Mixed results on climate finance at COP 27

A resumé of COP27 in Shamr-el-Sheik

Negotiations on climate finance at the COP 27 climate talks in Sharm-el-Sheikh, Egypt, in November 2022 did not produce any outstanding progress. Still, there were positive developments in the financing of climate-related loss and damage – a detailed analysis can be found here.

Little progress on 100 billion target and adaptation financing

At the moment, there are several indications that the industrialized countries will not fulfill their pledge of $100 billion a year in climate finance – a level that was actually already promised for 2020 – this year either. New financial commitments were lower overall than in Glasgow, e.g., for the Adaptation Fund (2021: $356 million; 2022: $243 million) or the climate-related Least Developed Countries Fund (LDCF) and Special Climate Change Fund (SCCF) of the Global Environment Facility (GEF) (2021: $413 million; 2022: $105 million). The specific outcomes of the COP were largely procedural. Developing countries unsuccessfully called for more substantive progress, such as concrete milestones for 2023 and an early debate on a target in the negotiations on the post-2025 New Collective Quantified Goal on Climate Finance (NCQG). The non-fulfillment of the climate finance pledge – to provide $100 billion annually from 2020 to 2025 (i.e. a total of $600 billion) – and active opposition to corresponding COP decisions continued to erode the all-important trust between the negotiating parties of the industrialized countries and the Global South. In particular, inadequate implementation – especially in the USA, but also in Australia – played a central role. A lack of clarity on how to deliver on the promise to double adaptation finance by 2025 also fueled growing resentment.

Finance negotiations were stymied in their progress by tactical motives and legal issues. Negotiators from developing countries repeatedly put the doubling pledge for adaptation finance in the Adaptation Fund agenda item, while industrialized countries did the same for Article 2.1.c) – shifting global financial flows toward low carbon and climate-resilient development pathways – in the post-2025 goal and long-term finance (LTF) agenda items. Both initiatives had failed in advance. However, the industrialized countries placed the issue of expanding the donor base on the agenda of climate finance negotiations related to the post-2025 goal – as with the discussion about financing loss and damage. In the last night, the Egyptian presidency deleted a reference to the broader donor base from the final documents without consultation. But the debate over whether to stay with the present donor base in future – for example within the framework of the new climate finance target or with regard to finance for loss and damage – will certainly continue. Regarding the doubling of adaptation finance, the Standing Committee on Finance (SCF) has now been asked to prepare a report on this.

Role of the private sector gaining in importance

The United States and other industrialized countries repeatedly emphasized the role of the private sector in the negotiations. It is clear that the Independent High Level Expert Group’s stated required investments of US $2.4 trillion for climate protection, adaptation, loss and damage and natural capital in 2025 will have to be predominantly privately financed. However, this cannot be achieved without also providing sufficient public funds to support poorer countries. Especially for adaptation and loss and damage, private funding is very limited. However, with the current constellation in the United States Congress, President Joe Biden will not be able to keep his international pledge to provide $11.4 billion for climate finance in 2024. Instead of targeting only the private sector and pushing questionable carbon market initiatives, the U.S. must find innovative ways to increase its climate finance.

Far-reaching consequences may therefore result from the increasing linkage of climate negotiations with the international financial architecture – especially the multilateral development banks (MDBs) and the International Monetary Fund (IMF), but also in relation to central banks. In the final declaration and scattered across various agenda items, the third long-term goal of the Paris Agreement under Art. 2.1.c) is more prominent than ever before in decisions. This article will be given significantly more space in future climate negotiations, even though it will not have its own agenda item for the time being. However, a dialogue format is now dedicated to the article: It will be at the center of a work program on Just Transition, and the Standing Committee on Finance (SCF) is continuing its work in this area.

For many developing countries, the reluctance to include Art. 2.1.c) as an agenda item is based on various factors. Some see the discussion of Art. 2.1.c) as the industrialized countries distracting from their obligation to provide climate finance under Art. 9 of the Paris Agreement. Others, especially oil and gas producing countries, but also those with fossil reserves that have not yet been tapped, see a danger from the implementation of Art. 2.1.c) in the diversion of funds from the fossil sectors to climate protection. The most vulnerable countries, in turn, are already seeing that global investment and financial flows are not reaching them. As a result, concerns arise that factoring increasing climate risks into investment and financial decisions is likely to increase their cost of capital, further exacerbating the problem. To address this issue with many partners, the legitimate concerns of developing countries must be effectively addressed in a package of solutions.

Outlook: new opportunities through a reform of the international financial architecture

Reforming the international financial architecture can present an opportunity to move into a new dimension in climate finance. For the first time, clear calls for MDBs and the IMF to align their vision, business model and instruments to adequately address the climate crisis emerged from the final declaration of a global climate summit. Among other things, this means increasing capitalization, adjusting the assessment of risks for climate finance, increasing focus on impact and efficiency, and adjusting operational models, channels as well as financial and risk instruments. Since the vast majority of parties in the UNFCCC process are also shareholders in these institutions, they now have a duty to actively demand such a realignment from the institutions. The procedural decisions made at Sharm-el-Sheikh must now be followed by substantial progress on the process for the new climate finance target, the fulfillment of the $100 billion pledge, and, most importantly, the work to finance loss and damage. There is plenty to do before the interim climate negotiations in June 2023. It will then be important to build the necessary momentum for the climate summit in the United Arab Emirates in the fall through measures such as a successful second replenishment of the Green Climate Fund (GCF).

David Eckstein, Germanwatch