Finance Day at the United Nations’ Climate Change Conference was on November 3, 2021. However, the developing world started the conversation around climate financing way before that date, urging rich nations to pay their fair share of the climate crisis.
In spite of this, a week after negotiators started discussing the rule book of the Paris agreement, climate finance continues to be a concern for developing countries as the details on disbursement, capital type and definition of climate finance remains ambiguous and out of discussions from negotiation rooms.
The day culminated with new promises on ensuring availability of money to mitigate the climate crisis. During the presidential meeting, countries discussed how public and private finance can lead to a net zero transition. They did not, however, discuss how the money would be allocated and to whom.
While some experts believe that introducing private finance will help catalysing climate finance, Mohamed Adow, the director of Power Shift Africa, says the realities of finance are different inside and outside the negotiating rooms.
In the run up to the talks in Glasgow, the COP26 presidency declared that meeting the $100bn goal could be met by 2023. India’s Prime Minister, Nerandra Modi, Mia Mottley, Prime Minister of Barbados and other leaders from developing nations demanded more finance towards climate adaptation and loss and damage.
The Financial support demanded by developing countries relates to the principle of climate equity, which is that while all countries are affected by climate change, their contribution to global warming differs. India is among those countries whose historical responsibility for climate change is marginal compared to that of developed countries like the United States.
Developed countries therefore need to do more to compensate for their historical carbon emissions, and assist developing countries in adopting cleaner energy and reducing carbon emissions.
The $100 billion target by 2023, set by developed economies in 2009, is inadequate because developing countries are estimated to need $600 billion a year, from 2020 to 2050 to decarbonise just their energy sectors.
During the World Leaders Summit, Mottley called for Special Drawing Rights (SDRs) of $500 billion to be issued to finance climate transitions each year for the next 20 years while Modi asked for $1 trillion for developing nations.
SDRs are a form of currency that are held and guaranteed by the International Monetary Fund, and are generally issued during crises. The most recent one was released in response to the Covid-19 pandemic and before that during the 2009 financial crisis.
One day after the summit, Mark Carney —UN special envoy for climate finance and former Bank of England executive— announced a commitment of $130 trillion from private finance under a fund called Glasgow Financial Alliance for Net Zero, GFANZ, which has become a source of concern for developing countries.
“Finance day must have begun with defining climate finance and acknowledging that $100 billion of promised finance by 2023 is insufficient,” says Harjeet Singh, senior advisor at Climate Action Network International.
Arjun Dutt, programme lead at the Centre for Energy Finance at the Council on Energy, Environment and Water, emphasizes that money from the public sector is not enough to meet the NDC targets of each country or to reach the net zero targets, and hence money from the private sector is needed. “It is not possible for public capital alone to reach the net zero targets. The requirements are in trillions.”
GFANZ pledged money from private financing and is also supposed to report progress to the Financial Stability Board, to ensure transparency, but it does not mention how members will be held committed to their promises.
Explaining the importance of private and public funding Dutt adds that private capital generally flows to commercially viable investment opportunities. This may not be true of investments in market segments where technology performance track records or business models are not well established, such as off-grid renewables, storage, and the vast majority of adaptation activities.
Risks are also high for investments in a number of underdeveloped countries. Public capital can be used to underwrite investment risks through instruments such as guarantees and thereby mobilise many multiples in private capital flows. Such a catalytic role is also the most efficient use of scarce public capital.
The undiscussed issues of finance
Until and unless you have a clear definition of climate finance, you can count anything as climate finance, says Meena Rahman of the Third World Network. The true value of reported climate finance by developed countries is estimated to be one third of the delivered amount, according to reports.
Singh also notes that the Umbrella countries which are an alliance of countries like Australia, Belarus, Canada, Iceland, Israel, Japan, New Zealand, Kazakhstan, Norway, the Russian Federation, Ukraine and the United States are not allowing the discussion around climate finance. All the presidential events are creating a show to give an impression that a lot is happening. But essentially, developing countries need a system that could deliver money to them, he said.
“There is a complete disconnect inside and outside of the negotiating rooms,” Rahman said while criticising the use of private funding for climate financing. “This is private investor’s money we are talking about. Who knows with what condition the money will come.”
Linus Mofor, a senior environmental affairs officer at the UN Economic Commission for Africa emphasizes that a lot of NDCs are conditional on the availability of climate finance. “It will be very important to reach an agreement on climate markets and article 6 to move forward towards implementation,” he said.