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
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.
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.
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.
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.
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)  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.
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.
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.
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 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.
 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.
 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.
 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.