The 29th United Nations Climate Change Conference (COP29) begins next week. One of the critical discussions at COP29 will be about the New Collective Quantified Goal on Climate Finance (NCQG), which aims to increase financial support from the Global North to the Global South for climate actions. Several outstanding issues in climate finance must be resolved to make NCQG more effective and efficient.
There is a lack of consensus on which eligible activities constitute climate finance. The prevailing socio-economic conditions in developing countries vary, placing them at different starting points. Since their low-emission pathway trajectories fluctuate, their climate finance definitions differ from those of developed countries.
Building consensus on the definition of climate finance is crucial, but will take time. Meanwhile, developed countries should financially support those activities defined by developing nations if they align with their Nationally Determined Contributions (NDCs) rather than being pushed to follow the taxonomies of developed countries.
The United Nations Framework Convention on Climate Change (UNFCCC) considers data from the Organization for Economic Cooperation and Development (OECD) as the most valid source of climate finance. Developing countries question the legitimacy of the OECD, a developed countries’ institution, in tracking climate finance data, arguing that the institution is not independent enough to provide accurate data. Its methodology is not sufficiently transparent to verify whether climate finance flows are calculated correctly.
Additionally, the OECD relies on data provided by developed countries, which may be inaccurate. The freedom in applying the Rio marker methodology, a contestable approach for calculating climate finance, and the absence of independent reviews warrant serious attention.
The solution lies in establishing a legitimate institution or agency acceptable to developing countries that is responsible for collecting, verifying, and collating climate finance flows.
According to recent OECD data, developed countries met their $100 billion climate finance commitment for the first time in 2022, although the number is contestable. Since the commitment was made in 2009, developing countries have elevated their climate goals. Climate finance commitments must reflect the cost of technology and the adoption rate that evolves rapidly. This commitment should increase in a short time, for example, five years instead of 15, to align with the needs of developing countries.
Even if finance is mobilised, there are delays in disbursing that capital. Developing countries are often blamed for not having the appropriate institutions, governance, and processes to receive financial support. It should be understood that it will take time for developing countries to meet the governance standards of developed countries, but there is no time to wait for climate action. Cumbersome bureaucratic processes, often in the guise of borrowers not following certain governance practices, should be abandoned to accelerate the disbursement.
Climate finance is calculated based on contributions from all developed countries. This undermines the accountability of individual countries or unions of countries. Some developed countries have significantly expanded their climate budgets but lagged in supporting developing nations. Individual commitments should be made so countries hiding behind collective actions can be identified and encouraged to meet obligations.
Types of capital
Developing countries disagree that returnable or private capital, even if attributed to international public finance intervention, should be considered as support from developed countries. It is unclear how certain agencies attribute that such support made private capital flows possible for climate actions to developing countries. Furthermore, several developing countries carry massive debt, and burdening them with more debt is an improper support mechanism. In 2022, loan was 63.6 per cent of total climate finance, increasing from 49.5 per cent in 2021. Varying types of capital should be offered instead, such as grants, guarantees, and equity, which are more catalytic compared to loan.
Historically, mitigation garners the majority of climate finance; conversely, adaptation that is not commercially viable but important for developing countries does not receive the required finance. Similarly, the Loss and Damage (L&D) Fund created at COP27 is not receiving the required commitment from developed countries. As of April 2024, the total pledged amount was a paltry $792 million, whereas the expected loss and damage in developing countries due to climate change is estimated to be $290-580 billion by 2030. Climate adaptation and the L&D fund must be given due consideration.
The NCQG will be vital in bridging the financing gap for climate actions in developing countries, but outstanding issues must be resolved for transparency, effectiveness, and efficiency.
Jena is a Sustainable Finance Specialist, and Garg is Director, South Asia, at Institute for Energy Economics and Financial Analysis (IEEFA)
A legitimate institution
or agency acceptable to developing countries
must be established
for collecting, verifying,
and collating climate finance flows