International climate finance / 100 billion

EU climate finance falls short

24. September 2020

Photo: S. Minninger, Brot für die Welt

The study “Falling short: seven ways in which the EU should improve its climate support to developing countries” is based on research by INKA Consult, which provided its findings pro bono. INKA Consult’s survey covered figures on climate finance by the European Union’s financial institutions, i.e. from the European Commission (EC), which is responsible for the annual budget and the European Development Fund (EDF), and from the European Investment Bank (EIB).

The evaluations are based on figures from two EU reporting systems: The EU reports to the United Nations Framework Convention on Climate Change (UNFCCC) and to the Organization for Economic Cooperation and Development (OECD). At the Copenhagen climate summit, COP15 in 2009, industrialized countries pledged to provide the poorest countries with climate finance to help them overcome the climate crisis. Resources flowing into mitigation and adaptation projects were to increase on a yearly basis, reaching USD 100 billion in climate aid a year in 2020. The industrialized countries also committed to this goal in the Paris Agreement in 2015.

The study comes to the conclusion that while the EU can indeed demonstrate a steady increase in climate finance, a closer look at the details shows that the EU is reluctant to honor its pledges and that the climate finance provided falls short: The lack of transparency makes it difficult to verify whether promises have actually been kept and funds disbursed.

Support in the form of grants is decreasing, while expensive loans are becoming more prevalent, and with them the risk of debt arising from addressing the climate crisis. At the same time, support is shifting away from the least developed countries to richer countries. However, it is precisely the poorest countries that have the least capacity to protect themselves and are already brutally affected by climate change, even though they are the least to blame for the climate crisis.

The ACT Alliance EU study points out seven shortcomings and makes recommendations:

1. EU climate finance

While EU commitments have grown in 2018, their growth rate has slowed compared to previous years. In addition, the growth is disproportionally due to increased lending by the European Investment Bank, and these loans will have to be repaid at normal market rates. Loans account for nearly half of the total pledges of almost six billion euros that the EU listed as climate aid in 2018. Thus, only a little more than half of the total constitutes direct aid payments. Such aid payments from the European Union, provided through the annual budget and the European Development Fund, have even decreased slightly in 2018 compared to the previous year. Above all, the EU should increase aid payments in the form of pure grants, as these are particularly important for financing adaptation measures in the poorest countries.

2. The transparency problem

While figures on climate finance commitments are fully available, it is unfortunately not possible to determine whether the EU is delivering on its promises. Reports on actual disbursements are inaccessible or non-existent. A report to the UN on disbursements does not currently exist, although the EU’s 4th Biennial Report does state that it is “working towards tracking climate relevant disbursements in the near future”. For example, the EU reported to the OECD that it had pledged EUR 2.81 billion through the EC and EDF in 2018, but it was only possible to account for EUR 1.18 billion in disbursements. The EU must strive for greater transparency, and the figures must be complete and publicly accessible. This is essential if the EU is to gain credibility as a climate finance pioneer.

3. Designation of loans as aid

In its financial reports to the UN, the EU equates loans, both at normal market rates and concessional loans, with direct grants. This is unfair because loans are not gifts and must be repaid. In addition, the EU earns money on the loans at market interest rates, which can lead to higher indebtedness of the recipient countries. Non-concessional loans should not be reported as climate finance at all. In the case of concessional loans, only the grant equivalent should be reported in accordance with the new OECD guidelines.

4. Adaptation versus mitigation

Less than a third of the total commitments in 2018 went toward adaptation projects, which the poorest countries urgently need in order to adequately protect themselves. The EU financial institutions earmarked 68% of total expenditures for mitigation projects in 2018, a small increase over 2017 (67%). This unfair ratio of commitments for adaptation versus mitigation is due to reporting by the EIB, which focuses primarily on lending for climate protection projects. Grants for adaptation measures are particularly important for the poorest countries and should be prioritized by the EU institutions. Furthermore, the EU has committed to the Paris Agreement and must ensure a better balance between its pledges for adaptation and climate protection projects.

5. Recipient countries

Who receives climate finance? The share of pledges to the least developed countries decreased in 2018 (14%) relative to 2017 (20%), while the share pledged to richer countries increased from 18% to 23% over the same period. In 2018, total pledges to Turkey were greater than the support to the least developed countries as a whole. The EU must provide adequate support to the poorest and most vulnerable countries in tackling the climate crisis. Disbursements must therefore be transparent so that it remains clear which countries are the recipients.

6. Private climate finance

The study shows that the financial resources mobilized by the private sector are not transparent; the figures are only available in aggregate. The EU credits private climate finance toward the USD 100 billion climate goal, yet it is not clear how these payments are sourced and who is receiving them. In addition, private investors tend to be more interested in financing profitable mitigation projects in richer countries than adaptation projects in the poorest countries that will not make a profit. The EU should ensure that climate finance from private sources is reported in a transparent manner. Private climate finance, leveraged through public funding by EU institutions, must also comply with the UN Guiding Principles on Business and Human Rights.

7. New and additional funding

In the 2010 Cancun Agreement, industrialized countries stated that the USD 100 billion in climate finance for developing countries as of 2020 must be new, additional and increasing. In its reports to the UN, the EU considers its climate finance to be “new and additional” because the funds have not been reported elsewhere previously, i.e. they have not been counted twice. But when the EU, like all other industrialized countries, committed itself to provide climate finance, it also recognized the problem that climate change requires new and much larger dimensions of funding than conventional development finance could muster. Climate finance must therefore be “new and additional” to existing official development assistance (ODA) commitments and provided in a manner appropriate to the climate crisis. Creative accounting or shifting funds from one budget to another will not solve the problem.

Summary

Climate finance is one of the most important measures, along with the concrete mitigation of greenhouse gas emissions, for curbing the effects of the climate crisis on the poorest people and thus containing humanitarian disasters caused by climate impacts. The EU must play an important pioneering role here and set the bar high for the industrialized countries as a group. Transparent reporting and adherence to exacting and fair reporting standards are fundamental if the EU is not to lose the credibility it needs to build confidence for alliances with strategic partners from the global North and South.

Sabine Minninger, Brot für die Welt

The article was first published by Brot für die Welt (in German).

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