New Collective Quantified Goal on Climate Finance: Existing issues must be resolved to make the commitment effective

The 29th United Nations Climate Change Conference (COP29) is less than a month away. All countries are expected to vow to meet earlier promises and set more ambitious climate targets. However, most countries’ actions do not align with earlier commitments, raising the question of how to enhance their commitment and accountability. 

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.

Agreeing on climate finance-eligible economic activities

There is a lack of consensus on which eligible activities constitute climate finance. There are more than 35 climate finance taxonomies (definitions) or variants worldwide. 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 climate finance 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. 

Establishing a legitimate institution for climate finance data collection

The United Nations Framework Convention on Climate Change (UNFCC) 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. Their 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 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. Developing countries must be adequately represented in the agency’s governance. 

The inclusion of private and returnable capital

Another issue under deliberation entails the inclusion of private financing or returnable capital in climate finance. Developing countries disagree that returnable or private capital, even if attributed to international climate finance intervention, can 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 returnable debt capital is an unsuitable support mechanism for developing countries, particularly lower-income ones. 

Ensuring climate finance commitment translates to capital disbursement

Another challenge is ensuring climate finance translates into capital mobilisation and disbursement. According to recent OECD data, developed countries met their US$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 and finance requirements. Climate finance commitments must reflect current realities as technologies' development and adoption rapidly evolve. This commitment must not be static but should increase in a short time, for example, five years instead of 15, to align with the needs of developing countries. 

Additionally, there is a significant difference between climate finance mobilisation and disbursement. 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 capital disbursement standard of developed countries, but there is no time to wait for climate action. Priorities may have changed by the time capital is received for climate actions. Cumbersome bureaucratic processes, often in the guise of borrowers not following certain governance practices, should be abandoned to accelerate the disbursement of climate finance to developing countries. 

Climate finance is calculated based on contributions from all developed countries. This undermines the accountability of individuals 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. Reporting climate finance support to individual countries will improve governments' accountability. 

Varying types of capital 

There is an emphasis on using international public finance to drive private capital from developed to developing countries. However, the leverage ratio of public capital has been poor, never crossing 1:1. Since developing countries struggle to mobilise private capital, international public finance should be catalytic instead of imitating private investors. In 2022, loan was 63.6% of total climate finance, increasing from 49.5% in 2021, when several developing countries faced a heavy debt burden. Providing loans to debt-ridden countries will not help climate action. Varying types of capital should be offered instead, such as grants, guarantees, subordinated debt, and equity capital. Loans to debt-ridden countries will not help climate action. Varying types of capital should be offered instead, such as grants, guarantees, subordinated debt, and equity capital.

Providing coverage for climate adaptation and loss damage

Historically, mitigation garners the majority of climate finance as this category is commercially viable and creates global public goods. Conversely, climate adaptation that creates local public goods and is not commercially viable 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 US$792 million, whereas the expected loss and damage in developing countries due to climate change is estimated to be US$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. 

This article was first published in The Hindu BusinessLine.