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Policy Pulse – 26 January 2022 – George Anjaparidze


Key messages:

  • Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

  • For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

  • Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources


The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.


We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.


Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment 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. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.


The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)


As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.


Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed for SDG 7.


Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:


Other key policy trends to watch in 2022:

  • Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

  • Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

  • The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

  • Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

  • Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

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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.

 
 
 

Policy Pulse – 4 November 2021 – George Anjaparidze and Vicente Paolo Yu


On 26 October 2021, Veritas Global published analysis: OECD inflates climate finance estimates ahead of COP 26. Our analysis shows that the OECD overestimated the scale of climate finance in 2019.


In total, the OECD 2021 Climate Finance Report overestimated the amount of climate finance provided and mobilized by developed countries in 2019 by US$ 46.9 billion – of which US$ 20.3 billion is due to overestimation in bilateral public climate finance and US$ 26.6 billion is due to overestimation for multilateral public climate finance.


The level of climate finance provided by developed countries points to a significant shortfall in following through on climate finance commitments. Developed countries committed to provide US$ 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. Making good on developed country climate finance commitments under the UN Climate Convention and its Paris Agreement can help crowd-in much needed capital for scaling-up climate action in developing countries.


This paper makes public the methodology used by Veritas Global to critique the OECD 2021 Climate Finance Report – Climate Finance Provided and Mobilized by Developed Countries – Aggregate trends updated with 2019 data.


I. Critique of bilateral public climate finance estimates


Context


To estimate the bilateral public climate finance, the OECD 2021 Climate Finance Report aggregated data from the fourth biennial reports submitted to the UNFCCC by developed countries. The report did not use data sources available to the OECD to adjust the reported data and correct for overestimation. It is important to note that for assessing other climate finance components (multilateral public, export credits and mobilized private) the OECD uses its own data sources (OECD DAC and OECD ESG) to estimate these components. In the methodology below, we explain how the Rio-markers contained in the OECD-DAC database could be used to assess the scale of overestimation of bilateral public climate finance in the OECD 2021 Climate Finance Report.


Data considerations


Despite originating from different sources, the data tagged through the Rio-markers and aggregated in the OECD 2021 Climate Finance Report have significant overlaps. This is perhaps not surprising because almost all major developed countries use the Rio-markers methodology to, in part or in full, report on their climate finance contributions under the UNFCCC, which have subsequently been aggregated in the OECD 2021 Climate Finance Report. The developed countries that did not make a reference to the Rio-markers in their Fourth Biennial Report constituted about 8% of the climate finance tagged as climate relevant through the Rio-markers methodology in 2018.


From the major bilateral public finance contributors, only the United States and Canada did not make any reference to the use of Rio-markers in their Fourth Biennial Reports under the UNFCCC. The United Kingdom has made a reference to Rio-markers in past reports but has not explicitly referenced Rio-markers in its Fourth Biennial Report. However, the United Kingdom has developed accounting practices for climate finance that build on and go beyond the Rio-markers methods.

The similarity in data sets is also revealed when comparing aggregates on bilateral public climate finance reported in the OECD 2021 Climate Finance Report and the climate-relevant OECD Rio-markers reporting. Between 2013 to 2018, about 91% of the reported data is estimated to overlap (or at least correlate) between these sources (see chart below).

According to the Rio-markers methodology, a project that has climate change as a secondary objective is tagged as climate “secondary/significant,” even if the share of finance supporting climate-specific activities is negligible. Once a project is tagged as climate “secondary/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 vastly overestimating the scale of bilateral climate finance. Therefore, we consider that it is inappropriate to count “secondary” projects as part of climate finance until a more robust methodology is developed for estimating the proportion of finance that really supports climate activities. To illustrate overestimation, we present an example of a project supported by the Ministry of Foreign Affairs of Iceland. The Buikwe District project in Uganda supports implementation of a program that improves access to water, sanitation and hygiene services, however, the program also has secondary climate change related objectives. Climate change related issues are only one of several activities being financed. Nevertheless, since Iceland uses a predetermined share of 100% to report finance of “secondary” projects towards climate finance, all financial support reported for this project was tagged as climate finance. This clearly leads to over-reporting of climate finance.


Some countries, such as the United Kingdom and Finland have developed more robust methods and report coefficients on a project-by-project basis for Rio-marked activities, including for projects that have climate change as their “principal” or “secondary” objective. In the future it may be appropriate to base estimations for “secondary” projects on these more robust methods but crucially there needs to be a coherent approach across developed countries.


Given the significant (about 91%) overlap or at least correlation in the data sets, we can estimate the proportion of the data in the OECD 2021 Climate Finance Report that corresponds to “principal” and “secondary” activities based on what has been tagged through Rio-markers. Using this approach implies a margin of error of about 10%, which we consider to be reasonable and more accurate than the current practice at OECD.


By not filtering out the finance associated with “secondary” projects from its assessment, the OECD 2021 Climate Finance Report has overestimated the total bilateral climate finance. We used the steps described below to estimate the amount by which the report has overestimated bilateral public climate finance of developed countries in 2019.


Steps to quantifying OECD overestimation


Step 1: Estimate share of bilateral public climate finance reported attributable to activities where climate change is a “secondary” objective.


To estimate the share of finance that supports projects where climate change is a secondary objective, we calculate the proportion of finance for “secondary” projects compared to total finance for “principal” and “secondary” projects in 2018. (The 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.)


Formula:


ShareOfSecondary2018 = ($RMSecondary2018) / ($RMPrincipal2018 + $RMSecondary2018)


Where,

  • ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018

  • $RMSecondary2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a secondary objective as reported through the Rio-markers of OECD DAC

  • $RMPrincipal2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a “principal” focus as reported through the Rio-markers of OECD DAC

Based on the above approach, the share of “secondary” projects was estimated at 70% in 2018.


Step 2: Estimate amount of bilateral public climate finance reported by OECD that corresponds with “secondary” projects


To estimate the amount of finance that is attributable to secondary projects, we apply the “ShareOfSecondary” derived in step 1 to the total bilateral climate finance reported for 2019 in the OECD 2021 Climate Finance Report.


Formula:

$EstSecondary2019 = $TotalBilateralPublicCF2019 x ShareOfSecondary2018


Where,

  • $EstSecondary2019 is the estimated US$ reported climate finance for 2019 for activities where climate change is a secondary objective

  • $TotalBilateralPublicCF2019 is the US$ total bilateral public climate finance reported in 2019 as aggregated in the OECD 2021 Climate Finance Report

  • ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018 (calculated in Step 1)

The amount US$ estimated for secondary projects in 2019 is equal to the amount by which the OECD 2021 Climate Finance Report has overestimated total bilateral public climate finance for 2019.


Results for bilateral public climate finance


Based on the above calculations, the OECD 2021 Climate Finance Report overestimated the scale of bilateral public climate finance in 2019 by about US$ 20.3 billion.


II. Critique of multilateral public climate finance estimates

Context


The OECD 2021 Climate Finance Report quantified multilateral public climate finance estimates using the OECD DAC database. The quantification includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. For climate finance raised by multilateral institutions themselves, the OECD 2021 Climate Finance Report attributes this finance in proportion of the developed country share capital. However, since the US$100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the funds raised by multilateral institutions towards the developed country annual climate finance target. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).


To be clear, the funds raised by multilateral institutions themselves should be reported and tracked as per the accounting modalities agreed at COP 24 because these resources are part of the climate finance ecosystem. However, resources raised by multilateral institutions themselves should not be counted towards the achievement of the US$100 billion climate finance target of developed countries. Only direct contributions from developed countries to developing countries through multilateral channels should be counted towards the US$100 billion climate finance target. In the methodology below we explain our approach to assessing the estimates of multilateral public climate finance in the OECD 2021 Climate Finance Report.


Data considerations


There are no specific data considerations. The same data sources used by the OECD 2021 Climate Finance Report are used for purposes of undertaking this analysis. Data for assessing the multilateral public climate finance is sourced from the OECD DAC database. For calculating attribution shares, the OECD 2021 Climate Finance Report uses the multilateral institutions’ annual reports.


The difference in conclusions between the OECD 2021 Climate Finance Report and our analysis is entirely explained by definitions on what is eligible to be counted towards the US$ 100 billion climate finance target. By counting the funds raised by the multilateral institutions themselves towards the US$ 100 billion target the OECD 2021 Climate Finance Report overestimated the finance provided by developed countries. We used the steps described below to estimate the amount by which the report has overestimated multilateral public climate finance of developed countries in 2019.


Steps to quantifying OECD overestimation


Step 1. Estimate the share of multilateral public climate finance that corresponds to the funding raised by the multilateral institutions themselves.


Using the OECD-DAC data (provider perspective), we filter out data based on imputed multilateral contribution of developed countries for 2018 – which was equal to about US$ 6.5 billion. We subsequently calculate the share of imputed multilateral contributions compared to total attributed multilateral public climate finance in 2018 (US$ 29.6 billion) as estimated by OECD. (Note, the 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.) Based on this assessment, we estimate that about 78% of the multilateral public climate finance in 2018 was overestimated.


Step 2. Estimate amount of multilateral public climate finance reported by OECD that does not correspond to imputed multilateral contribution of developed countries for 2019.


We multiply the OECD estimate for total multilateral public climate finance in 2019 by the overestimated share (78%) calculated in step 1 to obtain the amount overestimated.


Results for multilateral public climate finance


Based on these calculations, the OECD 2021 Climate Finance Report overestimated the scale of multilateral public climate finance in 2019 by about US$ 26.6 billion.


For media queries: contact@veritasglobal.ch

Briefing prepared by:



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.




 
 
 

Policy Pulse – 26 October 2021 – George Anjaparidze and Vicente Paolo Yu


Key messages:

  • The OECD has overestimated the 2019 climate finance provided and mobilized by developed countries by $46.9 billion.

  • The total shortfall in reaching the $100 billion target is about $67.4 billion, meaning that only $32.6 billion of climate finance has supported developing countries.

  • To avoid failure at COP 26, developed countries need to address the shortcoming in climate finance contributions by announcing a new pledge of $67.4 billion aimed at bridging the shortfall of the previous target.


Background on climate finance targets


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. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).


OECD overestimates climate finance provided by developed countries


Measuring progress against climate finance targets is not straightforward. The lack of internationally agreed metrics for measuring performance against the $100 billion target makes it difficult to definitively estimate climate finance flows. However, the methodology used by the OECD secretariat to estimate climate finance flows leads to overestimation.

The OECD secretariat estimated that in 2019 the climate finance provided and mobilized by developed countries was equal to $79.6 billion. The OECD figures overestimate climate finance provided by $46.9 billion in 2019. When adjusted for overestimating, the climate finance provided and mobilized by developed countries is about $32.9 billion in 2019. Meaning there is a shortfall of $67.4 billion in reaching the climate finance target. (See chart). There are two main drivers for OECD overestimation:

  1. Bilateral climate finance flows are overestimated by $20.3 billion in 2019. For bilateral climate finance, the OECD secretariat 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 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 of “climatewashing” bilateral assistance leads to significantly overestimating the scale of bilateral climate finance reported.

  2. Multilateral climate finance flows are overestimated by $26.6 billion in 2019. For climate finance that flows through multilateral channels, the OECD secretariat includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. However, since the $100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the resources mobilized by multilateral institutions towards the developed country annual climate finance target. Only direct contributions from developed countries to multilateral channels should be counted.


Implications for COP 26 and beyond


There is an urgent need to address the shortcoming in developed country climate finance contributions. As explained above, climate finance targets are key enablers for scaling-up climate action in developing countries and more broadly are confidence building measures.


As an immediate step, at COP 26, developed countries need to recognize that the previous climate finance targets have not been met and pledge to make-up for the shortfall. A new pledge, specifically targeting to close the previous shortfall, of $67.4 billion should be made at COP 26. A significant share of this finance should be pledged to flow through the Green Climate Fund. Developed countries should also show progress towards a post 2025 climate finance goal that is based on financial needs for climate action as expressed by developing countries in their NDCs.


In the medium term, 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. Without better metrics and enhanced transparency, there is a risk that future climate finance targets will not be credible. 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.


African Ministers of Environment called on the Glasgow COP to “set a new post 2025 climate finance mobilization goal with developed countries committing to mobilize jointly at least USD 1.3 trillion per year by 2030, of which 50% for mitigation and 50% for adaptation and a significant percentage on grant basis from a floor of USD 100 billion, taking into account the needs and priorities of developing countries and in particular the special circumstances of Africa.” The first Needs Determination Report, adopted at the 26th meeting of the Standing Committee on Finance, noted that the costed needs of developing countries up to 2030 amounted to about USD 5.9 trillion (summarized in Table 2 of the executive summary of the report). These estimates offer relevant benchmarks for the scale of the new climate finance commitments that developed countries should pledge.


For media queries: contact@veritasglobal.ch

Briefing prepared by:



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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