6 Areas Where Climate Finance Negotiations Need to Deliver at COP27

Climate finance has always been a central feature of UN climate negotiations. The grand bargain at the core of the Paris Agreement was that all countries need to do more to tackle the climate crisis, but the poorest and most vulnerable countries, who did least to cause the problem, will need financial support from richer countries to reduce their emissions and deal with the impacts of a warming world.

The 27^th Conference of the Parties (COP27) to the United Nations Framework Convention on Climate Change (UNFCCC) in Sharm El-Sheikh, Egypt, comes at a particularly tense moment for the climate finance regime. Devastating climate impacts around the world, a global energy crisis, and a growing number of countries in debt distress have reinforced the urgency of rapidly increasing funding for climate action. Yet rich countries’ failure to deliver on past finance pledges and lackluster results from efforts to mobilize private finance do not inspire confidence that climate investments will happen at the scale needed. Add the global economic slowdown, high inflation, and a strong dollar, and we face serious headwinds to ramping up climate finance.

But leaders are forged in crisis, and if they rise to the challenge they can deliver more climate finance for mitigation, adaptation, and loss and damage at COP27. There is no shortage of good strategies to deliver more and better quality climate finance, if only leaders rally around them. Mobilizing more climate finance is one of the key outcomes that needs to be delivered at COP27 and beyond.

Here are six key areas where the COP27 negotiations can help rally more finance:

1. Delivering the $100 billion per year climate finance commitment

In 2009, developed countries committed to mobilize $100 billion per year in climate finance by 2020. The money is supposed to to support developing countries with emissions reductions and adaptation to climate impacts. The Paris negotiations in 2015 agreed to maintain this level through 2025.

It’s widely acknowledged that developed countries failed to hit the target in 2020. In late October, the UNFCCC’s Standing Committee on Finance released a report assessing the variety of different datasets on developed country climate finance. Even the highest estimate, by the Organization for Economic Co-operation and Development (OECD), finds that developed countries only reached $83 billion in 2020, $17 billion short of the goal. The failure to meet the $100 billion commitment has undermined developed countries’ credibility and influence in the UN climate negotiations.

In 2021 Canada and Germany led work on a Delivery Plan that sets out how developed countries intend to meet the goal. They projected that they will finally deliver the full $100 billion in 2023 and that in 2024 and 2025 will exceed $100 billion so that the total over the period 2021-2025 could reach $500 billion, or $100 billion on average. A Progress Report on the Delivery Plan was released in late October and reaffirmed these projections, but didn’t provide detail on how countries were measuring up against their pledges. There have been worrying signs some countries, such as the UK and Germany, may be backsliding on their commitments. And the U.S. has come up woefully short to date in delivering the necessary climate finance.

At COP27, countries will discuss progress towards the goal under the “long-term climate finance” agenda item. On 14th November there will be a high-level ministerial dialogue on climate finance. To rebuild trust, developed countries should use the opportunity provide more detail on how they are delivering on their post-2020 climate finance pledges and, if necessary, make more ambitious commitments. They could also announce measures to unlock increased climate finance from multilateral development banks like the World Bank.

2. Doubling Adaptation Finance by 2025

While financing for emissions reductions remains crucial, even under the most optimistic scenarios humanity will need to invest much more in adapting to climate impacts. The latest Adaptation Gap Report by the UN Environment Programme estimates adaptation costs in developing countries of $160–340 billion a year by 2030. For comparison, international adaptation finance flows were $29 billion in 2020. The Paris Agreement called for climate finance to be balanced between mitigation and adaptation, yet adaptation made up only 24 percent of total climate finance from developed to developing countries between 2016 to 2020, according to OECD estimates.

In recognition of this imbalance, at COP26 developed countries pledged to at least double their collective adaptation finance from 2019 levels by 2025. While the Glasgow commitment didn’t specify the 2019 baseline amount, developed countries have said they would use OECD data which showed $20 billion in adaptation finance that year, meaning this would entail an increase to $40 billion by 2025.

In addition to increasing the quantity of finance, developed countries should work to improve the quality of funding. The OECD estimates that 62% of public adaptation finance between 2016 and 2020 was in the form of loans. This is inequitable; poor countries shouldn’t have to take on additional debt to deal with a problem they did little to cause. There is a need for a much higher level of grant-based finance for adaptation.

Given past failures by developed countries to meet their climate finance commitments the onus is on them to show that this time things will be different. They can do this by providing much more clarity, early on, about how they will increase adaptation funding to meet the goal. Last week’s Progress Report on the $100 Billion Delivery Plan included details about developed countries’ adaptation finance pledges, but worryingly several countries have yet to make any commitment on increasing their adaptation finance. They must use COP27 as the moment to do so. Collectively, developed countries need to assess whether their individual commitments will add up to collective doubling. Some of the largest contributors skew heavily towards mitigation, so even if smaller providers were to only provide adaptation finance it may still not add up to a collective doubling; every developed country must pull its weight here.

3. Loss and Damage Finance

Severe climate impacts are already occurring at 1.2°C (2.2°F) of temperature increase; and these will worsen—even if we succeed in holding temperatures to 1.5°C (2.7°F). While we need to be doing as much as possible to reduce emissions (mitigation) and take measures to reduce the severity of climate impacts (adaptation), some climate impacts will outstrip the ability of many communities—particularly the poorest and most vulnerable—to cope, resulting in loss and damage. Vulnerable countries have been raising this issue for as long as the UN climate negotiations have existed, and as climate impacts mount, the need to mobilize discrete funding for loss and damage has become urgent.

For the last decade there have been discussions in the UNFCCC about how to address loss and damage, but little progress on raising finance for this. At COP26, developing countries put forward a proposal to create a new facility under the UNFCCC for loss and damage finance, but developed nations including the United States and European Union refused to agree to this. Instead, the Glasgow Dialogue on Loss and Damage was created to discuss possible funding arrangements until 2024, with the first session taking place in June 2022. Developing countries have continued to push for a new facility throughout the year, and asked for an agenda item to discuss loss and damage funding arrangements at COP27, which was agreed on the first day.

Developed countries should engage in good faith negotiations around funding arrangements to address loss and damage under the UNFCCC. A number of potential options exist. Countries could explore whether a new loss and damage facility could be housed within an existing institution, such as the Green Climate Fund or Adaptation Fund. There is precedent for this: the Least Developed Countries Fund and Special Climate Change Fund, discrete UN funds focused on adaptation, are administered by the Global Environment Facility. They could also look at the creation of a standalone facility for loss and damage. All the details don’t need to be finalized this year, but countries need to agree to the contours of a financial arrangement to address loss and damage under the UNFCCC by the end of COP27.

Developed countries need to also set out how they intend to mobilize complementary funding for loss and damage outside the UNFCCC. This could include bilateral pledges of loss and damage finance as Scotland, the Belgian Region of Wallonia and Denmark have already done; commitments to multilateral initiatives such as the Global Shield and the Climate Vulnerable Forum & V20 multi-donor trust fund; debt relief for countries hit by climate-induced disasters; and reforms to financial institutions to speed up post-disaster disbursements and expand funding eligibility for vulnerable countries.

4. New Collective Quantified Goal on Climate Finance

Alongside adopting the Paris Agreement in 2015, governments agreed that prior to 2025 they would set a new collective quantified goal, from a floor of $100 billion per year. Governments began negotiating the goal in earnest at COP26, and must reach a decision at COP29 in 2024. Key questions that negotiations on the new goal need to grapple with include the overall size of the new goal, what thematic areas and sectors should be included, who the contributors are, the types of finance covered, and how to ensure countries and communities can access the finance.

As part of the process of devising the new goal, four technical expert dialogues are being held each year between 2022 to 2024, 12 in total! The fourth of these was  held on 5^th November, the day before COP27 starts, and will focus on the issue of enhancing access to climate finance. On 9^th November, there will be a high-level ministerial dialogue on the new collective goal.

While the deadline for agreeing the new goal is two years away, it will be important for negotiators to make the best use of time available. The technical dialogues have so far proved a good space for wide ranging discussions between governments and civil society experts, but there is now a need for clear political signals from ministers on how to organize future sessions so that they provide useful inputs for the negotiators to agree an ambitious and practical goal in an inclusive way.

5. Finance in the Global Stocktake

COP27 marks the midpoint of the first Global Stocktake, which began last year at COP26 and will conclude next year at COP28. The Global Stocktake is a key component of the Paris Agreement’s 5 year ambition cycle: countries submit Nationally Determined Contributions (NDCs) setting out their climate commitments, the Stocktake assesses collective progress towards achieving the Paris Agreement’s long-term goals, which then informs the ambition of the next round of NDCs.

One of the three overarching long-term goals the Stocktake is charged with reviewing progress towards is “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” This goal, Article 2.1(c) in UNFCCC-speak, covers developed-to-developing country finance flows, but extends to all finance flows—public and private, domestic and international. Ultimately, it is about the need for all finance to be aligned with the Paris Agreement’s objectives: reaching net-zero in order to keep temperature rise to 1.5°C and making societies resilient to unavoidable climate impacts.

This year, the Global Stocktake process has been in the information collection and technical assessment phases: collating data and analysis from a wide variety of sources and assessing this information in technical dialogues. The first of these technical dialogues took place in June this year, the second will take place during the first week of COP27, and the third in June 2023. These dialogues provide a space for governments and non-state actors to come together to assess progress. The outcomes of these dialogues will feed into the third and final phase of the Stocktake, consideration of outputs, which will culminate with a decision by the Parties to the Paris Agreement on how to enhance action and support to meet the long-term goals.

There is a wealth of finance data related to climate change. The challenge for the technical dialogues will be parsing it all and condensing it into clear findings that can be used next year to craft political recommendations on what different parts of society—governments, the private sector, international institutions, and civil society—need to do to scale up climate finance from all sources, shift funding away from fossil fuels and other activities that are incompatible with the Paris goals, and integrate climate considerations into all investments.

6. Multilateral Climate Funds

Over the years, governments have created a variety of multilateral climate funds under the UNFCCC: the Global Environment Facility (GCF), the Green Climate Fund (GCF), the Adaptation Fund, the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF). These UN funds report to and receive guidance from the COP each year, which helps ensure they are accountable to the international community. Furthermore, unlike the multilateral development banks, where voting power is based on the amount each government contributes, these funds have boards of equal numbers of contributor and recipient governments, and operate on a one-seat, one-vote principle.

While they only make up a small share of the total climate finance, UN climate funds’ direct link to the COP, more democratic governance principles, and mandates to focus on climate, means that many governments put a lot of emphasis on having more funding flowing through them.

There are a few important milestones for UN climate funds at COP27. It is the final COP before the GCF’s second replenishment, which will take place in late 2023. This means it is the last opportunity for the world’s assembled governments to give guidance to the Fund on priorities ahead of the replenishment. It is also the first COP since the GEF’s eighth replenishment, where governments pledged $5.3 billion in funding pledges. The COP’s guidance can help ensure this new cash is put to best use. And it is the 15th anniversary of the Adaptation Fund beginning its operations; an opportunity to celebrate the Fund’s successes and look at how to further ramp up its important work to help vulnerable countries prepare for climate impacts.

The Adaptation Fund and the Least Developed Countries Fund both hold annual pledging sessions at COPs. Last year saw them receive record pledges of $356 million and $413 million, respectively. Given the importance of increasing adaptation finance towards the goal of doubling by 2025, their pledging sessions at COP27 will be a key moment to watch.