German G7 presidency: Five areas for advancing climate finance in 2022

Germany can use its 2020 G7 presidency to advance the global climate finance agenda – in five key areas of action.

Germany’s G7 presidency in 2022 offers a unique opportunity for the (still relatively) new German government to advance the global climate finance agenda – and make good for some of the rich countries’ (including Germany’s) shortfalls of the past and after the mediocre outcome on climate finance at last year’s UN climate summit COP26.

This article is based on a joint paper by Care, Germanwatch and Oxfam, available here.

The Group of Seven (G7), comprising leading industrialised countries and historically major contributors to the climate crisis, has a particular responsibility to not only deliver its fair share in the globally needed mitigation effort but also to provide financial support to developing countries to enable their social-ecological transformation towards zero emissions while adapting to a changing climate and address unavoidable losses and damages that are increasingly threatening billions of people’s livelihoods, as the recent IPCC report on impacts, adaptation and vulnerability has highlighted earlier this week.

Against this backdrop, the G7 process in 2022 under the German presidency offers the opportunity to take important steps towards a new paradigm for climate finance, based on the actual needs in recipient countries, through people-centred and rights-based approaches, that also enable easy access and enhance gender equality, participation and a focus on the most vulnerable people and countries.

Here are five areas of action where the German G7 presidency should ensure progress during this year’s G7 process:

Meet the 100 billion goal

Ignoring an abundance of early warning signals and probably due to a lack of political will, developed countries did not keep their promise to increase financial assistance for climate action in developing countries to $100 billion a year by 2020. To soften that blow, rich countries had announced new pledges to increase finance and indicated they will reach the $100 billion level by 2023 – three years late. Other areas of concern on climate finance remain untouched, such as that much of climate finance is being provided in the form of loans, worsening debt levels in countries with already stretched budgets.

To compensate for the accumulated shortfall until the $100 billion level is reached, G7 countries should commit to ensure that this level will constitute the average over the years 2020-2025, which is anyway the only credible interpretation of the promise from 2009 and its extension agreed upon in 2015. This will require significant increases of grant-based climate finance that should be provided for people-centred, rights-based, and gender-responsive approaches. Germany, holding the G7 presidency, should lead by example and up its current pledge and increase budget allocations for climate finance to reach at least €8 billion per year by 2025 (with mobilised finance used to form loans coming on top).

Increase adaptation finance

Only a quarter of the current roughly $80 billion a year in climate finance is dedicated to supporting adaptation, way of course to achieve the agreed balance between mitigation and adaptation in the allocation of climate finance. Critical programmes on ensuring food and water security or protecting people from the worsening climate risks remain unfunded, deepening further gender and other inequalities. While at COP26 developed countries effectively committed to double adaptation finance to reach $40 billion per year by 2025, needs in developing countries are set to rise to up to $300 billion a year by 2030.

With this in mind, G7 countries should commit to lead the effort of the planned doubling of adaptation finance. They should also, with Germany leading by example, present concrete steps how to collectively and individually achieve the doubling – and more, with a view to achieve a share of 50 per cent of their climate finance by 2025, through increasing grants-based adaptation finance and prioritising the most vulnerable countries and people, particularly affected local communities and marginalised populations.

Enable (partnerships for) just transitions

Despite the worsening climate crisis, public finance for fossil fuels by the G20 and the multilateral development banks stood at $63 billion a year on average over 2018-2020, two-and-a-half more than finance available for renewable energies. Following the actions at last year’s G7 and G20 summits to end international finance for (unabated) coal, last year’s COP26 saw all G7 countries except Japan, join an initiative to end public finance for all fossil fuel projects that are inconsistent with the Paris Agreement’s 1.5°C limit. While this is an important step, it now needs to be strengthened and acted upon. This includes closing the existing loopholes and expanding the scope of the commitment but also must be accompanied with increasing overall climate finance for mitigation to support just transitions towards renewable energies in developing countries. A key approach would be dedicated climate and energy partnerships between developed countries and developing countries – such as the newly established partnership with South Africa.

Germany should now use its G7 presidency to ensure the G7 commit to ending all forms of public finance that both directly and indirectly extend or even expand the use of fossil fuels, and to advance this agenda in all other relevant for a, including in the G20 process and other forums such as the Organisation for Economic Co-operation and Development (OECD), and also use their voting power to end such finance in all financial institutions in which they are shareholders. Beyond ending fossil fuel finance, G7 countries should also commit to setting up adequately financed climate and energy partnerships with emerging economies and developing countries for participatory and democratically-owned just transitions, based on local expertise and needs and respecting the rights of affected people.

Provide finance for loss and damage

The recent IPCC report on impacts, adaptation and vulnerability highlighted the dramatic course the climate crisis is increasingly taking, with unavoidable losses and damages threatening the lives and livelihoods of billions or people, worsening food security, eroding development prospects, or destroying cultural and societal heritage. Estimated financial costs of such losses and damages in developing countries may rise to $290-$580 billion per year by 2030   . G7 countries have made incremental steps forward, on managing climate-related disaster risks, such as through the InsuResilience Global Partnership that aims at enhancing insurance coverage in developing countries. Yet, support remains woefully insufficient, including for slow-onset processes where insurance is not a viable option. For years, rich countries have rejected calls from developing countries to establish suitable mechanisms to provide urgently needed financial support to address, and recover from, loss and damage.

After the meagre COP26 outcome that did little more than to launch a dialogue to investigate existing arrangements on loss and damage, the G7 could use 2022 to demonstrate leadership and rebuild trust with the vulnerable countries. The G7 should clarify early on that they expect said dialogue to result in enhanced arrangements, including the establishment of a suitable mechanism or facility to channel needed financial support for addressing loss and damage as one element of a global protection system that would comprehensively address the various aspects of support needs on both rapid-onset and slow-onset processes leading to loss and damage, also including pro-poor  climate risk insurance approaches, social protection schemes and other suitable arrangements. Obviously, the G7 should also signal that they are ready to commit adequate additional finance for loss and damage. Germany, holding the G7 presidency, should lead by example and commit one billion Euros as a start-up contribution, to initiate a global pledging round for a global protection system on loss and damage.

Ensure a needs-based post-2025 goal

COP26 launched the negotiations on a new collective climate finance goal for the period after 2025 that, as was decided in 2015, would build on the (unkept) $100 billion promise by rich countries, but be notably different insofar as it would be based on actual needs of recipient countries. This offers a huge opportunity to greatly improve the system of providing and mobilising support underpinning the $100 billion promise, both in qualitative and quantitative terms. 2022 will see some more in-depth technical work on various aspects of the new goal, with a view to adopt the new goal by the end of 2024. Until then, negotiations will have to touch on the scope, nature and structure of the new goal as well as identify needs in developing countries not least to inform the level of ambition inscribed into the new goal.

While deliberations on the new goal take place under the Parisa Agreement, this year’s G7 process could be used to signal high-level support for the process and build trust by recognising some necessary aspects of the new goal. For instance, other than the $100 billion promise, the new goal will have to cover the area of addressing loss and damage, alongside the areas of adaptation and mitigation. Also, to address area-specific needs not only on scales but also on financial instruments, channels of distribution and access, the G7 should signal their readiness to consider setting sub-goals as needed (e.g. for grant-based adaptation finance) and adding qualitative aspects to the emerging goal-matrix, including on removing existing barriers for accessing finance and implementation. Obviously, the G7 would do well to early recognise that they, and other developed countries, will have to provide their fair shares in assistance to developing countries under the new goal, consistent with Articles 9.1-9.3 of the Paris Agreement and ensuring that countries contribute to climate finance based on their responsibility for causing the crisis and their respective capabilities to act.

On all items raised above, a successful outcome of this year’s G7 process will require that all relevant minister configurations – development, foreign affairs, environment, and finance – actively address these areas in their consultations. Germany, holding this year’s G7 presidency, has a particular responsibility for initiating the deliberations, but since much of the above will require on-going work, the G7 should agree on taking stock of progress towards their commitments and actions in their 2023 and 2024 work programmes.

Jan Kowalzig, Oxfam
Laura Schäfer & Vera Künzel, Germanwatch
Sven Harmeling, CARE

Further reading: G7 in 2022: Five areas for advancing climate finance, Policy brief by Germanwatch, CARE and Oxfam (PDF).