What is climate finance — and why developing countries need it | Explained News


The United Arab Emirates, which is hosting the ongoing COP28 climate summit, announced on December 1 that it would contribute $30 billion to a new fund aiming to divert private sector capital towards climate investments and improve financing for the Global South.

UAE President Mohamed bin Zayed al-Nahyan said the fund was “specifically designed to bridge the climate finance gap” and stimulate further investment of $250 billion by 2030.

Climate finance is a key topic of discussion at COP28 as it has been a bone of contention between low income countries and developed nations. Here is a look at the issue.

What is climate finance?

Climate finance refers to large-scale investments required for actions aiming to mitigate or adapt to the consequences of climate change.

Adaptation involves anticipating the adverse effects of climate change and taking appropriate action to prevent or minimise the damage they can cause. One example of adaptation measures includes building infrastructure to protect coastal communities against sea-level rise.

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Meanwhile, mitigation involves reducing the emission of greenhouse gases (GHG) into the atmosphere so that impacts of climate change are less severe. Mitigation is done by increasing the share of renewable energy sources, expanding forest cover, etc.

Why are developing nations demanding climate finance?

Developing countries have argued that developed nations should provide financial assistance to them to tackle climate change because it was due to the (now) rich world’s emissions over the last 150 years that caused the climate problem in the first place.

That’s why, the 1992 United Nations Framework Convention on Climate Change (UNFCCC) — the mother agreement under which COP summits have been taking place — required high-income countries to provide climate finance to the developing world.

No written promises were made until 2009, though. That year, developed countries finally agreed to provide $100 billion a year to developing countries by 2020. In 2010, the Green Climate Fund (GCF) was established as a key delivery mechanism. The 2015 Paris Agreement reinforced this target, and extended it to 2025. However, the high income countries are yet to fulfil their pledge (more on this later).

How much climate finance is needed?

According to a 2021 analysis by the UNFCCC standing committee, developing countries require at least $5.8 trillion by 2030 to meet their needs mentioned in their Nationally Determined Contributions (NDCs) — an outline for their efforts to reduce national emissions and adapt to the impacts of climate change. This means they require around $600 billion every year, which is much lower than the amount promised by developed countries.

To make matters worse, “a lack of available data, tools and capacity for determining and costing such needs in several countries imply that these figures are likely an underestimate,” according to a report by the London School of Economics. The UNFCCC estimate also doesn’t include the huge expenses that governments incur to tackle the impacts of extreme weather events like floods, droughts, and wildfires caused by climate change. This particular type of expense is being considered separately under the funding mechanism for loss and damage which was announced by countries at COP27 in 2022 — the fund was finally launched recently in COP28, but its scale or replenishment cycle remains unclear.

In 2022, Nicholas Stern, a renowned climate economist, in his report estimated that about $2 trillion will be needed each year by 2030 to help developing countries cut their greenhouse gas emissions and cope with the effects of climate breakdown.

How much climate finance is being provided?

Different organisations have debated over the actual amount of money being provided to developing nations.

Last year, the Organisation for Economic Cooperation and Development (OECD) — largely a group of rich countries including the US, the UK, Germany, France, Switzerland, Canada, and others — said that the developed world provided $83.3 billion in 2020 to the low income countries as climate finance.

However, Oxfam contested the figure, accusing the developed countries of using dishonest and misleading accounting to inflate their climate finance contributions to developing countries by as much as 225%.

“Oxfam estimates between just $21-24.5 billion as the ‘true value’ of climate finance provided in 2020, against a reported figure of $68.3 billion in public finance that rich countries said was provided (alongside mobilised private finance bringing the total to $83.3 billion),” it said.

Moreover, the higher income countries have also been criticised for giving most of the money as non-concessional loans. “This has added to debt pressures across regions and income groups,” according to a UN report.

A recent study from CARE International, a global nongovernmental organisation focused on poverty and social justice, revealed that 52% of climate finance provided by 23 rich countries from 2011 to 2020 was money that previously went to development budgets, including programs focused on health, education, and women’s rights, Foreign Policy magazine reported.

“Calls for more climate finance are important, but if current practice is any guide, a large share of the funds will be taken from budgets that fund critical development priorities, such as health, education, women’s rights, infrastructure construction, and humanitarian aid,” it added.

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