COP26: Ka-ching?

Did the climate conference deliver on climate finance? Photo: www.flickr.com

As so often in the past, climate finance was one of the key issues fought over until the very end at this year’s UN Climate Change Conference COP26 in Glasgow. The most important results at a glance:

The $100 billion promise

For years, industrialized countries had claimed to be on track to keep their 2009 pledge to increase financial support to poorer countries to $100 billion annually by 2020, and then to maintain that level – as agreed in Paris in 2015 – through 2025. In 2019 the level reached was not quite $80 billion – based on a very generous accounting method that allows donor countries to significantly overstate the climate relevance of funded programs, thus enhancing the figures. The target of $100 billion was almost certainly missed in 2020 (official figures will not be available until next year), and the same is likely to be true for 2021.

Just in time for the COP26, the industrialized countries presented their ‘Delivery Plan‘, which, based on new commitments from several industrialized countries, estimates that the annual level of $100 billion will be reached by 2023. The COP26 acknowledged the plan, but not without expressing its deep regret that the industrialized countries had not kept their original promise. Due to their resistance, the COP26 failed to commit the industrialized countries to reaching an average of $100 billion per year over 2020-25, so that the shortfall in earlier years would be offset by over-achievement in later ones – even though this really only reflects the substance of the pledge they gave in 2009 and expanded in 2015.

At least there were further commitments at the COP26 (here is the official overview), some of which have not yet been taken into account in the Delivery Plan. So it is possible that the $100 billion mark will now be reached before 2023, but it is not certain because the Delivery Plan works on assumptions about mobilizing private funds that are not backed up by specific commitments from countries.

Financial support for adaptation

For years, poorer countries severely affected by the climate crisis in particular have complained that only a small proportion of climate finance is being made available for adaptation to climate change. In 2019 this share constituted about a quarter of the funds allocated. The COP26 has now called on the group of industrialized countries to double the funds for adaptation by 2025 compared to 2019. Formally, it is an appeal, but since the industrialized countries have co-sponsored this appeal, it ultimately amounts to a collective commitment. In a further resolution, each industrialized country is called upon to significantly increase or double its funds for adaptation.

In parallel, there were individual pledges from several countries for the Adaptation Fund totaling $356 million, as well as $413 million for the Least Developed Countries Fund. While these are considerable sums for the two funds, they must of course be seen in the wider context of the $100 billion pledge. In addition, the pledges are generally one-time and not multi-year commitments, which further limits the planning security of the funds. For the first time, the United States has also contributed to the Adaptation Fund – this was previously impossible because the Fund was part of the Kyoto Protocol. Germany also pledged funds: €100 million for the Least Developed Countries Fund (LDCF) from Federal Ministry for Economic Cooperation and Development (BMZ) resources, and €50 million for the Adaptation Fund (AF) from Federal Ministry for the Environment (BMU) resources. Both instruments have become established, and the continued support from the ministries in their tandem effort is strengthening Germany’s standing in the negotiation process.

In addition, a steady (albeit probably limited) flow of financial resources could arise in the future if countries invest in climate protection projects in other countries under Article 6 of the Paris Agreement in order to offset the achieved climate protection against their own goals. However, the potential contribution to adaptation finance from carbon markets has been diminished by the fact that – contrary to clear demands – intergovernmental trade under 6.2 contributes to adaptation finance only on a voluntary basis. The United States opposed mandatory contributions, interpreting them as taxation that would require congressional approval. The Glasgow decision at least provides that a fee of five percent levied on emissions certificates traded under the 6.4 mechanism is to be paid into the Adaptation Fund.

New target for climate finance from 2025

The COP26 achieved a passable, albeit not very ambitious, result in the upcoming negotiations on a new target for climate finance for the period after 2025. Following the Paris 2015 decisions, this new target is to build on the $100 billion pledge and to consider the needs of poorer countries – which is an innovation in that the $100 billion target was set as a political goal at the time, with little relation to actual support needs.

The COP26 kicked off these negotiations and technical working meetings, which are now expected to produce a draft resolution on the new target by 2024. What matters now is that lessons from the $100 billion experience be applied to the forthcoming work program – and not to repeat the mistakes of the past. It would be important, for example, to agree on what should actually count as climate finance in the sense of the new target in order to prevent creative accounting and to focus on actual support, to consider possible sub-targets for areas such as adaptation to prevent its continued underfunding, to accommodate financial support for coping with unavoidable loss and damage, and to ensure that the target (or a target matrix) also generally promotes the restructuring of global private and public financial flows.

Finance for loss and damage? Postponed despite high public pressure

The demands of the developing countries and a broad section of civil society to finally make concrete progress on the issue of finance for dealing with loss and damage were largely blocked by the industrialized countries. Toward the end of the conference, the developing countries focused their demands with the proposed resolution of a Glasgow Loss and Damage Facility (and further elaboration afterwards) under the umbrella of the UNFCCC financial mechanism. However, the COP26 presidency ultimately refrained from including the proposed resolution in the final text, which drew considerable criticism.

What was finally agreed is a vague “dialog” on the financing arrangements for climate damage, which will begin in June at the Bonn climate negotiations and will last for two years – with an uncertain outcome. However, this offers an opportunity to put the developing countries’ proposal back on the table in concrete terms and to urge the industrialized countries not to continue blocking the debate on new sources of finance and their targeted use. The Egyptian presidency of COP27 could certainly work toward a more far-reaching decision for the conference in Egypt.

There was also an interesting dynamic when the Scottish government pledged £2 million for loss and damage from climate change and a group of philanthropic organizations pledged £3 million to support a resolution for a Loss and Damage Facility. This is a small amount given the needs, but an important symbolic gesture – Scotland is leading the way as the first developed country to do so.

Redirecting finance to climate measures remains a key unresolved issue

The negotiations continue to offer little scope for discussion of the third long-term goal of the Paris Agreement: to reconcile financial flows with a pathway to low greenhouse gas emissions and climate-resilient development. Despite a separate chapter in the biennial report of the Standing Committee on Finance (SCF), it remains unclear where the world stands with respect to this goal. While there is a 1.5°C limit for climate protection and a new global target is to be discussed in the next two years for adaptation, a global target for the reallocation of financial flows is not yet in preparation. This is a serious gap with a view toward the first global stocktake in 2023, in particular because the final declaration calls for the reduction of inefficient subsidies for fossil fuels on the one hand, and on the other, far-reaching announcements were made by the financial sector outside the UNFCCC process at the beginning of the negotiations, including the “Glasgow Financial Alliance for Net Zero” (GFANZ) – a global coalition of financial institutions committed to accelerating the decarbonization of the economy. But without criteria for implementing the goal, there is no framework for effectively operationalizing these announcements.

Outside the negotiations

There have also been some relevant developments in climate finance outside the formal negotiating context, including the new partnership of around $8.5 billion in which Germany, the UK, France and the EU will work with South Africa on its transition away from coal power, or the $12 billion for forest conservation from 2021 to 2025 – both important initiatives, which, however, fall under the $100 billion pledge rather than adding to it.

What is truly interesting, however, is the joint declaration by numerous countries to end the financing of international fossil energy projects. Germany joined the initiative a week late, and only because the declaration still leaves loopholes – that doesn’t exactly speak for leadership, but Germany’s accession is important nonetheless. Regarding the loopholes, German undersecretary Jochen Flasbarth pointed to the limited and clearly defined cases of natural gas financing that are compatible with limiting warming to 1.5°C and thus with the goals of the Paris Agreement. There is, however, a lack of clarity and definition.

Takeaways for the new German government

The coalition agreement of the new government envisages not only fulfilling the climate finance pledges made by Germany, but also increasing them in the long term. If implemented as formulated, the three-way coalition government could take a genuine step forward. This would require a timely commitment on the planned increase to go beyond the current pledge to increase the annual budget for climate finance to €6 billion by 2025. At increase to at least €8 billion per year by 2025 would be appropriate. In this way, Germany would also contribute to an earlier attainment of the $100 billion target of the industrialized countries.

Just under a fifth of the current public climate finance from Germany is in the field of adaptation. The new German government should directly implement the call to all industrialized countries to double the funds for adaptation within climate finance by 2025 for Germany’s funding as well – and not to shirk its responsibility with interpretation attempts or creative accounting related to the financial resources it currently provides.

It is also to be hoped that Germany will not only play a constructive role in the forthcoming debate on the existing arrangements for financing the handling of loss and damage, but that it will show leadership. After all, the Greens had called for a dedicated fund to deal with loss and damage in their election manifesto – and future Foreign Minister Annalena Baerbock has just brought international climate policy into her ministry.

As early as during the upcoming German G7 presidency, Germany should help to close the information gap on the actual climate finance needs of developing countries. The first report of the SCF showed that there is still a lot of catching up to do. At the same time, this information is essential for the new climate finance target for the period after 2025. Germany could provide funding with G7 partners so that developing countries could compile the information over the next two years.

Jan Kowalzig, Oxfam
Sven Harmeling, CARE
David Ryfisch and David Eckstein, Germanwatch