COP29: Why Climate Finance Will Remain Elusive
Ever since the Conference of Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC) first met in 1995, effective implementation of the commitment taken by the developed countries to “provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations” has received considerable attention. This was more so in the 29th COP (COP29) held at Baku in November 2024 which was expected to operationalise two new financial mechanisms for developing countries, namely, the New Collective Quantified Goal (NCQG), and the “Loss and Damage Fund” (L&D Fund). The former is intended to enable developing countries to meet their Nationally Determined Contributions or efforts to reduce national emissions and adapt to the impacts of climate change, a key element of the Paris Agreement of 2015. The L&D Fund, on the other hand, could test the commitment of the Parties to the Climate Convention for meeting the long-standing demand of the most vulnerable countries to be compensated for the “loss and damage” they have been suffering due to climate change.
Operationalisation of the NCQG is critical because it is expected to usher in a new phase of financial support for the Parties to the Climate Convention, the first step towards which was taken in the Paris Agreement. This financial mechanism is expected to ensure the continued provisioning of targeted climate finance, a process initiated in 2009, through the decision to set up the Green Climate Fund (GCF). The NCQG is considered vitally important for channelising the larger flow of funds that developing countries urgently require for climate action. It could support the implementation of low-carbon, climate-resilient solutions in energy, transport, agriculture, and other vital systems (https://www.wri.org/insights/ncqg-key-elements). Increasing financial support through the new window should enable developing countries to step up their climate ambitions in the next round of national climate plans, which are due in 2025.
The L&D Fund is the outcome of the COP27 decision to “establish new funding arrangements for assisting developing countries that are particularly vulnerable to the adverse effects of climate change”. The L&D Fund came into existence during COP28, after the Governing Instrument of the Fund was approved (https://shorturl.at/fQ47N). Ironically, this development took place more than three decades after the Alliance of Small Island States (AOSIS) made a case for compensating vulnerable countries for the loss and damage they have been suffering due to climate change in the course of negotiations to formalise the UNFCCC.
(i) COP29 Decisions on the “New Collective Quantified Goal”
At the conclusion of COP29, the organisers of the event were quick to announce that the “Conference agreed to triple finance to developing countries, protecting lives and livelihoods” (https://bit.ly/4go7F5H). The announcement alluded to the agreement in COP29 whereby developed countries would take the lead to make available at least $300 billion per year by 2035 for developing country Parties for climate action” up from the “previous goal of $100 billion annually”, which was agreed to as a part of the Copenhagen Accord in 2009. Additionally, COP29 called “on all actors to work together to enable the scaling up of financing to developing country Parties for climate action from all public and private sources to at least $1.3 trillion per year by 2035”. These two decisions formed the basis of the “new collective quantified goal” on climate finance.
It is ironic that these decisions in COP29 made headlines even when financial pledges to developing countries had two sets of problems. First, developed countries should have met the previous target of $100 billion by 2020; however, it was not until 2022 that their contributions reached the target. Second, private climate finance from developed countries has helped to realise the target, increasing by more than 67% in the two years since the COVID-19 pandemic. This implies that developing countries were forced to rely more on private sources of finance with relatively stiff borrowing conditions when facing economic stress due to the pandemic-induced downturn. These are worrying signs, especially for debt-distressed low-income countries.
Finally, the quantum of funding promised in Baku fell considerably short of the needs of the developing countries. Several estimates, including country submissions, have shown that, as opposed to the $300 billion per year that developed countries have promised by 2035, developing countries would currently need at least a trillion US dollars annually to combat climate change and address its adverse impacts. In its submission, India had argued that “developed countries need to provide at least $1 trillion per year, composed primarily of grants and concessional finance” and that the “quantum can be scaled up in proportion to the rise in the needs of developing countries” (https://bit.ly/4is3aJ9). Thus, the implementation of the current target of $100 billion and the new goal of $300 billion to be achieved by 2035 can both be criticised using the arguments that India made in its statement. In the same vein, Saudi Arabia argued that developed countries should provide $1.1 trillion to developing countries, which must largely be grant-based and concessional finance (https://bit.ly/3VTbzfp).
Assessments from several institutions, including the Climate Convention’s Standing Committee on Finance (SCF), have endorsed the estimates provided by India and Saudi Arabia. SCF estimated earlier this year that the financial requirements of 93 developing countries, based on their Nationally Determined Contributions (NDC) or the national climate action plans provided in fulfilment of their Paris Agreement commitments, would be in the range of $5 to $7 trillion by 2030 (https://unfccc.int/documents/636846). Using a similar methodology, a couple of private funds reported that the aggregate financing needs of 126 developing countries are likely to be $7.8 to $13.6 trillion by 2030 (https://bit.ly/4fbGwlI). However, both reports acknowledged that the estimates could grossly underestimate actual needs, considering that not all NDCs analysed were costed and that NDCs may not necessarily represent the highest level of ambition of countries to achieve collective climate goals.
The UNCTAD has estimated that the annual requirements of developing countries would increase from $500 billion in 2025 to $1.55 trillion by 2030. According to the UNCTAD, developed countries could agree to a target for climate finance equivalent to 0.7% of their gross national income (GNI) from 2025 and increase it to at least 1% of GNI by 2030. UNCTAD’s target does not seem unachievable, given that the UN target for developed countries to provide at least 0.7% of their GNI as official development assistance was not met by most developed countries.
In its recent report, the Independent High-Level Expert Group on Climate Finance estimated that the investment needs of emerging markets and developing countries, excluding China, would be close to $2.4 trillion a year until 2030, mainly for clean energy transition, adaptation and resilience, and loss and damage (https://bit.ly/41Om5YT). The International Expert Group estimates show that external finance from all sources, international public, and private sector sources in particular, would have to provide $1 trillion per year of the total investment need by 2030 and around $1.3 trillion by 2035. Almost half of external finance would have to be met by private finance, which would imply a 15- to 18-fold increase in current levels.
These estimates have three disquieting possibilities for emerging markets and developing countries. First, they would have to depend largely on private sources, as public institutions from developed countries may not be able to provide concessional finance that countries like India and Saudi Arabia have argued for. In other words, developed countries are unlikely to take larger responsibilities to provide climate finance, according to the International Expert Group. Second, the likelihood of the private sector stepping in at such a significant scale seems remote, given that the creditworthiness of many developing countries has been declining in recent years. Finally, even if the private sector takes responsibility, as the International Expert Group expects, the recipient countries would find it extremely challenging to manage their external debt.
The projections of the International Expert Group are significant because they show that developed countries would continue to renege on their commitment to providing financial assistance to developing countries under the Climate Convention. Developed countries’ first firm commitment on climate finance came a decade and a half after the Convention came into effect. In the Copenhagen Accord adopted at the end of COP15 in 2009, they committed themselves to a “goal of mobilizing jointly $100 billion dollars a year by 2020 to address the needs of developing countries” (https://bit.ly/3Drbp8y). The first signs that they would not stand by their commitment appeared immediately afterwards in COP16, wherein it was clarified that the “funds provided to developing country Parties may come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources” (https://bit.ly/4gtCcQi). This meant that meeting the financing needs of the developing countries was no longer the sole responsibility of the developed countries; private and alternate sources would contribute towards meeting the target of $100 billion.
Implementation of the $100 billion target was included as the central part of the “grand bargain” at the heart of the Paris Agreement, which has become the key reference point for the implementation of the Climate Convention. However, there were three major shortcomings in the implementation of this target. First, developed countries took advantage of ambiguity in the language of the Copenhagen Accord and interpreted $100 billion as the ceiling and not the floor. This problem became ever greater after they forced the extension of the target until 2025, while agreeing to the Paris Agreement, five years beyond the end date agreed upon in the Copenhagen Accord. Finally, there were shortcomings in the transparency requirements of the Paris Agreement Rulebook, which went against the interests of developing countries. The Rulebook stipulated that developed countries report on the funding provided through various channels and by financial instruments, namely grants, concessional loans, non-concessional loans, equity, guarantees, insurance, and others. However, what was not specified in the agreements were the proportions of financing from these different sources and how grants and loans should be counted (https://bit.ly/4iOv4j2). This information is critical for assessing the implications of financial support extended to developing countries, including the level of accumulated debt, especially of the highly indebted low-income countries, many of whom need considerable resources to cope with the climate crisis.
(ii) Institutionalising the “Loss and Damage” Fund
Excessive attention given to the “new collective quantified goal” at Baku took the focus away from the other key financial mechanism, the “Loss and Damage Fund”. This long-long-delayed mechanism aimed at providing support to countries most vulnerable and adversely affected by the effects of climate change was fully operationalised during COP29. The importance of the L&D Fund has increased significantly in view of the catastrophic climate events that several developing countries have suffered over the past few years.
Since the launch of its operations in COP28, the pledges to the L&D Fund have totalled $749.3 million from 26 countries. Four countries, France, Italy, Germany, and the UAE, together account for 60% of the pledges made so far. However, by the end of 2024, less than a fifth of the total pledged would have been contributed, with the US contributing 13.6%.
As in the case of the “new collective quantified goal”, financial resources would be a major constraint on the effective operation of the L&D Fund. Available estimates indicate that the actual requirements were between $171 billion and $671 billion in 2020, and are expected to increase to $447 billion and $894 billion by 2030 (https://bit.ly/3Bkwqku). The vacuousness of the L&D Fund clearly stands exposed.
(iii) Providing Climate Finance not among the Priorities of the Developed Countries
When they endorsed the Climate Convention, the developed countries had made a commitment to “provide new and additional financial resources to meet the agreed full costs incurred” by developing countries “in complying with their obligations” (https://bit.ly/3OQOsOg). They recommitted themselves in the Paris Agreement, agreeing to assist developing countries “with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention” (https://bit.ly/3D2Uadk). Through the three decades of implementation of the Climate Convention, developing countries have consistently argued that developed countries have never intended to provide them with financial resources necessary to stave off the climate crisis. The decisions taken in COP29 fully vindicate the position of developing countries. Undoubtedly, climate finance will continue to remain elusive.
Saving the planet from an impending climate catastrophe does not figure in the priorities of developed countries, including the US. Defence spending was one of the highest priorities in the US, which, in FY 2024, was close to $2 trillion or over 16% of the US federal budget (https://bit.ly/4gst4e2). Though the defence spending of Western European countries was slightly less than $350 billion in 2023 (https://www.sipri.org/databases/milex), these countries could increase their spending in the near future, as the US President-elect has insisted that the members of the North Atlantic Treaty Organization (NATO) must increase their spending (https://bit.ly/41tKKSu).
Over the past two years, the US’ defence spending increased by 16%, fuelled by its commitments to support Ukraine and Israel (https://doi.org/10.55163/CQGC9685 ). Ukraine has received from the US, over $25 billion since the beginning of its war with Russia (https://bit.ly/3ZJGJb9) and US’ principal ally, Israel received $17.6 billion over the past year since the October 2023 (https://bit.ly/3D7Iru8). When these commitments are compared with the $17.6 million that the US has contributed to the L&D Fund, the irony is glaring.
Biswajit Dhar is a former Professor at Jawaharlal Nehru University and presently a Distinguished Professor at Council for Social Development, New Delhi.
Image courtesy of COP29