International climate finance

Investing in ambition: analyzing the financial aspects of Intended Nationally Determined Contributions (INDCs)

160 Länder have submitted their INDCs to date. Photo: UNFCCC

Nationally Determined Contributions (NDCs) are a centerpiece of the new global climate regime that was agreed at COP21 in Paris, and form the foundation for the pathway toward low-carbon and climate-resilient development. By March 2016, 188 countries had submitted their Intended Nationally Determined Contributions (INDCs). The contributions of developing countries contain both unconditional measures to be realized by the countries themselves as well as conditional ones that rely on external support in the form of financing, technology transfers or the development of capacities.

While the submitted INDCs are a significant step toward avoiding dangerous climate change, they are insufficient to reach the objective of limiting global warming to well below 2°C or even 1.5°C. This implies two main challenges for the international community: firstly, to assure that all INDCs become NDCs through the ratification of the Paris agreement, and that not only unconditional components will be realized, but that the required support for the implementation of additional measures be provided. Secondly, additional ambition needs to be enabled and more stringent goals promoted to ensure the gradual closure of the emissions gap. Comprehensive financing strategies for the implementation of NDCs will play a crucial role in addressing both challenges.

Estimated financing requirements in INDCs

The nature of the measures specified in the INDCs of various countries can vary widely: 79% of all submitted INDCs contain measures that the countries intend to carry out independently. The majority of these also contain measures that require external support for implementation. Others only list measures that require external support. The required financing needs can only be estimated up to a certain point due to a dearth of information, clarity and comparability in the submitted INDCs. These lack a clear definition of time frame, base year, currency exchange rates and consideration of inflation.

It is nevertheless clear that the financing needed for measures (both unconditional and conditional) in the INDCs submitted to date will amount to more than $4.4 trillion (see Table 1).

Table 1: Costs and financial need indications in current INDCs

Challenges for the international community: promoting the financing of INDCs

Countries will need to develop comprehensive financing strategies in which both national and international public and private funding play a role in order to meet the vast financing needs for the implementation of the NDCs. The development of such financing strategies includes addressing the issue of how public finance options can be used to mobilize future private investment. At the same time, some sectors depend on public funding and have requirements that exceed domestic financing capacities – and thus need international support.

However, the INDCs have not to date indicated the share of the stated figures that represent investment requirements and for what specific purpose subsidies are needed. It is now up to each country to translate the stated amounts into concrete policies and programs that can then be financed. Such financing strategies should be developed with strong country ownership and at the same time with help from the international donor community. Clear instructions by the COP, capacity building and the sharing of experience are key elements in this regard.

The need for international public financial resources has become apparent in many INDCs, as only 13 percent of them contain measures that involve the private sector; all others plan their climate protection measures without private funding. International climate funds, and the GCF in particular, must make financing the implementation of INDCs a high priority. Bilateral cooperation is a further option for mobilizing support for NDC implementation. Donor countries like Germany should use NDCs as a basis for climate finance in order to promote targeted mitigation and adaptation measures in their partner countries. Developing countries, in turn, can present concretely planned measures in negotiations on bilateral financing or submit proposals to international climate funds.

Further development of INDCs

INDCs must not only serve the development of financial strategies, but should also provide the basis for the outstanding financing commitments from 2025 onward that were agreed in Paris. To this end, countries must have a standardized, harmonized and transparent approach to INDCs to permit precise funding needs to be determined. It is therefore important to gain a common understanding of the definition of independent contributions and to clarify whether – or to what extent – countries need international support.

Further research is also needed to examine conceptual possibilities, such as how to design an interaction of the various sources of climate finance and improve the transparency and comparability of financial aspects in the INDCs. Such efforts should be closely linked to expected developments in the drafting of the rules of the Paris agreement. In addition, case studies on the feasibility of financing of transformative mitigation measures in developing countries can serve to create a basis for the development of international guidelines.

Further reading: Investing in Ambition

This study by Germanwatch and Perspectives Climate Group analyzes the financial aspects of INDCs and intends to contribute toward defining a comprehensive financing strategy for the implementation of NDCs. It provides an analytical overview of financial issues in the INDCs submitted to date and outlines various options for financing NDC implementation.

David Eckstein, Germanwatch