In this fateful year of public climate financing, a quantum leap must be made

Issues of climate finance at the UNFCCC SB 60 negotiations in Bonn

What is climate financing fundamentally about? 

Climate finance is one of the most important means of implementation in the international climate process. For the implementation of ambitious climate targets, it has to be provided in an adequate, sufficient, and predictable manner, in addition to development financing or humanitarian support from rich countries to poor countries. In the Paris Agreement, all member states are obligated to make specific national climate commitments via nationally determined contributions (NDCs), which are to be updated every five years, with the aim of limiting global warming to 1.5 degrees Celsius compared to pre-industrial times in order to avert the worst climate consequences for people and the planet. However, developing countries make it clear in their climate plans that they need the financial support of industrialized countries for full NDC implementation. 

The UNFCCC stipulates that industrialized countries, which have benefited for decades, if not centuries, from the burning of fossil fuels for their economic growth and prosperity, and therefore have the main responsibility as historical climate polluters for the man-made climate crisis, support developing countries with financial resources, but also with technical and other assistance in the implementation of climate actions. This legal obligation is based on the polluter pays principle and is part of an equity approach anchored in the climate regime, according to which all 196 signatory states of the climate regime have common but differentiated responsibilities and respective according to their respective capabilities (CBDR-RC) to fight global climate change and protect the climate. In fact, the most severe impacts of climate change already affect marginalized population groups, such as women or indigenous peoples, and the countries that are least responsible for climate change disproportionally. For example, the 54 countries of the African continent with around 1.4 billion people only contribute around 4 percent to annual global emissions. By comparison, the 27 countries of the European Union, with around 448 million people, account for around 8 percent of global emissions, with Germany, with some 84 million inhabitants, being responsible for around a quarter of EU emissions. 

Why is climate finance the big issue at the climate negotiations this year? 

The COP29 climate summit in Baku, Azerbaijan, in November is labeled as the "finance COP" and is awaited with a mixture of excitement and concern, because the most important decision to be taken this year in the climate process is the decision on a new collective quantified goal on climate finance (NCQG). Since the Copenhagen climate summit in 2009, there has been an international climate finance goal stipulating that industrialized countries should support developing countries with 100 billion US dollars in climate finance per year by 2020. This is to be replaced from 2025 by the new target, which is being negotiated this year, including at the session in Bonn which just ended. 

According to the Organization for Economic Co-operation and Development (OECD), the 100 billion target was reached for the first time in 2022, two years late. However, observers criticize the fact that the majority of the funds were still only provided as loans and for emission reduction, but not for adaptation to climate impacts and not in the form of grants that do not further exacerbate the existing unsustainable debt burden of many developing countries. They are therefore calling for a significant increase in public climate finance provision as part of the new climate finance goal from 2025 onward. The quantity is important here - i.e. the total amount of money to be provided by industrialized countries to support climate protection measures in developing countries - but also the quality - i.e. that the majority of the money is provided as grants and in such a way that the most severely affected countries and population groups in particular have the easiest possible access. For example, locally-led adaptation measures carried out by communities should benefit from and directly access climate funds. Public grant support should also be provided for the losses and damages as a result of extreme weather events, which are becoming more frequent and more severe as a result of climate change and for which there is currently almost no funding.

How much money are we talking about? 

The new climate finance goal must be significantly higher than the 100 billion target that was set in 2009 as a political compromise of what was feasible and already at the time was far removed from the actual financing requirements of developing countries. Some 15 years later, the financial needs have increased massively, partly because the industrialized countries have not sufficiently met their emissions commitments and because, in view of the accelerating pace of climate change, scientists are calling for the rapid transformation of the economic and social systems of all countries and increased support for adaptation measures and to address increasingly devastating loss and damage. According to a 2020 UNFCCC report, the partial implementation of developing countries' NDCs, for which cost estimates are available alone, would cost around 1.1 trillion US dollars per year until 2030. For the most part, these cost estimates do not yet include the costs of the massive losses and damage in developing countries following extreme weather events, such as the flood of biblical proportions in Pakistan in 2022, which alone caused damage of at least 30 billion US dollars. Estimates suggest that loss and damage costs could shoot up to 400 billion US dollars per year by 2030. This is in stark contrast to the approximately 660 million US dollars pledged at COP28 in Dubai as initial funding for the new Loss and Damage Fund. When a new UNFCCC needs determination report (NDR) is presented in the fall shortly before COP29, the cost estimates are likely to be significantly higher. According to other cost calculations of climate finance needs, between 215 and 387 billion US dollars will be needed annually by 2030 for adaptation in developing countries alone and around 4.3 trillion US dollars per year in investments in clean energy globally in order to achieve the Paris climate targets. 

What are the key disagreements that are blocking the negotiations? 

With the new climate finance gaol, the future of public climate finance will also be decided this year and whether industrialized countries have a continued obligation to support developing countries. The main issue being debated is whether the contributor base should continue to be based on the fundamental principles of the UN Framework Convention on Climate Change, i.e. including historical responsibility and climate justice, or whether it should be expanded to include new contributors, particularly China and the rich oil-producing countries in the Middle East, which are still technically considered developing countries under the climate regime. At the same time, the USA in particular denies that the industrialized countries have any obligation to pay for the new climate finance goal, which it sees as a global investment target in which all financial flows to support climate measures, including developing countries’ own domestic financial efforts, are to be included. The rich industrialized countries are counting primarily on the contribution of the private sector for the necessary increase in climate financing. Although the European countries emphasize that the new climate finance goal should have a public climate finance core as part of a multi-layered structure, to which they want to continue to contribute, they see its size as limited. They also want to reserve the scarce public funds primarily for the recipient countries they determine to be the most in need, namely small island developing states and least developed poor countries, as well as for leveraging private sector investments. 

However, this fails to recognize the great climate vulnerability of many middle-income countries, with hundreds of millions of people affected by climate change in the global south. They are already suffering from unsustainable debt burden, are often already paying the rapidly rising costs of adaptation and addressing loss and damage out of their own pockets and at the price of foregoing investments targeting economic growth, development goals, and poverty reduction due to their limited fiscal space. In addition, due to their growing climate risks, they are being punished by the global financial market with ever higher costs for taking out investment loans for climate actions and sustainable development, not the least because they have to take out and repay loans in hard Western, not local, currencies.

What are the demands of civil society for the new climate finance goal? 

For civil society advocates, the demands are clear: we need a new climate finance goal that makes the quantum leap from billions to trillions, with the bulk provided from a public financing core with transfers from industrialized countries to all developing countries on the basis of historical responsibility and as a matter of climate justice. More funding is available, but must be politically prioritized. This should include redirecting climate misaligned financial flows, such as the approximately 123 billion euros for fossil fuel subsidies spent in the EU in 2022, as well as military spending, and considering new innovative taxation mechanisms, such as a wealth tax on the richest or an airline ticket levy. Funds for adaptation and for addressing loss and damage, which must be integrated into the new goal as the third distinct financing pillar, must be provided exclusively as grants in order to avoid deepening the unsustainable over-indebtedness of developing countries. Dozens of climate-vulnerable developing countries, especially in Africa and among the small island developing states, already spend more on debt servicing each year than on investments in climate actions or healthcare. Beyond the climate regime and the new climate finance target, a comprehensive debt forgiveness approach, a climate jubilee, must therefore be part of the debate on the future of climate finance. 

According to civil society, the rich countries have incurred an immense climate debt towards the developing countries, partly because they have limited their scope for economic development based on fossil fuels and have practically used up the global CO2 budget remaining if we want to limit emissions to 1.5 degrees. The rich countries in the West that industrialized early also benefit from their dominance in the international financial and economic system, including in the international financial institutions where they set the framework conditions. According to some estimates, the imbalance in the global economic and financial system in favor of industrialized countries, for example, due to unfair trade relations, the dominance of Western currencies, and excessive debt, results in a de facto financial transfer from developing countries to industrialized countries of around 2 trillion US dollars per year. This is another reason why industrialized countries must support a fair and inclusive transformation of economic and social systems in developing countries through continued and increased climate financial transfers as a matter of climate justice. 

The questions were asked by Linda Schneider, Senior Programme Officer for International Climate and Energy Policy.