• Vicente Paolo Yu

Methodology used to critique OECD estimates of climate finance

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

Photo by Crissy Jarvis on Unsplash


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.


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