At COP28, climate finance takes centre stage

More than any previous year, this year’s UN climate conference, COP28, is likely to be judged on its ability to deal with climate finance. The hosts, the United Arab Emirates (UAE), have implied this already in their stated aims for the summit, which rest on the four pillars of i) fast-tracking the energy transition; ii) fixing climate finance; iii) focusing on people’s lives and livelihoods; and iv) full inclusivity.

All of these are either directly related to climate finance, or can only be achieved by delivering climate finance properly. No longer can climate finance be considered a stand-alone issue. It is central to achieving almost all goals on the climate agenda. This is not just limited to the formal negotiations at the UN climate summits, but also deliberations outside the COP as well.

The programme for this year’s COP underlines the importance that the UAE is placing on the topic of climate finance. A tradition developed in previous COPs is to have a day dedicated to issues of key importance, and 4 December 2023 has been allocated to discussion of climate finance. Even more importantly, finance has been listed as a cross-cutting theme for the full duration of the two-week COP. This aids in providing momentum for action on finance outside the official negotiating rooms.

Fix climate finance by making it more affordable and accessible

One of the great failures of climate finance has been that of developed countries to furnish the USD 100 billion per year by 2020 that they promised to developing countries back in 2009 to support climate action. But this number pales in comparison to what the latest research tells us is needed.

A report on global climate finance released on 2 November 2023 by the Climate Policy Initiative (CPI) estimates that overall climate finance flows have increased to USD 1.265 trillion per year, compared to an estimated need of USD 10 trillion every year from now until 2050. Worse for developing countries, much of this finance is for mitigation, not adaptation, which moulders at about USD 63 billion per year, far less than the USD 212 billion the CPI estimates to be needed for adaptation. The report states that, “China, the US, Europe, Brazil, Japan, and India received 90% of increased funds,” leaving out most of the developing world.

The stakes could not be higher. The CPI report estimates that keeping global warming to within 1.5 C above pre-1850 levels, versus a business-as-usual scenario, would save the world USD 1,266 trillion in loss and damage from 2025 to 2100. COP28 has to deal with this now, as the New Collective Quantified Goal (NCQG) has to be agreed to before 2025. This will supersede the USD 100 billion commitment, but little progress was made on this at COP27, so pressure is mounting.

As diplomats pore over text during the two weeks of COP28, looking to make substantive progress on the NCQG, the presidency is also calling for a new climate finance infrastructure to be built simultaneously outside the formal negotiations. International financial institutions, the private sector and governments are all being coaxed into aligning global and domestic financial flows with the world’s goals of reducing greenhouse gas emissions and increasing resilience to climate change.

Supporting a transformational shift of the current financial system will only make sense for developing countries if these changes make affordable finance available and accessible; if they support investment in new jobs and new industries; if they are geared towards increasing their appetite for risk; if they are open to introducing non-debt instruments; and if they take into consideration the need to cope with climate shocks such as flooding, droughts, and sea-level rise. Anything short of that is rich countries exploiting the situation even further.

Expect mitigation finance to come in different shapes and sizes

Fossil fuels alone – coal, oil and gas – account for over 75% of global greenhouse gas emissions. While the UAE presidency looks to focus on goals such as tripling renewable energy capacity globally, doubling hydrogen production and transforming agriculture systems, how it strikes a balance with growing developments outside the COP28 agenda will lay the foundation for mitigation finance.

Although reduction or phase-out of fossil fuels is still a topic for negotiations under the formal COP agenda, two years ago on the sidelines of COP26 hosted by the United Kingdom, the first Just Energy Transition Partnership (JETP) was announced. A new financing cooperation mechanism, the idea is to support a just energy transition for a selected number of heavily coal-dependent emerging economies, involving an overhaul of their respective energy systems in an inclusive and equitable manner.

South Africa became the first such country to enter a JETP, with a tailored USD 8.5 billion funding agreement with France, Germany, the United Kingdom, the United States, and the European Union. Indonesia, Vietnam and Senegal are also in line to launch their own JETPs. Multilateral development banks and development finance agencies have joined the pool of bodies offering financial support.

The negotiations inside the formal COP around mitigation finance are slow, as they involve more than 190 countries agreeing on who needs to pay for what, under what terms and conditions. In the case of JETPs however, the unspoken hope is that since this model involves a relatively smaller number of stakeholders, it may be able to progress much faster outside the UN climate talks, where major gas- and oil-producing countries easily challenge such proposals. Unfortunately, South Africa’s experience with its JETP has been a difficult one, and the JETP itself was principally in the form of loans, which added to the country’s debt. This will not be an attractive proposition for developing countries.

Put lives and livelihoods first

Beyond helping developing countries to access finance for their energy transitions are the thornier issues of climate adaptation and loss and damage. Developing countries have a very simple demand: double adaptation finance by 2025 so that they can cope with the floods, droughts and disasters that climate change is forcing upon them.

This comes together with the expectation that the Loss and Damage Fund will be operationalised this year. This fund was established at COP27 despite extreme opposition from developed countries. Support from the fund is to kick in when adaptation measures fail, and countries are hit by climate catastrophes that are beyond their capacity to manage. The pressure on this front is equally high, as needs are expected to reach USD 671 billion annually by 2030, whereas current funding for loss and damage stands at less than USD 500 million per year, a pittance.

The UAE presidency’s aim is no less ambitious than aspiring to set the foundation for a finance system of the future. While this is no small goal by itself, the hosts will also have to deal with the outcomes of the first-ever global stocktake, which will conclude at COP28. This process, designed under the Paris Agreement to assess the global response to the climate crisis every five years, does not bring good news: science says global emissions must fall 43% by 2030 if we are to keep temperature rise below 1.5 degrees, but data suggests emissions have instead increased instead by 16% since 2010.

To address the massive wedge between requirement and delivery, between aspiration and grim reality, Sultan Al Jaber, president-designate of COP28, is talking about a major course correction. “We are not shying away from energy transition; we are running towards it.”

In only a couple of months, we will be able to judge whether he has succeeded.

Image: Frank Peters / Alamy