EU climate finance needs common rules

It needs more climate finance for adaptation to climate change, e.g. for water treatment facilites like here in the Sunderbarns, Bangladesh. Photo: Sabine Minninger, BfdW

Under the Paris Agreement, the industrialized countries pledged to provide USD 100 billion a year from 2020 onwards to help the poorest countries weather the climate crisis. A new study on behalf of ACT Alliance EU shows that the European countries are unlikely to keep their promise. The study “Setting the Standard” evaluates 2018 data reported by countries to the EU, the Organization for Economic Cooperation and Development (OECD) and the United Nations (UN) in 2019. It shows that the EU states are not meeting their obligations – and highlights some deficits in German climate finance.

EU climate finance reporting overstates the numbers

Climate finance should be new, additional and increasing. However, growth in climate finance over the last few years has been significantly too low. While total climate finance from the EU and its member states came to a total of EUR 23.2 billion in 2019 (around USD 27 billion), the EU’s fair share of the USD 100 billion should be between USD 33 and 36 billion (see study, p. 5).

Only a few EU member states, such as Denmark and the Netherlands, meet the expectations of the poorest countries and allocate funds for climate finance as grants. By contrast, Germany, France and Spain mostly provide climate aid in the form of loans, in some cases even at normal market rates. This is unfair because loans have to be repaid by the recipient countries. In addition, at least in the case of non-concessional loans, the donor countries earn money on the loans, and they can lead to higher indebtedness in the poorest countries. Those loans should therefore not be reported as climate finance at all. Even in the case of concessional loans, only the grant equivalent, i.e. the non-repayable share, should be reported in accordance with the new OECD guidelines. When applying these terms for the crediting of grant equivalents in official development cooperation to the data that the EU member states reported to the UN for 2018, total EU climate finance falls to a mere EUR 11.6 billion. In other words, only half the amount represents genuine climate aid.

The study also analyzes genuine climate aid as a share of gross domestic product (GDP) as an indicator of the efforts made by the EU and EFTA states relative to their individual productivity and prosperity. In 2018, only three countries allocated more than 0.1% of their GDP to climate finance (Sweden, Norway and Germany), and no country reached 0.2%. Belgium and Austria provided only 0.02 percent of their GDP. Others do even worse, such as Portugal with 0.0008 percent of its GDP.

No balance between adaptation and mitigation

Although the Paris Agreement states that a balance should be struck between climate finance for adaptation and mitigation measures, most funding goes to mitigation projects. This is particularly tragic for the poorest and most vulnerable countries, which are in dire need of assistance in dealing with the climate crisis. The imbalance is in part due to the high proportion of loans for mitigation projects.

Lack of common rules

According to UN agreements, climate finance should be “new and additional” to development cooperation. This was stipulated to ensure that combating climate change would not undermine other development cooperation efforts and exacerbate budgetary disputes. The United Nations had set itself the goal of the industrialized countries using 0.7 percent of their gross national income (GNI) for official development assistance (ODA). Officially, EU member states recognize the need for climate aid to be new and additional to ODA. However, since only a few countries have met the 0.7 percent target to date, climate aid is mostly not additional. Sweden is a happy exception: The country only reports funding as climate aid that goes beyond its commitments for development cooperation.

Other countries have a variety of arbitrary ways of defining their understanding of “new and additional”. There is currently no common definition. Germany only reports climate finance that it has not previously reported. One should, however, be able to take for granted that the same funds will not be reported twice. This does not automatically mean that German development finance will decrease as a result of this unusual accounting method, and that vital development programs will no longer take place. However, if Germany were to apply the Swedish method, German climate finance would no longer exist because Germany does not meet the ODA quota.

Recommendations to policymakers

The following recommendations emerge from the study:

1. The EU, its institutions and member states, as well as the EFTA countries, must more than double their contribution to climate finance.
2. Grants must increase relative to loans and, most importantly, more climate aid must be made available to the poorest countries. In addition, donor countries should report only the grant equivalents from concessional loans as climate finance to the UN by applying the new OECD guidelines.
3. Countries should allow their contribution to climate aid to increase in a fair proportion to their GDP.
4. The industrialized countries should strike a balance between providing climate finance for adaptation and mitigation projects. The area of adaptation in particular is still severely underfunded and will need to grow dramatically with the increasing challenges of climate change.
5. UN member states should agree on a common definition of “new and additional” climate finance so that climate aid is additional to development finance and does not end up cannibalizing it. Climate finance can only be “new and additional” if it is truly additional to the ODA quota.

Sabine Minninger / Brot für die Welt

Further reading: This text is based on a German article published by Brot für die Welt. The ACT Alliance study “Setting the Standard” can be found here.