With Loss and Damage Fund, COP27 Delivers Ray of Sunshine in a Darkening Climate Finance Sky

The continued barriers, obstacles and failings to the provision of new and additional, adequate, accessible and human-right centered climate finance as a matter of climate justice, equity and global solidarity, and thus with increased transparency and accountability for the pledged and delivered public funding provided by developed countries, were at the center of climate finance discussions at COP27. Rather than stepping up with concrete new finance commitments to developing countries, developed countries worked at COP27 in a consolidated manner to divert from their own shortcomings in fulfilling longstanding pledges and to downplay their existing responsibility under the Convention and the Paris Agreement to lead in providing necessary public financial support for climate actions in developing countries. Instead in every one of the more than a dozen separate climate finance negotiating matters, rich countries challenged what they see as an outdated understanding of the climate finance contributor base, urging its broadening beyond industrialized countries to include powerful emerging market economies, in particular China. This challenges the heart of the UNFCCC process based on ‘common but differentiated responsibilities and respective capabilities’ (CBDR-RC), in which equity demands a focus on historical responsibility of the main polluters since colonial times, unquestionable even in light of changed circumstances over the past three decades, where any financial input from the developing country side can only be voluntary, not mandated. Rich countries also pushed to place mandated climate finance provision into the context of broader financial systems reform, in which efforts would focus instead on aligning all finance flows with the ambition of the Paris Agreement as called under its Article 2.1.c.  At every possible opportunity, and this included the discourse about financing to address loss and damage, they highlighted instead the need to focus on a ‘mosaic’ of financing options and providers including in development finance and humanitarian assistance, most of which takes place outside of the UNFCCC. And they did this with high, if unrealistic, expectations placed in increasing and leveraging private sector investments.

There were only a few concrete climate finance outcomes at COP27 besides the decision to set up a Loss and Damage Fund, whose resource mobilization success is far from certain. Tellingly, these included the launch of the “Sharm el-Sheikh dialogue” on Article 2.1.c. of the Paris Agreement and the calls in the Implementation Plan for “a transformation of the financial system, and its structures and processes” for which initial action centers on the multilateral development banks (MDBs) and their ability through reform efforts “to contribute to significantly increasing climate ambition using the breadth of their policy and financial instruments for greater results.” Undoubtedly, the reform of the MDBs toward more climate-consistency of all their activities, including through an immediate stop to financial or technical support for fossil fuel activities in client countries, is necessary and overdue. However, this focus tilts the balance in climate finance discourses and provisions even further in favor of developed countries who are the MDB majority shareholders and towards climate finance that is less concessional, even for adaptation, and inaccessible on concessional terms for many developing countries classified as middle- or high-income, not climate vulnerability, such as a number of small island developing states (SIDS).

• Establishing a Loss and Damage Fund

• Pledging additional funding for loss and damage

• Operationalizing the Santiago Network on Loss and Damage

• Accounting for the US$100 billion goal

• Shortchanging adaptation finance

• Debating the scale, quality and scope of the new climate finance goal post-2025

• Supporting just transitions

• Calling for financial system reform

• Looking ahead to 2023 and COP28

Establishing a Loss and Damage Fund

What a difference a year makes. At last year’s COP in Glasgow developed countries still succeeded in derailing the joint push by developing countries and broader civil society advocacy for a fund or financing facility to address loss and damage, which was not on the formal agenda then, and instead only agreed to the Glasgow Dialogue, a multi-year talk shop, as a consolation price. However, over the course of the year the political price for developing countries for continuing to ignore loss and damage finance has risen dramatically, especially with some initial funding commitments made by Scotland, Wallonia and Denmark. Concerted civil society advocacy and constructive proposals for how such a fund could be resourced and operationalized helped, as did targeting the historic blockers of such an agreement, chief among them the United States. U.S. Special Climate Envoy John Kerry and his climate negotiators saw U.S. civil society as well as a Congressional Democratic Delegation ramped up the pressure just before COP27.

Loss and damage as a matter of climate injustice hits those countries, communities and people the hardest that have contributed little to the climate emergency and showcases the cost of delay due to a lack of mitigation ambition and adaptation support by developed countries over the past three decades, since SIDS first called for such support. In response to the growing needs of developing countries by some estimates the economic costs (not counting non-economic costs related to loss of cultural heritage or biodiversity) could be between US$290 and 580 billion a year by 2030 and would rise to US$1,132 to 1,741 billion a year by 2050. The finance ministers of the countries collaborating in the Climate Vulnerable Forum (CVF), the V20, have estimated in a recent report that the losses due to climate change impacts have eliminated one fifth of their collective wealth over the last two decades, estimated in aggregate dollar terms to amount to US$525 billion in losses.

At the end of COP27, parties not only agreed to set up a Loss and Damage Fund, but also acknowledged “the urgent and immediate need for new, additional, predictable and adequate financial resources.” The Sharm el-Sheikh Implementation Plan expressed “deep concern regarding the significant financial costs associated with loss and damage for developing countries, resulting in a growing debt burden and impairing the realization of the Sustainable Development Goals.”

Going into COP27, rich countries were on the defensive from the start after a year marked by extreme climate disasters and enormous devastation and human suffering in the Global South with drought and famine in east Africa and the unprecedented floods in Pakistan that drowned a third of the country, cost the lives of over a thousand people and likely more than US$40 billion in damages. After a 40-hour agenda fight, discussions on funding arrangements to address loss and damage were formally included in the COP27 negotiations. Developed countries’ longstanding position not to accept a funding commitment providing for compensation or liability was echoed in the clarification by the Egyptian Presidency that any outcome under this new agenda item would be “based on cooperation and facilitation,” using wording similar to the decision text on the Paris Agreement.

As a negotiating block, the G77 and China (which now represents 134 countries), which were led by Pakistan, stood firm throughout the negotiations in not accepting less than a Loss and Damage Fund under the UNFCCC and Paris Agreement as the main outcome of COP27. They presented their position for a Loss and Damage Fund with new and additional grant finance and accessible to all developing countries as an operating entity of the financial mechanism of the UNFCCC, guided by its equity principles and accountable to the COP, similar to the Green Climate Fund (GCF) and Global Environment Facility. Their stance was aided by unified civil society advocacy with escalating protest actions and a strong media focus in Sharm el-Sheikh, which made successful loss and damage funding arrangements along those lines the litmus test for failure or success at COP27. Developed countries, in contrast, did not want to set up a fund at COP27, but offered initially only a clearer work plan for the Glasgow Dialogue that would have postponed operationalization of more concrete funding arrangements to 2024 when it formally concludes. Earlier in the fall, the Maldives had introduced the language of a ‘mosaic of solutions’ to provide financing for addressing loss and damage as a way to stress the urgent need to mobilize broad action and support for loss and damage already happening. Appropriating this term, the EU and the USA used the same language to point to existing humanitarian, disaster risk reduction and development assistance, as well as existing funds or insurance-based solutions, primarily outside of the climate process, in arguing against the need for or the practicality of a new fund.

Several text versions were proposed and rejected, including one late in the conference (see text excerpts in the box above) with three proposed options, with the EU, the United States, Japan and other developed countries supporting option 3, while the G77 and China insisted on option 1, the only option guaranteeing the establishment of a new fund at COP27. The negotiations seemed hopelessly stalemated. To the surprise of many, the EU broke the negotiation logjam already in overtime with a new offer for a Loss and Damage Fund to be decided at COP 27, but with caveats and conditions, namely only accessible for the “most vulnerable countries”; funded by a widening circle of contributors to include China and other large emerging economies as well as a variety of other financing sources; and conditional on a strong mitigation outcome in Sharm el-Sheikh. This effort to divide the developing country by playing off small island states and least developed countries as those considered most vulnerable against the rest of the block ultimately failed, and the EU’s proposal was rejected by the G77 and China.

Ultimately, a last ditch effort was made with a carefully worded new proposal for a fund to address loss and damage. It was eventually approved. Its acceptability stemmed from the deliberate vagueness of some of its wording that seemingly offered a way to bridge the positions of developed and developing countries.  The decision calls for the establishment of “new funding arrangements” which include the establishment of a fund for responding to loss and damage, “for assisting developing countries that are particularly vulnerable to the adverse effects of climate change”. Satisfying developing countries, this language mirrors language of the Convention and does not per se exclude any developing country. However, in operationalizing such a fund, and in particular with the possibility of the new fund facing inadequate resources to respond to growing needs, some prioritization and ring fencing of financing for country groups considered ‘especially vulnerable’ is likely. A case in point is the experience with the allocation framework in the GCF, which safeguards half of its adaptation expenditure, a quarter of its overall resources, for SIDS, least developed countries (LDCs) and African states.

In a nod to developed countries’ insistence to a ‘mosaic’ of funding solutions and funding sources, the decision from Sharm el-Sheikh also clarifies “that these new arrangements complement and include sources, funds, processes and initiatives under and outside the Convention and the Paris Agreement” and that the process to operationalize such a fund must consider “identifying and expanding sources of funding” by “recognizing the need for support from a wide variety of sources, including innovative sources.” In contrast to the decision to set up the GCF in 2010, the last multilateral fund to be newly established under the UNFCCC, there is no similar commitment that a ‘significant share of new multilateral funding’ for addressing loss and damage will be channeled under the new Loss and Damage Fund.  Giving the ambivalent and imprecise wording on funding, the danger is real that the new fund, on which so many hopes and expectations are pinned, could chronically struggle for resources, not unlike some of the existing adaptation funds under the UNFCCC (such as the Adaptation Fund or Least Developed Countries Fund), especially if the fund’s full operationalization is not tied to a significant multi-year finance commitment by developed countries, such as through a replenishment process with grants as the sole financial inputs. There is also no clear commitment that the new fund will be an operating entity of the financial mechanism of the UNFCCC and Paris Agreement, similar in status to the GCF and the GEF. Instead, the wording leaves the option open that the fund could be established as a separate trust fund under an already existing fund (such as the Least Development Countries Fund, which is under the GEF).

The COP27 decision establishes a 24 member ‘transitional committee’ with equitable representation by developing countries, including two dedicated seats for SIDS and LDCs each (for 14 of the 24 total seats), which is tasked with providing recommendations for operationalizing the funding arrangements and the new fund to be adopted by COP28 and CMA5 in November 2023. The transitional committee (TC), supported by the UNFCCC Secretariat, will hold at least three meetings, with the first to be convened no later than the end of March 2023. Its work is also to be informed by the 2^nd session of the three-year Glasgow Dialogue in June 2023, which is supposed to focus on the operationalization of new funding arrangements and the establishment of the fund. Additionally, the UNFCCC secretariat is requested to conduct two workshops in 2023 on addressing loss and damage and including a diversity of institutions as participants and to prepare a synthesis report on existing funding arrangements and innovative financing sources relevant for addressing loss and damage.

The terms of reference for the TC are more sparing than those of the transitional committee for the GCF more than a decade ago, which undoubtedly served as inspiration for the G77 and China in suggesting a similar process for the Loss and Damage Fund. It would be advisable to apply some lessons learned from that earlier experience, such as the importance of an open, inclusive and transparent process allowing for the meaningful input and participation of civil society observers and the importance of support by technical experts guided by the best available science in what will be an invariably political process. It is likely for the TC to struggle with adopting recommendations by consensus as required on what could be diametrically opposed visions and priorities for a Loss and Damage Fund by its developed and developing country members, including with respect to its scale, accessibility and its role in a wider and still emerging loss and damage finance landscape.

The COP27 decision references this wider landscape by inviting the UN Secretary General to bring together leaders of international financial institutions (IFIs) and other entities considered relevant (and presumably including private sector actors such as insurance and reinsurance providers) to identify “the most effective ways to provide funding” to responds to needs in addressing loss and damage. Next year’s Spring Meeting of the World Bank and the International Monetary Fund (IMF) is proposed as an important date to consider a possible contribution of IFIs to the broader funding arrangements that should include new and innovative approaches. These could range from thinking about using the IMF’s unused pool of reserve currency in the form of Special Drawing Rights (SDRs), to debt relief or a broader use of guarantees.

Pledging additional funding for loss and damage

Already during COP27 it became clear that developed countries see the new Loss and Damage Fund as one important piece, but not even necessarily as the cornerstone of a ‘mosaic of funding solutions’, with a number of rich countries making new pledges purportedly for addressing loss and damage. Such commitments tallied more than US$300 million. However, for a number of pledges announced, such as the €2.5 million by Belgium, the NZ$20 million by New Zealand, the €10 million by Ireland, or the €60 million by the European Commission, the promised money was not new and additional, but instead ‘repurposed’ previously announced climate finance. Additionally, very little of the announced funding will be quickly and directly accessible to affected people and communities, such as through some non-governmental organizations or philanthropic foundations, which might channel a part of the Scottish and Danish loss and damage finance support. 

Instead, the bulk of the committed new funding, around €170 million provided by Germany with an additional €40 million by other contributing countries (including Denmark, Ireland, Canada, France, the USA, and Luxembourg) will go through a new initiative, the ‘Global Shield against Climate Risk’ set up by Germany and the G7 with the V20 of 58 climate vulnerable countries. It is built by updating and expanding the existing structures of the InsuResilience effort and focuses primarily on individual and sovereign climate risk insurance schemes, including subsidies for insurance premiums, and related social protection schemes for V20 member countries. Its financing structure foresees several complementary funds, namely the Global Shield Solutions Platform, which builds on the InsuResilience Solutions Fund and a Global Shield Financing Facility set up at the World Bank.  A third is the Climate Vulnerable Forum (CVF) & V20 Joint Multi-Donor Fund that promises to establish a loss and damage program utilizing the GEF Small Grants Programme (SGP) structure to make smaller funding amounts directly available to affected communities. However, it is not clear how funding committed to the ‘Global Shield’ will be proportioned between the three funding instruments, although it is likely that contributors are drawn by the possibility to earmark funding for specific purposes, such as Germany, which will target half of its ‘Global Shield’ contribution to incentivize private sector climate risk finance instruments.

There is some skepticism about both the Global Shield as well as its focus on insurance schemes with its limits in coverage of slow onset events and equity failings in placing the financial burden for protection on the victims of losses and damages. Both are seen as a possible distraction and diversion of scarce public funding from a more comprehensive funding mechanism under the UNFCCC that developing countries hope the new Loss and Damage Fund can be, especially if those developed countries, now giving willingly to the Global Shield, fail to support the full and speedy operationalization of the Loss and Damage Fund and to adequately contribute to its initial resource mobilization efforts.

Nevertheless, the COP27 decision establishing the fund explicitly welcomes the Global Shield against Climate Risk as well as the UN Secretary General’s proposed US$ 3.1 billion Early Warnings for All initiative. The latter is also reflected in the Sharm El-Sheikh Implementation Plan with its own subheading. Its goal is to protect universal coverage with early warning systems over the next five years targeting the one third of the globe, including the majority of currently uncovered Africa, by addressing global gaps and geographical blind spots in the provision of actionable climate information and data to enabling understanding of adaptation limits, provide early warning and help attribute extreme events leading to loss and damages. It is noteworthy that a number of climate funds, including the Adaptation Fund and the GCF, already provide some funding for early warning system und systematic climate observation and data generation as adaptation financing in line with their operational policies.

Operationalizing the Santiago Network on Loss and Damage

An important corollary to a decision for a new Loss and Damage Fund at COP27 is the speedy full operationalization of the Santiago Network on Loss and Damage (SNLD). This network, created in 2019, is supposed to provide demand-driven technical assistance to developing countries, including to prepare them for implementing eventually larger loss and damage finance flows, for example for actions and priorities detailed under comprehensive loss and damage needs assessments supported by the SNLD. At COP27, parties reached an agreement on setting up the SNLD, wjocj previously was little more than a website, with a secretariat hosted by an organization or network yet to be determined and governed by a 14-member Advisory Board with regionally diversified representation, with representatives from developing countries in the majority. A big win for inclusiveness and ensuring the technical needs as well as expertise and contributions of affected communities are taken into account is allowing three active non-voting participants representing the women and gender, Indigenous Peoples and youth constituencies to “actively participate in the deliberations of the Advisory Board”, which will make decisions by consensus. A call for proposals to host the SNLD is to be issued by the end of 2022, inviting a single organization, or a consortium of partner organization with “broad regional presence”, a “track record of facilitating technical assistance and building capacity” and with “strong networks across communities of practice, including development and humanitarian actors” to apply. It is rumored that the United Nations Office for Disaster Risk Reduction (UNDRR) is considering throwing its hat in the ring.  An evaluation panel, including with members from the Warsaw International Mechanism (WIM) Executive Committee and the Climate Technology Centre and Network (CTCN) Advisory Board, will suggest the three best candidates, with the winner to be approved by the subsidiary bodies at COP28. The choice of secretariat host for the SNLD will matter not only for the operational and policy directions that the SNDL will take, as it develops the policies, procedures and guidelines for its functioning under the guidance of Advisory Board, but because the host organization will also appoint the director of the SNLD, subject to the approval of the Advisory Board.

At COP27, several countries, including Austria, Canada, Spain and Luxembourg, included smaller amounts for the SNLD in their pledged funding for addressing loss and damage. While welcome, it is clear that more is required to respond to the expected demand for loss and damage technical assistance and capacity building. However, developed countries should not attempt to sell additional funding commitments for loss and damage technical assistance as a substitute for not contributing substantially to the new Loss and Damage Fund.

Accounting for the US$100 billion goal

Several parallel discussions and negotiations during COP27 focused on accountability for the fulfillment of the annual goal of US$100 billion in climate finance jointly mobilized by developed countries by 2020, which was set already in 2009 as a political, not needs-based, target. Chief among them is the process under the long-term finance (LTF) work program, which at COP26 last year was extended until 2027. Given the two year time-delay in reporting and verifying climate finance data this is aimed to ensure full accountability for financial provision by developed countries under this commitment up to and including in 2025, after which a new collective quantified goal (NCQG) is to take effect. 

Already set as a political agreement in 2009, the US$100 billion goal has yet to be met in 2022, although the extent of the gap in delivery is under dispute. This is due in substantial part to a lack of a uniformly accepted, multi-lateral definition on climate finance, resulting in different accounting methodologies and reports with diverging numbers.  For example, a recent OECD assessment of climate finance self-reported by developed countries showed that they provided US$83 billion in 2020, two thirds of it for mitigation and more than 70 percent of the public finance provided as loans, including increasingly as non-concessional finance through MDBs. Those numbers are questioned by a recent Oxfam analysis, which claims that given substantial mislabeling and over-reporting by developed countries under the OECD tracking system the actual amount delivered could be much lower, potentially as low as only a third. Numbers compiled by the UNFCCC’s Standing Committee on Finance (SCF) in its first US$100 billion progress report and its now 5^th Biennial Assessment (BA) report on climate finance flows, relying on preliminary data for 2019 and 2020 of Annex II countries mandated reporting to the UNFCCC, differ yet again. They show public climate finance flows to developing countries reaching around US$40 billion on average, with UNFCCC funds and multilateral climate funds channeling US$3.5 billion in 2020 (mainly through the Green Climate Fund, GCF) and US$33.2 billion provided by the MDBs attributable to developed countries.

Public climate finance flows from developed to developing countries, 2019-2020, by source, theme and instrument, according to the SCF 5^th Biennial Assessment  

Respective numbers provided in different reports don’t add up – a challenge long lamented by the SCF, which has adopted and used an operational definition of climate change since 2014 and points out in its 5^th BA, its flagship publication, that its work is a data compilation, not aggregation, as “data on international climate finance flows are compiled using various methodologies and have varying interpretations.” Acknowledging these shortcomings, Parties at COP27 requested the SCF to prepare a report for COP28 on climate finance definitions in use to inform a possible update and fine-tuning of the body’s own definition.  Nevertheless, some trends showcased by those different reports are uniform. They indicate that overall climate finance flows have increased over the past two years, disproportionally so for adaptation finance (which grew 40 percent, albeit from a low base, and now accounts for 28 percent), but also much more needs to be done to increase quality and accessibility of climate finance to ensure it reaches the poorest and most vulnerable countries and communities. They also highlight that earlier expectations and hopes for private sector finance mobilization through public interventions have fallen short.  

Developed countries have maintained that the goal could be reached in 2023 according to a progress update published just before the meeting in Sharm el-Sheikh by Canada and Germany, which were tasked in advance of COP26 last year to present a delivery plan with various ambition scenarios. Unsurprisingly, the progress update to the delivery plan focuses on efforts to scale up the mobilization of private sector finance, but also details actions by developed countries to double adaptation finance and provides an overview table of such commitments.

At COP27, developing countries, including during the High Level Ministerial Meeting on Long-Term Finance, decried the failure to deliver as a breach of promise and undermining trust in collective climate actions. This stifles their ability to make ambitious climate commitments through updated Nationally Determined Contributions (NDCs), many of which are conditional on predictable and adequate climate finance delivery, as well as the provision of the majority of finance in the form of loans as many face already unsustainable debt levels. Developed countries for their part wanted credit for increases achieved over the past years and tried to include decision language referencing a widening of the contributor base to include major emerging economies, especially China.

The COP27 decision on the LTF program “notes with deep regret” the failure of developed countries to fulfill their commitment and urges them “to fully deliver on the USD$100 billion per year goal urgently and through 2025, and noting the significant role of public funds”, also “reiterates the need for grant-based resources in developing countries”.  It does not specify, as developing countries had demanded, an aggregate amount of US$600 billion to be delivered from 2020 to 2025, which would have made up for the shortfall from 2020 to 2022, as the goal will be achieved earliest in 2023.  However, it requests the SCF to prepare biennial reports to the COP in 2024, 2026, and 2028 on progress toward achieving the goal, including by taking into account other relevant reports, while admitting that this climate finance tracking effort is complicated by “the lack of a common definition and accounting methodology in this regard”.

While the developed countries’ push to widen the contributor based failed to be reflected in the final decision language – the cover decision “urges developed country Parties to meet the goal” in “continuation of their existing obligations under the Convention” – this discourse is far from settled. It should be expected to even strengthen next year, as technical and political deliberations for setting the NCQG continue and discussions about funding arrangements for loss and damage, including the sources of financial inputs in the new fund Loss and Damage Fund heat up.

Shortchanging adaptation finance

In the Glasgow Climate Pact, the continued lack in the quantity and quality of adaptation finance provision got top billing with the inclusion of a separate chapter, which committed developed countries to double adaptation finance from 2019 levels by 2025 to US$40 billion. The expectation going into the COP27, billed as the ‘African COP,’ was that adaptation would get priority attention by the Egyptian Presidency, including with a focus on the widening adaptation finance gap at a time when impacts of climate change on vulnerable countries and communities are increasing in scale and severity. This is due to lackluster mitigation action and emissions reduction ambition, which puts the world on a minimum 2.5 degree Celsius temperature increase trajectory by the end of the century.  

OECD 2022: thematic split of climate finance provided and mobilized in 2016-2020 in US$ billion

Annual adaptation finance needs by some estimates could reach up to US$340 billion by 2030 and close to US$565 billion by 2050, significantly more than the US$24.2 billion provided in 2020 according to the 5^th BA Assessment Report. However, with the main fights on loss and damage finance and mitigation ambition, the issue languished in the negotiations, reflected in a weak decision basing progress in implementing the two-year Glasgow-Sharm-el-Sheik work program on a global goal on adaption on the development of a framework structuring inputs, including through four workshops during its second year in 2023, which fails to make the link to adaptation finance provision. A clear roadmap for doubling adaptation finance is also missing as a central anchor of its adaptation chapter in the Sharm el-Sheikh Implementation Plan. The cover decision, while acknowledging the central role of existing funds under the Convention in supporting adaptation finance support (the Adaptation Fund, the Least Developed Countries Fund, LDCF, and the Special Climate Change Fund, SCCF), calls instead only on the SCF to prepare a progress report on doubling for consideration at COP28. This falls far short of what developing countries had hoped for, with the African Group of Negotiators (AGN) having pushed even for a separate agenda item on doubling adaptation finance.

Overshadowed by the push for loss and damage financing commitments, the momentum for new adaptation finance pledges seems to have been somewhat lost in Egypt. Last year’s Glasgow climate summit saw new adaptation finance pledges by developed countries with commitments of US$356 million to the Adaptation Fund, including US$50 million pledged for the first time by the United States, and US$413 million to the LDCF. However, as of early November 2022, just about half of the pledges to the Adaptation Fund had been fulfilled, even as developed countries in Sharm el-Sheikh announced new pledges of US$232 million for the fund. The largest new contributor is Germany, which by pledging another €60 million is on track to become the largest single contributor with over US$500 million pledged since 2010. Among the 12 countries, two regions and one philanthropic organization promising new finance at COP27 is the United States, which since Glasgow has gained a seat on the Adaptation Fund Board, and announced in Egypt that it would double its (still unfulfilled) pledge from COP26. The LDCF likewise saw only US$71 million in new pledges, significantly less than last year, with the SCCF only garnering new commitments of US$35 million. All three adaptation-focused funds under the UNFCC lack predictable finance commitment, as most pledges are annual, not multi-year, and none of the three funds has dedicated replenishment processes. This compares with the GCF, the largest adaptation finance provider among the UNFCCC funds. Although technically not an adaptation fund, the GCF, which received US$10 billion in commitments under its ongoing four year replenishment phase until the end of 2023, commits 50 percent of its allocation in grant equivalent terms to adaptation measures and can act therefore with some planning security and predictability with respect to available resources.

Debating the scale, quality and scope of the new climate finance goal post-2025

Negotiations on a new collective quantified goal (NCQG) on climate finance to come into effect from 2026 and replace the inadequate politically set US$100 billion goal with a new needs-based and science-based much higher target started last year in Glasgow. A largely procedural decision set up a three-year cyclical negotiating process as an ad hoc work program, in which technical deliberations – with four planned technical expert dialogues (TEDs) per year – would be informed by political yearly high level ministerial meetings and vice versa. COP27 in Sharm El-Sheikh saw the last of the four TEDs for 2022, with a focus on improving access to climate finance, as well as the first High Level Ministerial Dialogue on the NCQG take place. These events, as well as the negotiations for a NCQG decision, highlighted the continued very divergent understanding and ambition regarding the scale or quantity, quality, scope, access features and sources of funding for the NCQG that had dominated the discourse from the beginning.

Developing countries throughout have pushed for new annual goal surpassing the trillion dollar mark with the primacy of public finance to be provided in the majority as grants codified and including loss and damage as the third distinct financing pillar in addition to funding for mitigation and adaptation actions. Developed countries, in contrast, reiterated their calls for broadening the contributor base beyond Annex II countries, putting any discourse about the scale of the new financing goal in the context of shifting all financial flows into compatibility with the long-term climate goals as expressed in Article 2.1.c. of the Paris Agreement, and overall pointed to the need to mobilize private sector investments for the bulk of needed finance. 

During the High Level Ministerial Dialogue, many developing country ministers, as well as observers, were taken aback by a controversial plan proposed by US Special Climate Envoy John Kerry, which they saw as an effort by the United States as the largest historic polluter to evade its responsibility to provide a fair share of needed public climate finance. Based on the needs of impacted developing countries and the damage caused by the US historic contribution to climate change, under a climate justice framing advocacy groups have estimated this to be up to US$800 billion until 2030.  Arguing that “No government in the world has enough money to get the job done”, Kerry proposed the establishment of an ‘Energy Transition Accelerator’ as a voluntary carbon market in which companies would purchase carbon credits to offset their greenhouse gas emissions and meet corporate climate targets generated by energy transition efforts away from fossil fuel in developing countries with estimates that this could provide up to US$139 billion in new mitigation funding. However, as pointed out by critical civil society voices and confirmed by many experts, including in a new report by the UN High Level Expert Group on the Net-Zero Commitment of Non-State Entities, an “undue reliance on the use of offsets” should not distract on the necessity of concrete mitigation action with developed countries actors taking the lead in what remains of this critical decade.

Efforts by developing countries to anchor ‘early harvest’ findings in the COP27 decision on the NCGQ, such as indicative findings from the first four TEDs on what they argued were common understandings of needs, scope, lessons learned from the shortcomings of the 2009 target with respect to improving access and the quality of finance provided, as well as improving monitoring and transparency arrangements were rebuffed by developed countries. They held the negotiation line that they were not prepared to decide on any elements of the new goal until late in 2024, when the process concludes. The NCQG decision from COP27 is therefore again largely procedural, focusing instead on the opportunity of a ‘reset’ of sorts for the ad hoc work program by aiming to “significantly strengthen” it by sharpening the focus of what many parties and observers saw as a too broad approach to the technical discussions in the first year of the process. Presumably, a new pair of co-chairs is tasked to publish a work plan for the four TEDs by March 2023, including their themes, to be held in 2023 with parties invited to submit their views on the issues that should be addressed. Continuing with an overall approach of what was widely considered open and transparent expert exchanges in 2022 that allowed for the participation of a wide range of observers in addition to Parties, their collective input via submissions is now requested on specific guiding questions in the lead up to each TED in the hope that this will lead to the “substantive progress in the deliberations” needed for 2023.  Developing countries in particular feel that this must include better representation and participation of voices and experts from the Global South and with more balanced geographical representation than in the first year of the NCQG work program, while developed countries are urging to include more private sector experts in the deliberations.

As mitigation action is delayed, climate impacts compound and losses and damages from extreme climate events grow, so do the estimates for climate finance needs in the trillions until 2030 to finance the massive economic and social transformation required to keep the possibility of limiting the global temperature increase to 1.5 degree Celsius alive. According to the 2022 UNEP Emissions Gap Report, investments of at least US$4-6 trillion per year are required.  Presented already at COP26, the first ever assessment report by the SCF on financial needs of developing countries to comply with the Paris Agreement estimated that developing countries would need around US$5.9 trillion until 2030 to implement their NDCs. These needs are juxtaposed with the actual climate finance available, including all relevant private sector investments, which the SCF’s 5^th BA calculated to amount to around US$803 billion from 2019-2020 globally, and thus to a third of what would be needed annually to limit the global temperature rise to 1.5 degree Celsius. While overall levels are rising – CPI’s tracking effort estimates climate finance mobilized in 2021 could amount to US$850 - 940 billion, which would be an all-time high – this still falls significantly short.

The cover decision from Sharm el-Sheikh notes with concern the growing gap between the needs of developing countries and the support mobilized and provided, while emphasizing “that scaled-up public grants for mitigation and adaptation for vulnerable regions, in particular sub-Saharan Africa, would be cost effective and have high social returns in terms of access to basic energy” and urges developed countries “to provide resources for the second replenishment of the Green Climate Fund while demonstrating progression over previous replenishments and in line with the programming capacity of the Fund”.  It also launches the Sharm el-Sheikh dialogue on Article 2.1.c. with two planned workshops in 2023, thus fulfilling a persistent request by developed countries, especially the European Union, to look at increasing financial flows through regulating and providing incentives to the private sector, including financial sector actors, such as through taxonomies. This is seen as crucial for the NCQG process and as a counter-part to climate finance flows mobilized and provided by developed countries under Article 9 of the Paris Agreement. Initial mapping efforts by the SCF on available information relevant to Article 2.1.c., which were presented in a report to the CMA and could inform the further discourse on the NCQG in 2023, were simply noted. This reflects that there was no uniform endorsement of the findings of the report.

Global climate finance in the context of broader financial flows

Supporting just transitions

The issue of just transitions received elevated billing at COP27. The Sharm el-Sheik Implementation Plan devotes a segment to pathways to just transition with a decision to establish a work program the details of which, such as its length, way of working and specific issues have still to be worked out by UNFCCC subsidiary bodies for adoption at next year’s climate summit, which will also host the first annual high level ministerial roundtables on just transition. This is a win for the constituency of trade unions, which has advocated for such a focused engagement by the climate body, particularly as the language highlights that the focus has to be beyond energy transition to focus also on the socioeconomic and workforce implication and be placed in the context of nationally defined development priorities while including social protection measures.  

How to finance just transitions is at the heart of the discourse. However, these broader dimensions of social support and protection have so far received less attention in financing debates, which usually center primarily around the costs of the required energy transition, one segment of the larger just transition package. Global annual energy investment needs in renewable energy until 2050 for net-zero are estimated at around US$4.5 trillion, as detailed for example in the SCF’s 5^th BA. It will be interesting to see if the 2023 SCF Finance Forum, which is on the topic of financing just transitions, will pay attention to the finance needed to support those broader dimensions, including the issue of social safety nets for workforces and communities and centrally addressing the link to the quality (grants versus loans and their concessionality) of the finance mobilized and provided for this purpose.

At COP26, developed countries touted an innovative new financing approach in support of just transitions, the Just Energy Transition Partnership (JETP), in which several industrialized countries agreed to collectively provide a targeted finance package to an emerging economy to speed up its exit from coal and to accelerate a transition to a clean energy economy.  An integral part of this model deal is a focus on a just transition by targeting economic regeneration in coal mining regions through the creation of alternative green jobs. The first ever JETP was announced by South Africa at COP26 with the United States, UK, France, Germany and the EU after months-long negotiations as a US$8.5 billion package of grants and concessional finance over the next five years. The deal was seen as a template for similar agreements with other states, such as Chile, Vietnam, India or Indonesia.

During COP27, a new JETP with Indonesia, which held the G20 Presidency in 2022, was announced at the G20 summit in Bali, which was touted as the largest individual country climate finance transaction thus far. It intends to mobilize an initial US$20 billion in public and private financing over a three-to-five-year period, using a mix of grants, concessional loans, market-rate loans, guarantees, and private investments. It centers around US$10 billion in public sector pledges coupled with a commitment to work to mobilize and facilitate US$10 billion in private investment from an initial set of private financial institutions coordinated by the Glasgow Financial Alliance for Net Zero (GFANZ), according to a White House press release on the deal.

In the meantime, as South Africa’s cabinet just weeks before COP27 approved its own JETP financing package and detailed its just energy implementation plan, criticism has become louder that the “just” part of the partnership and its focus on social transition was questionable in light of only 3 percent of the financing to be provided as grants, which will be needed to finance worker protection schemes. Instead, the JETP will add to South Africa’s already burgeoning indebtedness.

A reference to the JETPs as example of meaningful collaborative action was included in the Sharm El-Sheikh Implementation Plan as a contribution toward “deep, rapid and sustained reductions in global greenhouse gas emissions by Parties across all applicable sectors, including through increase in low-emission and renewable energy”. Noteworthy here is that the reference to ‘low-emission and renewable energy’ in the context of just transitions leaves the door open to include gas and CO2 abatement technologies such as carbon capture and storage (CCS). This reflects that efforts to anchor a commitment to phasing out all fossil fuels in the COP27 cover decision, pushed initially by the EU and India, and ultimately supported by more than 80 countries, were thwarted by the Egyptian COP Presidency, which settled the Sharm El-Sheikh Implementation Plan with language that repeats, but does not go beyond, last year’s language in the Glasgow Climate Pact.  It only refers to the need to accelerate the “transition towards low-emission energy systems, including by rapidly scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phase down of unabated coal power and phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition.”  

Worrisome in this reference are the qualifiers, which do not rule out ‘abated’ coal power, or fossil fuel subsidies deemed ‘efficient’. Climate justice activists have often pointed out that getting rid of all fossil fuel subsidies, which in 2021 according to the OECD and IEA almost doubled to US$697.2 USD billion in government support in 51 countries globally from US$362.4 USD billion in 2020 due to rising energy prices, would – together with debt cancelation – be one of the most effective ways to mobilize additional vast funding for climate actions.

Calling for financial system reform

Just weeks before the COP27, pressure on the World Bank significantly increased after its President David Malpass made comments putting his understanding of and commitment to fighting the climate emergency in doubt and raising calls for his ouster. A recent report and energy finance database by World Bank watchers details that the Word Bank Group has continued to invest in fossil fuel projects and policies totaling US$14.8 billion since the Paris Agreement was approved in 2015, with more than US$2.8 billion in the last two years alone. This follows the World Bank’s and other MDBs’ noticeable absence from Glasgow public finance commitments to end financing for coal, oil and gas at COP26. In a repeat performance from last year, the MDBs during COP27 again released a joint update on aligning their investment flows with the Paris Agreement criticized not only for its lack of ambition but also for its failure to commit to phasing out fossil fuel support. The statement touts the MDBs’ role in increasing their provision of climate finance in 2021 to reach US$51 billion to low- and middle-income countries.

Focusing on the Word Bank Group, which many observers feel lags behind other MDBs in terms of climate commitments, a group of ten major shareholders, lead by Germany and the United States, at the World Bank and IMF Annual Meetings in October pushed the World Bank to come up with a substantive reform plan to better respond to multiple intersecting crises, including by scaling up its climate finance provision, by the end of the year.  Civil society groups have similarly called on the World Bank to sharply increase climate investments and actions.

At COP27 during climate finance discussions, the reform of the international financial system, with a focus on the role of the MDBs in increasing climate finance flows to developing countries, was an often-repeated discussion point, including in negotiations on long-term finance and the NCQG. This comes in the wake of a G20 expert report on sustainable finance, which presented five core recommendation to maximize MDBs’ capacity to mobilize and provide transition finance of several hundred billion US dollars, including through more concessional lending, without threatening its financial integrity.

Calls for the MDBs to do more included the caveat by many developing country speakers with the concern that most of the MDB climate finance is currently provided as loans. They pointed out that increasing the climate finance role of MDBs would have to go hand-in-hand with increasing the concessionality of the finance they provide, especially grant support to developing countries, including those classified as high-income, as many SIDS are. From 2019 to 2020, MDBs on average provided only 15 percent of their adaptation finance, and less than 5 percent of their mitigation finance, as grants, significantly lower ratios than bilateral providers and multilateral climate funds.  With the levels of indebtedness unsustainable for the majority of developing countries, more than 37 of which are classified by the IMF as being in danger of or already in debt distress, non-debt inducing efforts to increase available finance for climate actions is a priority for most developing countries. The debt-climate nexus has resulted in increased attention for recent proposals for debt-for-climate swaps as innovative financial instruments as well as in calls for comprehensive debt cancelation as a matter of climate justice.

The 2022 Bridgetown Initiative proposed by Barbados and widely discussed in the lead-up to and during COP27, centers on expanding the availability of US$1 trillion in highly concessional finance to more developing countries through possible capital increases to the World Bank and other MDBs, an increase in their risk appetite for lending, and new guarantees for investments prioritizing the achievement of the sustainable development goals and building climate resilience in climate-vulnerable countries. While the initiative does not call for debt cancelation, it includes suggestions for debt suspension in case of climate disasters and proposes ‘re-construction grants’ for loss and damage.

Reigniting the discussion about the use of alternative sources of financing, the Bridgetown Initiative proposes the use of IMF Special Drawing Rights (SDRs), a reserve currency amounting to US$12.7 trillion currently, to finance a US$500 billion Global Climate Mitigation Trust. And at COP27, Barbados Prime Minister Mia Mottley and other leaders of small island states also reiterated calls for a windfall tax on fossil fuel companies by applying the polluter-pays principle governing the obligations of states in the climate regime to non-state actors as a way to fund support for addressing loss and damage, which UN Secretary General Guterres also pushed during the UN General Assembly in the fall.  According to some calculations, a 10 percent windfall tax would have netted US$24 billion in 2022 alone. Innovative financing instruments such as the use of taxes and levies, including on shipping, air transport or on speculative currency transactions, but also SDRs, frequently discussed more than a decade ago as alternative sources of climate finance, might see a renaissance of interest in 2023, including in the context of discussing funding arrangements for addressing loss and damage and dealing with the growing climate financing gap more generally. 

Acknowledging these discussions and calls, the Sharm El-Sheikh Implementation Plan calls on the “shareholders of multilateral development banks and international financial institutions to reform multilateral development banks and priorities, align and scale up funding, ensure simplified access and mobilize climate finance from various sources.” It encourages MDBs to “define a new vision and commensurate operational model, channels and instruments that are fit for the purpose of adequately addressing the global climate emergency, including deploying a full suite of instruments, from grants to guarantees and non-debt instruments, taking  into account debt burdens, and to address risk appetite, with a view to substantially increasing climate finance.”

Looking ahead to 2023 and COP28

With the decisions and calls for action on climate finance under the Sharm El-Sheikh Implementation Plan, what is happening outside of the UNFCCC framework over the course of the next year will fundamentally shape important negotiations and processes in the UNFCCC. This will especially affect the deliberations for the NCQG and the funding arrangements for addressing loss and damage, and with it the shape, scale, scope and significance of the new Loss and Damage Fund whose operational modalities are to be approved at COP28.  Climate finance watchers will therefore need to add in particular the upcoming Spring Meetings of the IMF and World Bank in Washington, DC in April to their calendar to see if and how loss and damage finance will be discussed, and how the IFIs respond to the call for more action by the climate community. Similarly, a climate summit to be hosted in Paris in June 2023 by French President Macron, aims to follow up on the proposals from the Bridgetown Initiative, in particular on how the use of SDRs can be accelerated. These activities are very much in line with the rhetoric about the ‘mosaic of solutions’ that was pushed during climate finance discussions in Sharm El-Sheikh.

While the necessary reform of the broader financial system and aligning all financial flows with the mandate of the Paris Agreement is important, it should not be understood as a dilution of the core responsibility of developed countries under the UNFCCC and Paris Agreement as a matter of climate justice, equity and global solidarity to urgently step up their efforts in providing  new and additional, adequate, accessible and human-right centered climate finance, with an increased focus on grant financing. This must remain the central push in the international climate finance debate moving toward COP28 under the presidency of the United Arab Emirates in Dubai. Approving the operational modalities for a Loss and Damage Fund centered around this core understanding, including through constructive engagement of developed countries in the transitional committee process to develop them, will then become, once again, a litmus test for success at the next COP.