The 'implementation COP' turns into a 'finance COP'

Introduction

Billed as an ‘implementation COP’, the summit in Egypt is in fact a finance COP, not because of actual financial commitments made, which are so far generally modest, but because it has underlined that finance is the most important factor in transforming climate ambitions into reality.

Increasing public and private investment in mitigation and adaptation projects is key to the realisation of many countries’ NDCs, and thus the collective goals of the Paris Agreement. This will require the restructuring of global financial systems and institutions to redirect capital away from the causes of climate change and into the solutions.

As remarked by John Kerry, US Special Envoy for Climate, in his talk at Bloomberg Green on Wednesday, restructuring multilateral banks and providing concessional capital and insurance to de-risk private investment are critical to addressing the shortfall in climate finance.

A major challenge for climate finance is the need to increase the flow of capital from the Global North to the Global South, as access to adequate funding will be critical for less developed economies to meet their NDC goals. Ensuring this capital flow can also be seen as a way of improving co-operation between the parties to the COP by going a way to address historical inequities and issues of climate justice, as well as increasing the confidence of countries of the Global South to increase their ambition. If done well, climate finance will also have major co-benefits for assisting the Global South to meet their Sustainable Development Goals.

A report commissioned for the COP by Egypt and the UK and released this week claims that the failure of the Global North to deliver on its promise of providing $100 billion in climate finance by 2020 has impacted this confidence and trust between the parties.

There remains a large gulf between the levels of financing required by the Global South and that being provided by the Global North. The report also states that US$1 trillion in external financing for the Global South will be required annually by 2030 to meet the scale of investment needed for emerging markets and developing countries (excluding China) to reach their climate and related development goals.¹ The enormity of this gulf was apparent today with relatively slow progress being made towards increasing climate finance.

Country announcements

The lack of countries making increased funding pledges this year has been widely reported. However, given the high number (and value) of new climate finance commitments at COP26 in Glasgow, it is not surprising that COP27 has been quieter in this regard.

A positive development was an announcement by the UK of new climate finance with funding for adaptation to increase to £1.5 billion by 2025. Similarly the Netherlands pledged 100 million euros for adaptation in Africa.

The US Government, in partnership with the Rockefeller Foundation and the Bezos Earth Fund announced it would bring a proposal to COP28 for an ‘Energy Transition Accelerator’ that aims to generate carbon credits from greenhouse gas reductions from emissions reductions projects in the Global South. If successful, this could assist in creating additional investment in emissions reductions projects, but it is yet to be seen how it may be differentiated from existing voluntary carbon markets.

The EU announced a green hydrogen partnership with Egypt. This deal under the REPowerEU plan aims to import 10Mt of hydrogen by 2030, creating demand for an international green hydrogen market.

We have reported on new finance commitments for loss and damage in a preceding blog post, and therefore do not address them in this post.

Multilateral financial institution announcements

World Bank-led Climate Investment Funds has announced funding for nature based solutions such as the restoration of degraded wetlands in the Zambezi River Basin Region. The funding will begin with a pilot of $350 million pledged by Italy, the UK and Sweden with further investment plans to be prepared in anticipation of further funding pledges.

Egypt has been assisted by the Green Climate Fund to develop a climate investment plan to provide a model for securing finance for its climate priorities. Climate investment plans are intended to provide investors with climate risk, vulnerability and feasibility information to make it easier to match investors to initiatives within each country. The roll out of climate investment plans will provide increased opportunities for investors to select appropriate countries and projects to invest in and it is hoped that this increased transparency will accelerate investment in countries that adopt them.

In addition, the United Nations Economic Commission for Africa launched an initiative to reduce the cost of climate finance through green, social and sustainable bonds issued at affordable rates. It will do so by establishing a sustainability sovereign debt hub to facilitate debt issuances that are aligned with climate targets, capacity building to enable more countries to access green and sustainable bond markets, and encouraging multilateral development banks to offer more guarantees for external debt, or facilitate debt cancellation.

Private Sector announcements

The International Capital Market Association announced that it would be providing wording for climate resilient debt clauses, following the outcomes of a working group which included the G7, IMF and World Bank. The clauses will allow for a freeze on repayments of two years following a relevant climate event.

Norwegian energy company Scatec announced the development of a major 100MW green hydrogen plant in Egypt, located on the Red Sea coast.

Negotiations

In light of the need for a new target to replace the missed goal of $100 billion by 2020, the High-Level Ministerial Dialogue on the New Collective Quantified Goal on Climate Finance focused on expectations for the goal, including how to avoid repeating the missed $100 billion pledge.

Suggestions included broadening the base of state contributors, providing a specific focus on funds going to least developed countries and small island developing states as well as mainstreaming climate finance into multilateral financial institutions.

Negotiations are ongoing in key finance-related streams of the negotiations, including on long-term finance, and the new collective quantified goal on climate finance. Key issues relate to the fulfilment of pledges, the gap between needs and delivery, accounting for and tracking the delivery of finance commitments, the balance between mitigation and adaptation finance, and the amount of the new collective goal.

Meanwhile negotiations continued, albeit slowly, on Articles 6.2 and 6.4 of the Paris Agreement. A further post in this series will provide more detail on the Article 6 negotiations.

Points of interest you may have missed

• The UK will be first country to pause debt service payments for low-income countries and small island developing states when they are hit by climate disasters.
• The International Organisation of Security Regulators is opening a consultation until 10 February to seek views on ensuring fair and functional carbon markets.
• Countries from the Global South have voiced concerns about the lack of sufficiency, sustainability and predictability of resources available to the Adaptation Fund.
• Small island developing states have called for a non-proliferation treaty to stop the further production of fossil fuels.

This post was written by Jay Gillieatt and Sophie Whitehead. The authors would also like to acknowledge Charlie Bevis for his ‘on the ground’ insights.