A new report, published by the Organisation for Economic Cooperation and Development (OECD), showed that economically developed countries fell short of their promise to jointly mobilise $100 billion a year, towards the climate mitigation and adaptation needs of developing countries, in 2021 – one year past the 2020 deadline. The report said developed countries mobilised $89.6 billion in 2021 and that finance for adaptation fell by 14% in 2021 compared to 2020.
Why is the OECD report notable?
The OECD is largely a group of rich countries including the U.S., the U.K., Germany, France, Switzerland, Canada, and others. The report, as such, offers a peek into their idea of climate finance ahead of the COP 28 climate talks in the United Arab Emirates next week, where the topic is expected to be an important bone of contention.
The report also comes against the backdrop of a pledge by the bloc of developed nations at the COP 26 talks in Glasgow, in 2020, to double adaptation finance. Parties to the United Nations Framework Convention on Climate Change (UNFCCC) had also said at Glasgow, “with deep regret” that the developed nations bloc hadn’t met the $100 billion climate finance goal in due time in 2020.
The failure to mobilise adequate climate finance lowers capacity in developing countries to address climate mitigation (like emissions reduction with renewable energy) and adaptation needs (like developing and incentivising climate-resilient agriculture), and reduces trust among the world’s poorer countries that the developed world is serious about tackling the climate crisis.
How is climate finance accounted for?
The OECD report showed that of the $73.1 billion mobilised in 2021 by the public sector via bilateral and multilateral channels, $49.6 billion was provided as loans. While the report doesn’t classify them in terms of the rates at which they’re provided, data available elsewhere sheds light on the extent to which rich countries rely on loans at commercial rates to fulfil their climate finance obligations.
For example, an assessment by the American non-profit research group Climate Policy Initiative of global climate finance flows between 2011 and 2020 found that 61% of climate finance was provided as loans, of which only 12% was at concessional interest rates.
So when the OECD report states that two-thirds of public climate financing was provided as loans, it means the conditions attached to such financing could further exacerbate debt stress in poorer countries.
This is related to a critique of the OECD report: it considers loans at face value, not the grant equivalent, when arriving at total climate finance figures. So while poorer countries shell out money towards repayment and interest, the loan is still counted as climate finance provided by the developed world.
What is additionality?
Another issue in the OECD report pertains to additionality. The UNFCCC states that developed countries “shall provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations under the convention”.
This means developed countries can’t cut overseas development assistance (ODA) in order to finance climate needs because that would effectively rob Peter to pay Paul. In the real-world, it could cut off support for healthcare in order to reallocate that money to, say, install solar panels.
The “new and additional finance” also means developed countries can’t double-count. For example, a renewable energy project could contribute to both emission reductions and overall development in a region. Per the U.N. Convention, however, donor countries can’t categorise such funding as both ODA and climate finance because it wouldn’t fulfil the “new and additional” criterion.
Yet they do. A few years ago, European Union officials admitted to double-counting development aid as climate finance.
What counts as climate finance?
At present, there is no commonly agreed definition of ‘climate finance’ because developed countries have endeavoured repeatedly to keep it vague. For example, at the COP 27 in Egypt last year, Australia and the U.K. even sought to end discussions to define ‘climate finance’. In the run up to the COP 26 in Glasgow, the U.S. led an effort to block debate on a common definition, alongside Switzerland, Sweden, and some other developed countries.
The lack of definitional clarity has reportedly led to strange situations like funding for chocolate and gelato stores in Asia and a coastal hotel expansion in Haiti being tagged as climate finance.
The ambiguity works in favour of richer countries because it leaves the door open to arbitrarily classify any funding, including ODA and high-cost loans, as climate finance and escape the scrutiny that a clearer definition might bring.
So while developed countries can claim they have provided billions in climate finance, the actual flows need to be checked for whether they actually went into climate mitigation and adaptation in developing countries or something else.
How much do developing countries need?
The latest OECD report also claims, based on preliminary and as-yet-unverified data, that the $100 billion goal was likely met in 2022. But the data is neither finalised nor published, and the advisable take-away is scepticism.
Note also that the figure of $100 billion came out of thin air at the COP 15 talks and isn’t based on an assessment of how much climate investment developing countries actually need.
The OECD report added that by 2025, developing countries are estimated to require around $1 trillion a year in climate investments, rising to roughly $2.4 trillion each year between 2026 and 2030. The $100 billion goal pales in comparison, dwarfed further by the fact that it remains unmet.
What role can the private sector play?
To meet the scale of the challenge, people like the U.S. climate envoy John Kerry and World Bank president Ajay Banga have routinely emphasised the role the private sector could play.
But the OECD report itself threw cold water on such hopes, showing that private financing for climate action has stagnated for a decade. The problem is particularly worse for climate adaptation because investment in this sector can’t generate the sort of high returns that private investors seek and which the mitigation sector – like a solar or wind farm – could generate. There also haven’t yet been signs that the private sector is interested in massively scaling up its climate investments.
At the end of the day, the ball rolls back into the court of public funding, i.e. governments in the developed world plus multilateral development banks.
Rishika Pardikar is a freelance environment reporter based in Bengaluru.
