• Vicente Paolo Yu

OECD inflates climate finance estimates ahead of COP26

Updated: Oct 27, 2021

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

Photo by Pascal Weiland on Unsplash

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.

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