Transfer of Science or Research

Authors: Shonali Pachauri, Setu Pelz, Alexander Nauels, Carl-Friedrich Schleussner, Keywan Riahi

This COP must deliver an agreement on a New Collective Quantified Goal on climate finance (NCQG) starting in 2025. This will replace the old targets set in 2009, in which rich countries pledged to give developing countries 100 billion Dollars a year to help navigate the climate crisis. These targets were woefully insufficient, but still, rich countries didn’t live up to their promise. Now developing nations are demanding one trillion Dollars. Much more is needed.

Discussions leading up to COP 29 have stalled on key issues, including the total amount of finance needed and which countries should contribute.

Without a strong international finance regime, ambitious climate action critical to reaching the Paris Agreement goals, will remain far beyond what national budgets can typically support. Particularly for many low and middle-income developing nations. These flows are essential not only for reducing emissions globally, but also for promoting equity by sharing the economic burdens and benefits of climate action.

At COP 29, agreement on how to urgently mobilize and scale-up finance for climate action is critical. The IPCC’s sixth assessment report (AR6) has concluded that current investments and related financial flows are vastly inadequate, and without substantial international support, the world risks missing its climate targets. At the same time, failure to act decisively exacerbates inequalities between regions, reneging on the most vulnerable nations to bear the brunt of the climate crisis.

Key recommendations

• High-income developed nations must lead in increasing financial support. Under all notions of fairness, North America and Developed Asia Pacific, and all of Europe must increase their financial contributions. Regions such as Africa, Southern and Southeast Asia should receive more financial support. The increasing share of global emissions from emerging economies implies that these big emitters may also need to contribute to global climate finance in the future. This could include big emitters like China, and rich Middle Eastern nations like the United Arab Emirates.

• Scale-up support for low- and middle-income countries (LMICs). Building on findings from the IPCC’s sixth assessment report (AR6) on mitigation, our analysis shows that financial flows between regions need to increase by between 250 billion Dollars and 1.6 trillion Dollars annually during 2020-2030 to close the climate mitigation finance gap equitably. This implies an average sixfold increase in international financing is needed globally, for climate mitigation investments alone.

• Achieve fair regional outcomes. So far, pathways to meet the Paris Agreement's temperature goals highlight least-cost mitigation opportunities. But they do not show how costs and benefits should be fairly shared across regions. To ensure equity in distributing the required financial investments, it's crucial to integrate and clearly define principles of fairness.

• Fully integrate the new Loss and Damage Fund into global climate finance frameworks as a dedicated component independent from existing adaptation and mitigation finance considerations. If the fund, established at COP 27, is not included in the new finance target, many of the world’s most affected communities will be left behind without the necessary resources to recover. This means more money is needed.

What’s at stake
To limit global warming to 1.5°C, global carbon dioxide (CO2) emissions must be reduced by over 40% by 2030. Achieving this goal requires significant investments in climate mitigation, particularly in transforming our energy systems to transition away from fossil fuels. This includes tripling renewable energy capacity and doubling the global annual energy efficiency improvement rates by 2030 and achieving net-zero carbon dioxide emissions by 2050.

The latest findings from the IPCC’s sixth assessment report (AR6) show that the current global climate finance flows for climate mitigation alone are three to six times lower than what is needed to meet Paris aligned temperature targets by 2030. But political and financial barriers continue to hinder the pace of climate action.

Adequate global private, public, and philanthropic capital is available. However, the current investment rate is insufficient. More money is needed to be directed toward mitigation efforts, particularly through international cooperation and public-private partnerships.

The upcoming negotiations at COP 29 will play a critical role in closing these investment gaps.

Expanding the donor-base
The upcoming COP 29 in Baku, Azerbaijan, is built on two key pillars. The first aims to increase ambition by ensuring countries implement enhanced national plans and maintain transparency. The second pillar focuses on enabling action, specifically using finance as a critical tool to drive efforts in reducing emissions, promoting climate adaptation, and addressing loss and damage. Discussions on the NCQG will likely touch on how climate finance will be allocated.

Since the last finance goal was established before the Paris Agreement, there is growing interest in expanding the donor base for the NCQG. High-income nations, particularly in North America and Europe, have called for major emerging economies like China, and other high-income developing countries to contribute more due to their increasing greenhouse gas emissions. However, developing countries contend that the Paris Agreement assigns primary financial responsibility to high-income nations.

A manyfold increase in finance needed until 2030
Recent assessments, including by the Independent High-Level Expert Group on Climate Finance (IHLEG), estimate that emerging markets and developing countries, excluding China, will need to spend around 1 trillion Dollars per year by 2025, more than doubling to 2.4 trillion Dollars per year by 2030. This is to transform their energy systems, respond to growing vulnerability to climate change, and invest in restoring nature. These figures are part of a broader context where it is estimated that global climate finance must increase at least fivefold, to reach 9 trillion Dollars annually by 2030.

A recent study that builds on the estimates of mitigation investment needs outlined in the IPCC AR6, suggests that financial support for low- and middle-income countries (LMICs) must increase substantially to meet climate targets equitably. Depending on the fairness indicator used, this work suggests financial flows between regions need to increase by between 250 billion Dollars and 1.6 trillion Dollars annually during 2020-2030 to close the climate mitigation finance gap equitably.

Reducing emissions: More fairness needed
The IPCC's AR6 outlines cost-effective pathways that achieve the long-term temperature goals of the Paris Agreement and the mitigation investments needed. However, these do not specify who should finance these investments and how the costs and benefits of mitigation should be fairly distributed across regions. It is therefore crucial to integrate equity considerations. While high-income countries are expected to finance a significant portion of these investments, the challenge lies in determining how to equitably share the significant financial investments needed, which must be addressed in the COP 29 negotiations.

The principle of "common but differentiated responsibilities and respective capabilities" (CBDR-RC) from the Paris Agreement is vital to discussions about climate finance. Common interpretations of this principle are equality, responsibility, capability and need.

Equality: Ensuring all individuals have equal rights under similar conditions. Responsibility: Those most responsible for causing climate change should bear a greater share of the costs. Capability: Those with a higher ability to pay should contribute more to mitigation efforts. Need: Those most vulnerable and deprived should be shielded from having to contribute. These interpretations can be quantified into fair shares by applying appropriate allocation rules and indicators.

Historical responsibility
The IPCC AR6 mitigation pathways imply a substantial scale up of interregional financial flows for mitigation investments in this decade. A key equity principle requires historical responsibility to be considered. Looking at CO2 emissions only since 1990, instead of earlier dates, favors high-income regions of the Global North that have benefited over a longer period from causing CO2 emissions, compared to others that have experienced significant industrial growth more recently.

Different allocation regimes following implementations of fairness principles may differ and can be explored in a web tool that allows for a user-defined selection and weighting of indicators.

Fair inter-regional finance flows
Under all notions of fairness North America and Developed Asia Pacific, and under most notions Europe, both West and East, must increase their financial contributions. Whereas regions such as Africa, Southern and Southeast Asia should receive more financial support. Other regions, like East Asia, including China and the Middle East may need to bear a significant portion of the costs of their own regional transformation, depending on the principle applied.

The increasing share of global emissions from emerging economies implies that these big emitters may also need to contribute to global climate finance in the future. Additionally, the analysis focuses on regional responsibilities and does not rule out the possibility of assigning financial obligations to individual countries within developing country regions. This could be particularly relevant for countries such as Qatar, Kuwait, and the United Arab Emirates, which have some of the highest emissions and GDP per capita rates in the world.

Carbon debt matters
Recent research estimating carbon debt provides insights into how the balance between domestic and international financial flows shifts under various pathways aimed at achieving net-zero targets. Carbon debt may have already accrued for some Parties due to their responsibility for past emissions, whereas delayed mitigation may cause others to accrue carbon debt later this century.

Drawing down carbon debt in the short-term implies larger domestic investments and mitigation efforts, but also reduces the financial obligations to mitigation internationally.

In each case, the carbon debt measure guides domestic action and informs the direction and magnitude of international investment necessary to equitably minimize overshoot. The assessment of carbon debt has so far focused on an aggregate regional level, often covering a broad spectrum of countries with varying emission profiles in each region. This includes both major fossil fuel producers and countries with some of the lowest per capita emissions. Further differentiation within regions can inform more specific national insights.

Additional investment needs for adaptation and loss and damage
Increasing adaptation finance flows and further implementing the dedicated loss and damage fund will also be critical for COP29 success. The fund was agreed upon at COP 27 to support vulnerable nations experiencing the worst impacts of climate change. It is hosted by the World Bank for at least four years and must provide fair and efficient access, e.g., through direct budgetary support.

If the fund is not included in the new finance target, it risks ringing hollow, leaving many of the world’s most affected communities without the necessary resources to recover. Ensuring that the fund is fully integrated into global climate finance frameworks as a dedicated component independent from adaptation finance considerations will be essential for supporting countries already experiencing severe climate-related losses.

Implications and conclusion
To meet the Paris Agreement’s targets, fairness in climate finance must be at the core of global climate action. This requires a dual approach: strong domestic climate commitments from all nations alongside robust international financial support to ensure an equitable sharing of efforts. Wealthier nations, given their historical emissions and economic capacity, should lead in financing, while emerging economies can contribute in line with their capacity and increasing emissions. Equity must drive, not delay, the rapid mobilization of climate finance—transitioning from billions to the trillions required in this decade.

Clear differentiation between the financial needs for adaptation, mitigation, and loss and damage is essential for effective resource allocation.

The optimal mix of financial instruments required will need to balance the need for accessible, equitable financing with the goal of mobilizing sufficient resources to meet global climate targets. This is likely to vary by project type and country needs, with grants prioritized for non-revenue-generating projects in vulnerable regions and concessional loans or blended finance more suited for projects with potential economic returns.

COP 29 presents a critical opportunity to set an ambitious climate finance target that includes funding for mitigation, adaptation, and the Loss and Damage Fund established at COP 27. By embracing equity in financial contributions, the international community can support regions and populations most vulnerable to climate impacts.

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Weitere Informationen:
https://iiasa.ac.at/blog/nov-2024/cop29-in-baku-is-climate-finance-cop-its-about-justice