CRISPIAN OLVER: What next after the ‘finance COP’?

This year’s 29th UN climate change conference, COP29, ironically hosted by the petrostate Azerbaijan, was billed as the “finance COP” because it was scheduled to adopt a new global goal on climate finance called the new collective quantified goal.

The most recent goal, adopted as part of the 2015 Paris Agreement, aimed to mobilise $100bn annually by 2020 (the target was only reached in 2022, with some creative accounting). In the Paris Agreement it was agreed that a new global goal on climate finance would be developed for 2025-35. 

Negotiations at COP29 were always going to be difficult. Global economic conditions remain fragile, with low growth outside the US economy and persistent debt overhangs from the Covid-19 pandemic. Emerging markets and developing economies are in particularly strained circumstances, with a high cost of capital, unsustainable debt burdens and limited fiscal space.

Climate finance is concentrated in developed economies and China, and in mitigation rather than adaptation. Private finance is also primarily delivered in the form of debt and most financing remains in its country of origin. The financial constraints mean that, outside China, developing countries are missing out on the investment bonanza in clean energy. 

At COP29 battle lines were drawn between developed and developing countries. The former wanted to limit demands for new grant finance, push more of the burden onto debt markets and expand the contributor pool to include large economies such as China and Saudi Arabia. Developing countries wanted an expansion of the finance target, which they argued should be based on need, with the focus on grant finance provided by the historically defined group of developed countries. They also pushed for proportionally higher allocations to adaptation finance and strong autonomy for recipient countries to pursue their own development strategies.

There is a wide divergence of estimates of need. Totalling up the investment requirements to 2030 in countries’ nationally determined contributions (a country’s plan for cutting emissions and adapting to climate change), it works out to between $455bn and $584bn per year for mitigation and an additional $215bn-$387bn for adaptation. These figures are most likely an underestimate.

The Independent High-Level Expert Group on Climate Finance set up by the COP26 and COP27 presidencies estimated that $2.4-trillion was needed per annum for climate and nature-related investments, with the largest share ($1.5-trillion) going towards energy transition investments. While these numbers are enormous, climate finance flows have more than tripled over the past decade, reaching $1.3-trillion in 2021/22, about 1% of global GDP. 

In the end, the COP negotiators settled on a two-level architecture for the climate finance goal, acknowledging a broader investment need that was to be “mobilised” while committing to a smaller quantum of public finance that was to be “provided”.

Actors were “encouraged” to work towards scaling up private investment to reach $1.3-trillion per annum by 2035. This was the number SA and other developing countries were advocating as the climate finance target, so its acknowledgment in the text is important, even though the actual amount of funding to be raised through development assistance is orders of magnitude smaller. 

The core figure for the New Collective Quantified Goal is $300bn per annum by 2035, the amount of climate finance that developed countries will stump up from a wide variety of sources, including public and private, bilateral and multilateral, as well as alternative sources, such as carbon markets.

The actual grant or grant equivalent component of this figure is unclear. The quantum was kept out of the negotiating text until the final stages, and developing countries were deeply unhappy with the amount. The Small Island Developing States and Least Developed Countries staged a walkout over the issue, and a number of countries made statements of unhappiness to the plenary after adoption of the target.

There was no change to the pool of contributor countries, but developing countries are “invited” to make additional voluntary contributions towards climate finance. 

Given the challenges with measuring and achieving the previous target, transparency and reporting were deemed integral to tracking the implementation of the goal. The standing committee on finance has been mandated to prepare a report biennially, commencing in 2028, on collective progress. 

The goal will support implementation of developing country nationally determined contributions, national adaptation plans and measures to increase ambition. Allocations will prioritise countries that are most vulnerable to climate change. There is acknowledgment that adaptation finance should be scaled up. The text also acknowledges the importance of addressing just transition aspects and “loss and damage” from climate change, but these are not explicitly included as items to be funded. 

The challenge the world faces is how to get from the “provided” target of $300bn per annum to the “mobilised” target of $1.3-trillion. The Independent High-Level Expert Group on Climate Finance had provided some guidance about how to find the required R2.4-trillion per annum. They believe about 58% of this target needed to come from domestic resource mobilisation, while 42% ($1-trillion per annum) would come from external financing. The external financing was split between bilateral and innovative concessional finance (18%), private finance (55%) and multilateral development banks/other development finance (27%). The goal acknowledges these different layers to the financing equation and emphasises qualitative aspects of climate finance.

Grants and highly concessional finance are undoubtedly needed for highly vulnerable countries with limited fiscal space. Emphasis is placed on bilateral channels and the multilateral climate funds (both of which have their challenges). Bilateral funds make integrated deals such as SA’s Just Energy Transition Partnership (JETP) difficult to negotiate, and multilateral climate funds are not particularly efficient or innovative. Yet, the goal raises access to climate finance as an important issue, to be addressed across the range of bilateral and multilateral mechanisms.

In terms of domestic resource mobilisation there are substantial barriers. Some of these can be resolved by governments through governance reforms, clear signals to investors and domestic public funding. Strong emphasis is placed on derisking and leverage to allow climate finance to go to scale, with mention made of first-loss instruments, guarantees, local currency financing and foreign exchange risk instruments. Exploration, use and scaling up of innovative sources and instruments of finance are encouraged.

The multilateral development banks have an important role to play in this system. The goal echoes the call for bigger, better and bolder development banks. There is broader mention of reform of the international financial architecture (a hot topic for the G20 this year) to enable developing countries to finance climate action, including lowering cost of capital, addressing limited fiscal space and lowering transaction costs. 

The goal emphasises country-led programmatic approaches. SA has been a pioneer in this space with our JETP, an investment plan linked to broader energy sector reforms. Other countries have been following suit, with Brazil and Columbia recently making waves with their integrated climate, nature and energy platforms. Now that the global deal is finalised, we can expect a lot more focus on country-level deals to show how the different components of the goal can work together. 

Much damage control is needed and a lot depends on what happens on the ground. This year the focus is on submitting updated nationally determined contributions that take account of last year’s global stock take and the need for far greater levels of ambition to keep global warming within the Paris Agreement targets. Some of the unresolved issues will be picked up in other multilateral processes, such as the G20 and the Finance for Development Summit in the middle of the year.

Brazil, freshly emerged from hosting the G20, will host COP30 at year’s end, which will have to weave together the different strands of ambition, finance and development and build a more positive outcome than the fractious COP29. 

• Olver is executive director of the Presidential Climate Commission.