting the needs of poorer and more vulnerable countries.
This is why bilateral grant funding and donor generosity in replenishing multilateral concessional funds like International Development Association (IDA) and African Development Fund (ADF) are so important. It’s also why some would prefer a “grant equivalent” goal, which would be smaller, but more transparent on the true value of the finance.
The poorest and most vulnerable countries also care about what proportion of the finance is for adaptation. The adaptation finance goal within the $100 billion was previously doubled from $20 billion to $40 billion a year. One option would be to double it again to $80 billion. While $80 billion may not seem like a “balanced” amount of a $300 billion overall goal, if it were mainly grant and highly concessional finance, the “grant equivalent” would be more balanced.
Least developed countries (LDCs) and small island developing states (SIDS), in particular, call for greater ease of access to international climate finance, with different concerns about the length, complexity and bureaucracy of the funding process, which is often made worse by the creation of yet more new funds. An agreement that improves this situation will be important.
Finally, many countries are looking for the new climate finance agreement to send a signal on debt. With nearly 40 countries now in or at the risk of debt distress, high repayments mean they have little domestic finance left over to invest in climate action, and no space to borrow more externally. Cross references could be made to the Expert Review on Debt, Nature and Climate and other processes examining how to take a more comprehensive approach to debt restructuring and relief.
Securing a New Climate Finance Agreement at COP29
COP29 can mark a pivotal moment in global climate finance by acknowledging that total needs of developing countries are over $1 trillion and committing to at least triple the amount of what will be provided and mobilized by public finance. The financial commitment could be even higher if countries are willing to bank on future political agreements in other fora, such as through capital increases and solidarity levies.
If the new climate finance goal is tripled, it would still leave a gap between the amount provided and mobilized and what’s needed to meet the $1 trillion+ need. It also would say nothing about the purely private flows within the $1 trillion, over which the COP has no authority. The agreement could cross-reference processes outside the UNFCCC that need to tackle those wider financial system and domestic public policy reform issues and help close that gap. Agreements outside the COP on effective delivery of public, private, domestic and international finance will be equally critical to turning climate finance into impact on the ground.
But importantly, a strong new climate finance goal would provide much-needed momentum to accelerate meaningful climate action that benefits both people and planet.