Climate finance is a key issue being discussed at this year’s climate conference: COP27. It refers to financing used for climate change mitigation and adaptation, as well as the loss and damage from climate change impacts. It can be sourced from a number of areas (public and private), using different types of financial instruments and at varying scales (local, national or transnational).
Climate finance is a key aspect of the UNFCCC, with the principle of “common but differentiated responsibility and respective capabilities” stipulating the need for developed countries to support developing countries financially with mitigation and adaptation methods, in recognition that developed countries have typically caused the majority of anthropogenic emissions to date. The obligation for developed countries to lead the mobilisation of climate finance and to support developing countries was reaffirmed in the Paris Agreement, with developed countries committed to collectively mobilise $100bn annually in climate finance to support developing countries by 2020.
However, this target was widely missed and was a key factor of discussions at COP26 in Glasgow, 2021. During COP26 fresh climate finance pledges were made and the agreement that, by 2025, a new collective quantified goal on climate finance will be set, starting from a floor of $100bn per year and taking into account the needs and priorities of developing countries.
Climate finance continues to be high on the agenda for negotiations at COP27, with loss and damage at the forefront of discussions for the first few days.
Climate finance for mitigation
To date mitigation measures have received the majority of financial investment. Climate Policy Initiative’s 2019/2020 Global Landscape of Climate Finance shows that ~90% of climate finance has gone to mitigation projects, with the lion’s share directed at renewable energy systems.
The Glasgow Financial Alliance for Net Zero (GFANZ) was also announced at COP26 and has seen over $150tn of private capital committed by private institutions towards transforming the economy to net zero. A report which was released before COP27 however shows that GFANZ has cut ties with the UN-backed Race to Net Zero campaign. This means that the minimum requirements for participation in the scheme is no longer aligned with the campaign and the associated use of science-based targets to reach net zero.
At COP27 Finance Day the US announced the Energy Transition Accelerator, which aims to develop a new carbon credits market to finance the decommissioning of coal and accelerate clean energy in developing countries, further trying to support mitigation in developing nations.
Climate finance for adaptation and resilience
With a significant amount of warming already locked in for the planet (the global average temperature has risen over 1.1°c since 1880 and the IPPC has projected that in a moderate emissions scenario that features little change from today’s global-development patterns average global temperatures will rise by 2.1–3.5 °C) it is vital that finance is made available for the inevitable adaptation measures needed across the globe to a changing climate to support climate resilience.
Adaptation and resilience have historically been neglected both in terms of investment and discussion. At COP26, developed countries agreed to at least double finance for adaptation from 2019 levels by 2025, equating to roughly $40bn. This represents a step in the right direction but more work is needed at COP27 to determine how this finance can be best-used and directed.
COP27 has seen the release of the Adaptation Agenda, which outlines 30 Adaptation Outcomes to enhance resilience for 4 billion people living in the most climate vulnerable communities by 2030. This includes specific areas to invest money to support adaptation.
Watch our previous webinar on financing adaptation and resilience, presented by IPCC Lead Author David Viner to find out more about the issue.
Loss and damage
Loss and damage has been at the forefront of the discussions at COP27, with countries bearing the brunt of climate change impacts arguing for a specific financial mechanism: a loss and damage fund. This fund would support poorer countries to recover from climate-related disasters with the finance provided by countries which have contributed the most to emissions leading to climate change.
Discussions on loss and damage are likely to dominate COP27 over the next two weeks. Research has shown that the top 20 worst-affected countries, such as Pakistan which has been hit by devastating floods, contribute less than half a tonne of CO2 per person - against the US and Canada's 14 tonnes, Australia's 15 tonnes, and Saudi Arabia's 18 tonnes per person. Until this disparity is acknowledged through tangible action and investment, it is unlikely that negotiations will get very far.
At COP27 China's climate envoy stated that it would be willing to support a mechanism for compensating developing nations for loss and damage, but it was later declared that this would not involve direct payment. The UK also committed to allow debt referrals where countries are hit by disaster but did not promise direct payment. The loss and damage issue therefore remains high on the agenda.
Uniting the world of finance and economics with the complex natural systems linked to climate change requires widespread adoption of science-based targets and greater harmonisation of multiple sustainability ambitions to provide markets with the certainty needed to drive forward green investments. Last year, the IES published its Manifesto for Transformative Change, which outlines 54 recommendations for global climate action, as well as the analysis and evidence to support them. This includes 5 key recommendations for how finance can be utilised for climate action.
Over the course of COP27 we will be producing a number of outputs aligned with the Presidency-themed days and championing the role of science and evidence-led action. This article was prepared for the Finance Day of COP27. After COP we will reflect on the progress made and the key outcomes from the conference.
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