COP26 Reflections on Climate Finance Matters

Karishma Ansaram a, b

a,PhD Student
IESEG School of Management, Univ. Lille, CNRS, UMR 9221 – LEM – Lille Economie Management, F-59000 Lille, France

b Contact Point,
Finance & Market Working Group, YOUNGO                                                                                                   

INTRODUCTION

‘Climate Finance is known as the elephant in the room’- Chatham House. The latter has dominated the negotiation agenda in COP26 more than in any other COP. Negotiators agreed in Paris, in 2015, to align financial flows with a pathway towards low greenhouse gas emissions and climate-resilient development, but they left numerous tricky elements for successors to hammer out.

The success of COP26 rested on Climate Finance matters from diverse streams; the delivery of the $100 billion goal, long term finance program and Article 6 of the Paris Agreement which is largely related to emission trading. Despite the long preparation and discussion, Parties were hanging on the negotiations until the last minute about the deliverables on Climate Finance. In this piece of reflection, we bring forward the key matters that were reigning the negotiations, present the related outcomes and discussion on the way forward or ongoing work programmes.                                                                           

$100 billion Climate finance goal

The two-week negotiations have been outcried over the missed target of $100 billion a year promise that was made more than a decade ago in 2009 Copenhagen Accord and formalised in Cancun, 2010. Climate Finance need is increasing every year with the uprising climate risk and especially the conditionality of developing countries’ nationally determined contributions (NDCs) are relying on external financing.

However, amongst the unfulfilled promise, we saw the introduction of news promises to sooth the paining negotiations. OECD[1] forecasts released on the eve of COP26 was a hope of light that the target will be met by 2023. Unsurprisingly, the ambiguity over this projection was the centre of critics i.e key matters such as country-by-country figures are not set out. This two-year hope was least of an assurance to developing countries.

The most recent estimates included in the fourth Biennial Assessment[2] (launched during COP26) by the Standing Committee of Finance provides overview of climate finance flows show that global climate finance flows reached an annual average of $775 billion in the period 2017-2018, an increase of 16% from the period 2015-2016. However, total public finance support from developed to developing countries only grew 2.7% in the same timeframe. Most developed countries have not yet mobilized climate finance in accordance with their fair share.

What comes after the $100 billion is the second-highest priority on the climate finance agenda. Parties have several options for launching a process to establish a new, collective, quantified goal for climate finance for the post-2025 period, from a floor of $100 billion per year, to be agreed by 2024. In doing so, countries can consider the first-ever Needs Determination report of developing countries, published by the Standing Committee on Finance in October 2021.                                                                                                     

LONG TERM FINANCE

As mentioned before, the $100 billion is only a drop in the ocean for need of Climate Finance. Developing countries need in between $ 5.8-5.9 trillion by 2030 (UN, 2021). Matters of concern on long term finance goes beyond mere billion or trillion. Parties especially least developing countries put forward urgent matters that needs to be addressed.

First of all, the disproportionate allocation of climate finance between adaptation, mitigation and loss and damage was flagged. The Secretary-General of the United Nations, António Guterres has said that 50 per cent of overall climate finance must be committed to adaptation, but only around 25 per cent of this US $80 billion was allotted as such. No formal decision was taken on adaptation finance, except through Article 6, but Parties are requested to submit their adaptations communication before COP27 (only 35 have done so to date).

Loss and damage talks were left at bay in previous COPs. After much lobbying and advocacy for loss and damage, for the first time, the latter has garnered global attention in COP and an entire section was dedicated to this matter in the Glasgow Climate Pact[3]. Countries are increasingly including loss and damage in their NDCs. The G77 plus China urged COP26 to introduce a ‘Glasgow Loss and Damage Facility’ to offer financial assistance to vulnerable countries. Accessing the funding was one of the obstacles that least developing countries mentioned. They are pushing for a harmonized approach for the grant application process.

Parties also commit to a process to agree on long-term climate finance beyond 2025. A consortium of investors has pledged to align $130 trillion of private finance assets – 40 per cent of the total to net zero. Although the group is still substantially invested in fossil fuels companies, the agreement is a further part of the overall finance jigsaw, but much will depend on its implementation.

Developing countries are also pushing for more transparency on what is “counted” on climate finance and requiring rich countries to disclose more details about what type of climate finance they are contributing.

But that process must tackle two main major challenges. First, on the level of ambition, balancing assessments of need with political realism. Second, on learning lessons from the current goal – in particular ensuring clarity on additionality of funds as well as on measurement of progress as the lack of these has undermined trust in the current target.                                                                                                   

Article 6 of Paris agreement

Six years after the ratification of the Paris Agreement, the rulebook of Article 6 has finally been completed. The intense and overnight negotiations were rewarding at the end. Critics are not in a celebration mode over this but rather highlights that the language of the rulebook fell short of fully realizing the rules and procedures that needed to bring market forces to bear as strongly as possible on emission reduction.

Article 6 of the Paris Agreement[4] recognizes that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity. Article 6.2, 6.4 and 6.8 were related to the carbon pricing mechanisms and were largely negotiated.

Under Article 6.2, countries can transfer their mitigation outcomes against another country’s NDC, it is known as the internationally transferred mitigation outcomes (ITMOs). Environmental integrity and accountability of those transfers is key if we wish to meet the global climate goals. As such double counting should be avoided and the rules of corresponding adjustments were introduced such that the offset credits cannot be claimed twice. A second crunch issue was on adaptation finance through the Share of Proceeds which the article would not address but in the end concluded with encouragement to make adaptation finance available commensurate with what is collected under Article 6.4.

Article 6.4 was paradoxical of wanting to move forward by dragging the past along i.e the how to incorporate the Clean Development Mechanism (CDM) that was part of the Kyoto Protocol. The CDM, launched when the Kyoto Protocol was ratified by 192 countries in 1997, allowed the creation of emissions trading to let countries invest abroad to earn credit towards their Paris Agreement emissions targets. After much lobbying by climate activists on the ‘zombie credits’ of the CDM, the outcome gave room to a limited number of certified emission reductions (CERs) produced between 2013 and 2020 under the Kyoto CDM to be offset against countries’ NDC commitments for 2030. Environmental groups were wary that if CERs were allowed to be brought forward, the supply will increase thereby driving the price down and providing an easy way for countries to meet their NDCs, rather than directly reducing their emissions. Thus, the Article 6.4 catered for discounting (reducing) the CERs by 2% when they are being transferred as ITMOs.

There was debate among countries over a carbon trading tax intended to fund adaptation in developing nations. While bilateral trading in carbon offsets will not be subject to the levy, there will be a separate international system for issuing offsets, on which a 5 per cent tax will go to adaptation.

Standards are vital for environmental integrity and will enable tracking and transparency of the use of emission reductions and internationally transferred mitigation outcomes. The development of comparable and measurable standards and baselines for emission reduction activities under the Article 6 mechanism and for voluntary cooperation should be transparent and take into account sectoral expert consultations, as well as existing experience with MRV principles under the UNFCCC.

Article 6.8 provides a non-market mechanism. At the very beginning of the discussions, this section was undefined and could be about cooperation on development aid or on climate policy through fiscal measures, such as taxes on carbon usage or emissions. A Glasgow Committee on non-market approaches was also established to implement the work programme of Article 6.8. It will meet bi-annually along with the Subsidiary Body for Scientific and Technological Advice (SBSTA), starting in June 2022.                                                                                                         

DIVESTMENT AND JUST TRANSITION

In order to deliver on these promises, COP26 also agreed for the first time to accelerate efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies, and recognised the need for support towards a just transition.

COP26 President-Designate Alok Sharma has vocally supported a ban on coal finance or even all fossil fuel investments. Political signals in the right direction have emerged from the G7 Summit and the 76th UN General Assembly, in September, including the announcement by Xi Jinping on the Chinese decision to stop building new coal power projects abroad. Further outcomes are also expected at the G20 Rome Summit.

Conclusion

Glasgow has been a critical crossroad on Climate Finance negotiation matters. Finance has the power to reframe what is possible: more urgent action on adaptation and mitigation. Looking forward to the work programme on long term finance, accessibility and equity for the most vulnerable is key. Additionally, it is of utmost importance to look into the definition and standardization of climate finance based on an evidence-based assessment of needs.

A matter of life or death: At COP26, vulnerable countries tell developed nations it’s time to keep their promise on climate finance

https://news.un.org/en/story/2021/11/1105222

Has COP26 delivered enough on climate finance to drive the ambition that vulnerable communities need?

https://www.eurodad.org/cop_26_analysis

Cop26: African nations seek talks on $700bn climate finance deal

https://www.theguardian.com/environment/2021/nov/08/cop26-african-nations-seek-talks-climate-finance-deal

COP26: Article 6 rulebook updated, but remains work in progress

https://ihsmarkit.com/research-analysis/cop26-article-6-rulebook-update-but-remains-work-in-progress.html

COP26: Five reasons why carbon markets (Article 6) matter

https://carbonmarketwatch.org/2021/10/28/cop26-five-reasons-why-carbon-markets-article-6-matter/

Carbonmarketinstitute.org : COP26-Glasgow Article-6 Explainer

https://carbonmarketinstitute.org/app/uploads/2021/11/COP26-Glasgow-Article-6-Explainer.pdf

Business views on Article 6—for Parties – ICC – International Chamber of Commerce

https://iccwbo.org/publication/business-views-on-article-6-for-parties/

Ercst.org : Post COP26 Assessment on Article 6

https://ercst.org/wp-content/uploads/2021/11/20211122-COP26-Art6-final.pdf

[1] https://www.oecd.org/environment/forward-looking-scenarios-of-climate-finance-provided-and-mobilised-by-developed-countries-in-2021-2025-a53aac3b-en.htm

[2] https://unfccc.int/sites/default/files/resource/Fourth_BA_2020_technical_report-V21.pdf

[3] https://unfccc.int/sites/default/files/resource/cop26_auv_2f_cover_decision.pdf

[4] https://unfccc.int/process/the-paris-agreement/cooperative-implementation