The ongoing 29th Conference of Parties (COP29) in Baku, Azerbaijan, has a critical decision to make on delivering finance. In 2010, at the Cancun round of the global climate talks, developed countries had agreed to provide developing countries $100 billion per year by 2020.
However, ever since the adoption of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, developed countries have evaded their responsibility to provide “new and additional” climate finance to developing countries in order to enable them to undertake climate measures without compromising. on their developmental priorities.
The 2015 Paris Agreement required the countries to define a New Collective Quantified Goal (NCQG) on climate finance before 2025. At Baku, there are three key issues in finance: quantum, sourcing, and access modalities of such financing.
On the quantum question, the second Needs Determination Report by the Standing Committee on Finance under the UNFCCC estimated that between $5-7 trillion would be needed by 2030 to meet half the needs of 98 countries. It is no surprise, therefore, that developing countries, including India, have asked for commitments of $1-2 trillion under the NCQG. Given the scale of financing required, it has to be predominantly from public sector sources. Going by the long-term trend of the leverage ratio between public finance and private finance (1:4), $1-2 trillion must be sourced through budgetary allocations by developed countries to mobilize $5-7 trillion in aggregate. However, that might not be enough given that quantum only meets half the needs of less than 100 countries out of 194 signatories to the UNFCCC.
In addition to the scale, however, the modalities of access to climate finance need bold political decisions. The limited ability of public finance in developing countries to unlock the potential of financial markets for climate action is well understood. COP27 had categorically underestimated how high debt burdens of developing countries limited their ability to fully leverage the fiscal instruments to incentivize domestic private capital for climate action. Accessing $1-2 trillion through debt instruments, therefore, isn’t an option for developing countries. It would add to their fiscal and economic vulnerabilities, further deteriorating their adaptive capacity with regards to the climate crisis. One must also keep in mind that the remaining quantum will eventually have to be sourced from the capital market.
Clearly, a successful agreement on finance at COP29 goes beyond the quantum of climate finance. The ultimate objective is to strengthen the fiscal capacities of developing countries and unlock financial markets for financial flows aimed at climate action. This would require reducing the debt burden of developing countries and ensuring that the financial markets begin to look at the risks and returns differently — in a manner that favors climate investment in developing countries. While instruments such as “debt swaps for climate” and “risk guarantees” have been proposed and indeed experimented with, the scale of the challenge would require bolder commitments.
The issue of prohibitively high lending rates in developing countries compared to developed countries, along with the bulk of global financial flows being restricted within the OECD countries, has been well documented. Hence, ensuring a flow of climate finance to developing countries at affordable lending rates is key. The success of COP29, therefore, should not be assessed only by the quantum of finance it agrees on but must also consider the scope of its influence on making the global financial markets favorable for climate action in developing countries. In order to ensure that the NCQG is adequate, predictable, and of quality, developed countries must not only commit public resources at scale but also put their economic credibility behind climate investments in developing countries. An institutionalised way of doing that would be to revisit countries’ credit ratings. It would be wise to think of the potential that developing countries offer for averting the climate crisis, with timely investments as a measure of credit ratings in addition to the macroeconomic strength and political stability of these countries.
Ultimately, if timely climate investments are not made, the stability of the global economic order itself may be prone to climate-induced risks. The outcome of COP29 in terms of climate finance, therefore, could only be the beginning of the finance agenda. It better be firm and forward-looking.
Manish Kumar Shrivastava is senior fellow and associate director, Earth Science and Climate Change Division, The Energy and Resources Institute (TERI). The views expressed are personal
