Gap persists between collective climate ambition and individual actions

Policy Pulse – 21 October 2021 – George Anjaparidze

Photo by Markus Spiske on Unsplash

Key messages:

• Updated nationally determined contributions are insufficient to achieve an emission trajectory consistent with Paris Agreement temperature goals.

• We estimate the emission trajectory from updated NDCs is most consistent with about a 3°C warming.

• Making good on climate finance commitments of developed countries can help crowd-in much needed capital for scaling-up climate action in developing countries.

Updated climate action plans, known as Nationally Determined Contributions (NDCs), fall significantly short of what is needed to achieve the collective temperature goals of the Paris Agreement. The gap between collective ambition and individual national actions persists according to the latest synthesis report by the UNFCCC Secretariat, which reflects the information from 191 countries, including updated NDCs covering 113 countries.

The gap between updated NDCs and the needed emission levels under the least-cost 2°C scenario is estimated at 14.1 Gt CO2e in 2030. The gap has been estimated by comparing the updated NDC emission trajectory with the previously assessed emission trajectory in the May 2016 synthesis report of the UNFCCC Secretariat. However, the gap is likely to be even larger if we consider more recent global emission pathway modeling. The latest IPCC Special Report on 1.5°C estimates that to limit global warming to below 2°C, CO2 emissions need to decrease by about 25 per cent from the 2010 level by 2030, which implies that updated NDCs have a gap of about 20.1 Gt CO2e in 2030. To be on a global emission pathway consistent with the 1.5°C goal, global CO2 emissions need to decrease by about 45 per cent from the 2010 level by 2030, which implies that updated NDCs have a gap of about 30 Gt CO2 in 2030.

We estimate the emission trajectory from updated NDCs is most consistent with about a 3°C warming. The increase in planned climate actions up to 2030 reflected in the updated NDCs has been marginal and has not resulted in a revision in the expected level of warming compared to our previous assessment. (See Veritas Global analysis from 17 April 2019, Paris Agreement: the inconvenient gap between ambition and reality).

In the longer-term, there is scope for cautious optimism. Several major economies have put forward more ambitious climate plans that go beyond 2030, including pledges for reaching net zero emissions by mid-century. A key enabler for achieving these goals, particularly in developing countries, will continue to be the scale-up of support for implementation of climate actions. Making good on climate finance commitments of developed countries can help crowd-in much needed capital for scaling-up climate action in developing countries.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

George Anjaparidze

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Climate Finance is the Key to Success for Biden Earth Day Summit and COP 26

Policy Pulse - 21 April 2021 - George Anjaparidze and Vicente Paolo Yu

Key messages

• The Biden Earth Day Climate Summit can have a real impact on international climate change negotiations if it addresses the shortfall in international climate finance.

• Developed countries have not met their commitment to provide $100 billion annually in climate finance by 2020 to address the needs of developing countries – the shortfall is likely to be about $67.1 billion per year.

• To rebuild confidence, leaders need to use the Summit to recognize that developed countries’ climate finance commitments have not been met. Developed country leaders hence need to commit to put forward new climate finance pledges by COP 26 that make-up for the past shortfall.

• In addition, developed country leaders need to also signal that they will live up to their continuing climate finance commitment to provide at least $100 billion annually in climate finance up to 2025 as called for by the Paris Agreement.

• One immediate opportunity for the Biden administration is to contribute at least $8 billion to the Green Climate Fund as that would undo the previous US administration’s efforts to defund this fund.

• More broadly, in the context of long-term climate finance, there is a critical need to address the shortcomings of the current climate finance system. As negotiators start to discuss setting new climate finance goals for 2025 and beyond, they will need to ensure that the approach meets expectations of developing countries with respect to additionality, adequacy, and predictability, and complies with long-standing commitments by developed countries under the UN Climate Convention and its Paris Agreement.

Photo by Micheile Henderson on Unsplash

1. What does success look like for the Earth Summit?

US President Biden is scheduled to convene 40 world leaders for the Earth Day Climate Summit on April 22 and 23, 2021. The Summit has the stated ambition to be a key milestone on the road to the United Nations Climate Change Conference (COP 26). To have a real positive impact on international climate negotiations, the developed country leaders at the Summit need to commit to address the shortfall in international climate finance.

Developed countries have not met their commitment to provide climate finance of $100 billion per year by 2020 that was promised to developing countries. The shortfall is likely to be about $67.1 billion per year in 2020 (see section 4 below). This shortcoming has eroded the credibility of developed countries and risks undermining the entire climate negotiations. Finance is a key enabler of climate action. Without a further scale-up in climate finance the needed scale-up in climate action in developing countries is unlikely.

To rebuild confidence, leaders need to first recognize that the climate finance targets have not been achieved. Developed country leaders hence need to commit to put forward new climate finance pledges by COP 26 that make-up for the past shortfall and live up to their continuing climate finance commitments up to 2025.

One immediate opportunity for the Biden administration is to contribute $8 billion to the Green Climate Fund (GCF) as that would undo the previous US administration’s efforts to defund this fund.

The Trump administration defaulted on Obama-era commitments and refused to contribute to the fund’s latest replenishment. By making good on past commitments and participating on equal footing with other donors, the US has an opportunity to restore its credibility in international climate negotiations.

2. Background on climate finance negotiations

International climate finance negotiations cover an array of issues, including scale of resource mobilization, institutional arrangements, governance, access modalities and guidance on implementation. The focus of this brief is on climate finance negotiations specifically in the context of the scale of financial resource mobilization from developed countries.

The text of the UN Framework Convention on Climate Change (UNFCCC) includes commitments for developed countries to provide finance to developing countries. However, at the time (early 1990s) when the Convention was being negotiated, there was no clear understanding on the scale of finance that would be needed. In fact, even today, knowledge on climate finance needs continues to evolve. Therefore, instead of setting prescriptive numerical finance targets, Parties agreed on overarching commitments.

One of the key overarching finance commitments is for developed countries to provide “agreed full costs” incurred by developing countries in preparing reports to the UNFCCC. Another key overarching finance commitment for developed countries is to provide financial resources to meet the “agreed full incremental costs” of implementing climate mitigation and adaptation measures and related international cooperation. Each of these overarching commitments are explained by the illustrative diagram below.[1]

Diagram 1:

Illustration of overarching UNFCCC finance commitments of developed countries

In effect, negotiations are about identifying what are the costs for developing countries and what share of these costs should be funded by developed countries.

3. The policy context of the $100 billion climate finance commitment

Developed countries committed to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation. This commitment was first made by developed countries in December 2009 in Copenhagen under the Copenhagen Accord that was noted by the Parties at COP15. The target was subsequently reiterated through various annual decisions under the UNFCCC beginning in 2010 in Cancun at COP16. This commitment of $100 billion annually has been extended under the Paris Agreement upon its adoption in 2015 to the post-2020 period up to 2025. The finance targets are seen as key enablers for scaling-up climate action in developing countries and more broadly as confidence building measures.

Measuring progress against climate finance targets is not straightforward. There are differences of perspective on which climate actions are eligible to be counted towards the $100 billion target. For example, some Parties consider the target to be only in the context of mitigation actions, with adaptation and other climate actions requiring additional support separate from this commitment. Furthermore, there are no agreed metrics and definitions for measuring climate finance flows. Nevertheless, a closer look at the policy context at the time when this target was adopted can help shed light on the expectations of negotiators.

In the years leading up to the adoption of these targets there was increasing awareness of the significant additional cost that would be associated with addressing climate change. The first independent and comprehensive global assessment that was used in policy deliberations was published by the UNFCCC secretariat in October 2007. The study estimated that the additional annual investment needs for developing countries in 2030 would be up to $97 billion to address climate mitigation and up to $67 billion to address climate change adaptation. Although these estimates proved to be far too conservative, they had a transformative impact on the climate finance negotiations. In effect, shifting the focus of discussion from millions to billions.

In the period leading up to the December 2009 Copenhagen conference, many other assessments were launched that further shed light on the scale of additional costs associated with climate action and the volume of investment needed above business-as-usual (BAU) development. For example, in January 2009, McKinsey & Co. estimated that additional annual investment in climate mitigation measures of €530 billion in 2020 and €810 billion in 2030 would be needed to achieve an emission trajectory consistent with containing global warming below 2°C. International Energy Agency analysis, published in June 2008, highlighted that additional annual investment (above BAU) of up to $1,100 billion would be needed up to 2050 for climate mitigation investments to achieve an emission trajectory consistent with containing global warming at about 2°C. In both of the mentioned studies the majority of abatement in greenhouse gas emissions would need to be made in developing countries.

The evidence from leading international organizations clearly showed that developing countries would need to make additional investments of hundreds of billions of US dollars per year under any scenario that targeted avoiding catastrophic impacts of climate change. The policy question facing negotiators was then what proportion of this additional cost would developed countries agree to cover. The political answer in 2009 was that developed countries would ramp-up climate finance efforts immediately and provide $100 billion per year in 2020. Even at this early stage, it was well understood that this figure only represented a fraction of the additional finance needed and that this figure would need to be scaled-up over time.

4. Has the $100 billion climate finance target been reached? No. Developed countries have not reached the target of providing $100 billion in climate finance by 2020. The lack of agreed metrics for measuring performance against this target makes it difficult to estimate the extent of the shortfall. We estimate that if 2020 flows are similar to those in 2018 (the latest year for which data is available) the shortfall will be at least $67.1 billion per year.

Diagram 2:

Developed countries have missed their climate finance target

We estimate the shortfall to be significantly larger compared to figures published by the OECD secretariat. The OECD secretariat overestimates the climate finance flows for several reasons, three issues are investigated below:

a) For bilateral climate finance, OECD includes aggregation of projects that do not have climate change as the principal focus. A project that has climate change as a secondary objective is automatically tagged as climate “significant”, even if the share of finance flowing to support climate specific activities is negligible. Once a project or program is tagged as climate “significant” most OECD countries report the finance based on a predetermined share (usually between 30% and 100%) as climate finance. This accounting practice leads to significantly overestimating the scale of bilateral climate finance reported. In 2018, the OECD secretariat overestimated bilateral climate finance by over 200% or about $23.0 billion.[2]

b) For climate finance channeled through multilateral channels, the OECD includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised directly by the multilateral institutions. For the latter, this is particularly a significant issue in the context of the climate finance that is mobilized by global and regional development banks. For climate finance raised directly by multilateral institutions, the OECD secretariat attributes this finance in proportion of the developed country share capital. Nevertheless, since the $100 billion climate finance target is focused specifically on the finance mobilized by developed countries (it is an outflow measure) it is not appropriate to count the resources raised directly by multilateral channels towards the developed country annual climate finance target. Therefore, if the focus is placed only on developed country annual climate finance outflows to multilateral channels, as called for by the target, it implies that in 2018 the OECD secretariat overestimated multilateral climate finance provided by developed countries by over 350% or about $23.1 billion.

c) More broadly, the approach taken by the OECD secretariat does not take into account business-as-usual finance from developed countries. In our view, this is something that needs to be incorporated into the assessment in the future. As explained earlier in the brief, the policy context in which the $100 billion target was set had to do with determining the portion of the additional cost of climate action in developing countries that would be funded by developed countries. This implies that the target is focused on measuring finance flows beyond business-as-usual. Different methods could be used to set the business-as-usual scenario. If the business-as-usual scenario for net ODA flows as measured in grant equivalents was set at the level of 2009 ($121 billion), the increase observed in overall flows in 2018 would be about $29 billion. Since the total ODA increase is more than the developed country contributions to climate finance through bilateral and multilateral channels no further adjustment has been applied in our assessment.

The approach used by the OECD secretariat has also come under criticism from developing country governments. For example, India critiqued the OECD’s approach to reporting and quantifying the climate financing provided by OECD countries. The estimates from the Biennial Assessment of the Standing Committee on Finance of the UNFCCC also point to significant shortfalls and indicate that developed countries provided only about $34 billion in 2016 through bilateral, regional and other channels.

5. What has been the likely cause of the shortfall in climate finance?

It is difficult to assess the drivers of the shortfall because at the time the target was set there was no indication of how it would be met. Some countries expected developed countries to meet the target mostly through grant-based finance, others expected it to be met mostly through carbon markets and yet others expected other approaches. The wide variety of views makes it difficult to undertake a definitive assessment of the causes of the shortfall. Nevertheless, the findings of the 2010 UN Secretary General’s high-level advisory group on climate finance (AGF) [3] provides a good reference point on what was the mainstream expectation at the time on sources for meeting the $100 billion climate finance goal.

Comparing expectations of the AGF with what has happened over the past decade, reveals two leading causes for not meeting the target. First the finance targets were missed because of lower-than-expected financial pledges of developed countries, which were particularly suppressed because the previous US administration (Trump) did not scale-up international climate finance contributions. Second, lower ambition in climate targets and restrictions on international cooperation depressed demand for carbon credits sourced from developing countries.

Table 1:

UN Advisory Group expectations in 2010 for meeting $100 billion target

6. What lies ahead for climate finance in the long term

Looking ahead, there is a critical need to address the shortcomings of the current climate finance system. Improving the metrics and transparency of how developed countries meet their climate finance targets will be critical to restoring confidence of developing countries. As negotiators start to discuss setting new climate finance goals for 2025 and beyond, they will need to ensure that the approach meets expectations of developing countries with respect to additionality, adequacy, and predictability, and complies with long-standing commitments by developed countries under the UN Climate Convention and its Paris Agreement.

The evidence on the additional cost of addressing climate change has greatly improved over the past two decades but it will no doubt continue to evolve. After the Copenhagen conference, especially during the negotiations in relation to the establishment of the GCF, other estimates were prepared. The South Centre, for example, estimated that the total adaptation and mitigation financial requirements of developing countries could well add up to at least $1,000 billion a year.[4]

More recently, in October 2018 IPCC Special Report estimated that to transform the energy system about $2.4 trillion per year of investment is needed to keep global warming within a 1.5°C scenario. Further resources will also be needed to support adaptation and other climate actions. An increase in climate actions by developing countries will also increases their needs for climate finance.

In addition, it is important not to lose sight of broader development challenges, such as the Covid-19 pandemic, an emerging debt crisis, and the impacts of climate change and biodiversity loss, that place a strain on the financial position of developing countries. Even in the absence of climate change, developing countries have had difficulties in meeting their financial needs of their “business-as-usual” development. Therefore, a dual focus is critically needed that on the one hand supports with additional resources to scale-up climate action while at the same time does not dilute the effort to address broader development challenges.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

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[1] In addition to the two overarching finance commitments mentioned here, developed countries also have other commitments under the Convention on providing support to developing countries.

[2] This estimate also assumes that 100% of the finance is attributed to climate finance for projects that had climate change as the principal (or primary) objective.

[3] The AGF was chaired by former Prime Minister of Ethiopia, Males Zenawi and former Prime Minister of Norway, Jens Stoltenberg. The membership included heads of state, ministers, heads of international organizations and other thought leaders.

[4] This does not include costs of preparing national communications, scientific development, data collection, building institutions to address climate change, education and training and other aspects of capacity building.

Unprecedented opportunity for climate policy in 2021

Policy Pulse - George Anjaparidze - 14 January 2021

2021 promises to be a defining year for international climate policy. There is an opportunity to build on the positive momentum from the 2020 Climate Ambition Summit and accelerate the transition to a climate conscious economy.

Positive momentum in 2020

In 2020, COVID-19 impacts on mobility and economic activity led to the largest annual drop in greenhouse gas emissions, which contracted by about 5%. Despite the drop in emissions, concentration of greenhouse gases in the atmosphere continued to rise, in terms of CO2 equivalents, we estimate an annual increase of about 0.7%. In absolute terms, the rise in atmospheric concentration in 2020 will be among the ten largest annual increases on record.

The disparity in growth profiles in 2020, between emissions and concentrations, is because the two measures are different. Emissions can largely be thought of as a flow measure, meaning it quantifies the amount of greenhouse gases released each year. Concentrations can largely be thought of as a stock measure, meaning it quantifies the accumulation of greenhouse gases in the atmosphere.[1] While there is a linkage between the two measures, they are fundamentally different.

In the context of climate change, it is the atmospheric concentration of greenhouse gases that is the more important measure as the flow of emissions in any one particular year has a relatively small aggregate influence on the planet’s climate system. In recognition of this dynamic, more governments in 2020 announced plans to align their long-term targets with stabilization of greenhouse gases in the atmosphere to levels more consistent with temperature goals of the Paris Agreement. In addition to announcements from western European states, other major economies, including Argentina, Brazil, China, Japan and South Korea, also communicated mid-century carbon neutrality targets. In the United States, the incoming Biden administration was elected on a platform of achieving net zero emissions by 2050. A win for Biden is a win for climate, with immediate implications for international climate policy.

2021 could be breakthrough year for climate policy

A breakthrough year does not mean that there has to be a new climate treaty. Strengthening the existing international climate policy architecture and identifying a clear pathway to scaling-up actions within it, can potentially have a bigger positive impact.

There are three champions, or sources of optimism, for achieving progress on international climate policy in the year ahead:

• The UN Secretary General, António Guterres, has demonstrated a strong commitment to the climate issue and will help ensure it remains a top priority in international fora.

• The incoming presidency – the United Kingdom – of the Conference of the Parties of the United Nations Convention on Climate Change (UNFCCC) has a well-resourced team and detailed consultation schedule for the year ahead. The postponement of the conference from November 2020 to November 2021 may prove to be a blessing in disguise. Furthermore, the UK political leadership may be willing to expand a significant amount of political capital internationally to ensure the conference is a major success, as it could help demonstrate UK’s relevance on the global stage in a post-Brexit world.

• Changing global public sentiment has led to increased pressure for action as climate change and environmental issues are emerging as top priorities of public concern. A survey by the UN of more than 1.5 million people in 195 countries found that, across all regions, climate change and environmental issues was identified as the number one long-term global challenge.

On the policy front, there are three key developments in 2021 that have potential to be transformational for international climate policy.

1. Climate finance could get back on track

2020 was planned to be the year when climate finance flows were supposed to reach $100 billion per year from developed to developing countries. Instead, developing countries experienced the largest absolute capital outflows recorded in recent history. One of the challenges in assessing performance against the climate finance target is that governments have not agreed on how to count climate finance flows. Our assessment, carried out prior to COVID-19, analyzed performance on the basis of net finance flows and concluded that while there was increase in finance flows there was also a significant shortfall in reaching the $100 billion per year target. An independent expert group, assembled by the UN, also concluded that the $100 billion target was not reached in 2020.

At the political negotiations level, meeting climate finance targets are important for sustaining an environment of trust. At the implementation level, climate finance flows support scaling-up of climate action. The incoming presidency of the next UNFCCC conference has identified priorities for climate finance related issues in the year ahead, which offer a good starting point for relaunching the climate finance discussions. A key challenge facing the presidency will be to prioritize the agenda.

At the end of the day, finance is about restoring trust. To do this, there needs to be a recognition that the $100 billion per year target was not achieved. The point of that would not be to lay blame but rather to encourage countries to bridge the shortfall in climate finance in a way that leaves no doubt about future climate finance flows. Crucially, climate finance pledges need to be scaled-up and mechanisms may need to be put in place to make the flows more predictable. Achieving all of these goals in 2021 may not be realistic, but countries could start by announcing significant increases in public finance contributions to multilateral institutions such as the Green Climate Fund. In addition, setting a clear pathway for scaling-up finance flows and making them more predictable will greatly help forge a conducive environment for all countries to contribute to raising the level of ambition for climate action.

2. Raising ambition of climate action

It is now unequivocally clear that the measures communicated by governments through their nationally determined contributions under Paris Agreement are not enough to achieve their collective ambition, which is to limit the rise of average global temperatures to within 1.5°C to 2°C. Instead, the planned climate actions would put the world on an emission trajectory consistent with about a 3°C warming.

There are reasons to be cautiously optimist that the momentum from the 2020 Climate Ambition Summit will carry forward into 2021 and more economies will target carbon neutrality by mid-century. There is a real opportunity for 2021 to be the year that sets the mid-century vision for the global economy (at least in terms of greenhouse gas emissions). However, in addition to long-term targets, policies need to provide clarity over how short- and medium-term measures will set the emission trajectory on a desired path. Otherwise, there is a risk of “baking in” undesired levels of warming that eventually lead to missing the Paris Agreement temperature goals.

3. Clear rules for international collaboration under the Paris Agreement

The last two UNFCCC annual climate conferences have not been able to agree on clear rules for international cooperation on mitigating climate change. Having said that, there is already scope for countries to pursue bilateral cooperation, however, not having multilaterally agreed rules still poses an impediment. Perhaps the biggest shortcoming is a lack of a centrally agreed mechanism. If negotiators fail to agree again, it will significantly undermine confidence in the ability of the UNFCCC negotiations to deliver. This pressure could serve as a motivation for negotiators to try harder to converge on a solution. But in itself, this reputational pressure, is unlikely to be sufficient. Greater political leadership is need to champion resolution on securing clear rules for international collaboration.

The lack of a multilaterally agreed mechanism for promoting international cooperation on mitigation has resulted in the development of instruments outside the scope of the Paris framework. If negotiators want to avoid diluting the Paris framework, they should do more to develop solutions within it. For example, the aviation sector was left with no choice but to identify other carbon offsetting mechanisms for meeting future offset demand under its Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Plans to source offsets from outside the Paris Agreement framework has led to a perception, among some, that the aviation sector will not adequately contribute to achieving the Paris Agreement goals of keeping global temperature rise to within 1.5°C to 2°C. In Europe, this perception has increased the pressure to introduce other more costly measures targeting the aviation sector.

Other key policy trends to watch in 2021:

• The COVID-19 pandemic has led to the deployment of large fiscal support, with the recovery phase expected to have even greater resources mobilized. A key focus of policy makers and development partners will be to identify ways that climate friendly policies can be deployed to support a green recovery.

• Global debt levels have risen sharply and reached all-time highs. According to the International Monetary Fund, global public debt stood at 83% of GDP in 2019 and is estimated to have made an unprecedented jump to about 100% of GDP in 2020. OECD countries and official finance providers (such as China) may have different perspectives on how borrowers should manage the debt burden and in application of conditions associated with new financing arrangements. Differences in approach could be a source of tension between finance providers, which may spill over unfavorably into climate negotiations and could also potentially impact the overall financing environment.

• The aviation industry is currently the only sector with a global cap on net CO2 emissions. However, the targets adopted under the CORSIA scheme are not in-line with an emission trajectory that would be consistent with Paris Agreement temperature goals. Some airlines have adopted more ambitious individual targets. However, in order for climate action to be financially sustainable, especially in the medium and long term, action at the industry level is essential. Coherent and ambitious industry level action can help the sector avoid being subject to a patchwork of more costly measures and prevent creating competitive distortions.

• An initiative to impose a carbon boarder adjustment mechanism is being considered by the EU. A conceptually similar approach was used with some success in motivating greater climate action for managing international aviation emissions. While a carbon boarder adjustment mechanism is unlikely to be implemented in 2021, developments during the year will shed more light on the extent to which such an initiative can become part of the EU climate policy tool kit for incentivizing greater international climate action.

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[1] The established practice is to quantify atmospheric concentrations through direct measurement. Estimating concentration requires one to take into account a number of complex natural phenomena such as the planet’s absorptive capacity, decay rate of exiting stock of greenhouse gases as well as several other complex interactions in the earth system.

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics andinfrastructure.