Methodology used to critique OECD estimates of climate finance

Policy Pulse – 4 November 2021 – George Anjaparidze and Vicente Paolo Yu

Photo by Crissy Jarvis on Unsplash

On 26 October 2021, Veritas Global published analysis: OECD inflates climate finance estimates ahead of COP 26. Our analysis shows that the OECD overestimated the scale of climate finance in 2019.

In total, the OECD 2021 Climate Finance Report overestimated the amount of climate finance provided and mobilized by developed countries in 2019 by US$ 46.9 billion – of which US$ 20.3 billion is due to overestimation in bilateral public climate finance and US$ 26.6 billion is due to overestimation for multilateral public climate finance.

The level of climate finance provided by developed countries points to a significant shortfall in following through on climate finance commitments. Developed countries committed to provide US$ 100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation. Making good on developed country climate finance commitments under the UN Climate Convention and its Paris Agreement can help crowd-in much needed capital for scaling-up climate action in developing countries.

This paper makes public the methodology used by Veritas Global to critique the OECD 2021 Climate Finance Report – Climate Finance Provided and Mobilized by Developed Countries – Aggregate trends updated with 2019 data.

I. Critique of bilateral public climate finance estimates

Context

To estimate the bilateral public climate finance, the OECD 2021 Climate Finance Report aggregated data from the fourth biennial reports submitted to the UNFCCC by developed countries. The report did not use data sources available to the OECD to adjust the reported data and correct for overestimation. It is important to note that for assessing other climate finance components (multilateral public, export credits and mobilized private) the OECD uses its own data sources (OECD DAC and OECD ESG) to estimate these components. In the methodology below, we explain how the Rio-markers contained in the OECD-DAC database could be used to assess the scale of overestimation of bilateral public climate finance in the OECD 2021 Climate Finance Report.

Data considerations

Despite originating from different sources, the data tagged through the Rio-markers and aggregated in the OECD 2021 Climate Finance Report have significant overlaps. This is perhaps not surprising because almost all major developed countries use the Rio-markers methodology to, in part or in full, report on their climate finance contributions under the UNFCCC, which have subsequently been aggregated in the OECD 2021 Climate Finance Report. The developed countries that did not make a reference to the Rio-markers in their Fourth Biennial Report constituted about 8% of the climate finance tagged as climate relevant through the Rio-markers methodology in 2018.

From the major bilateral public finance contributors, only the United States and Canada did not make any reference to the use of Rio-markers in their Fourth Biennial Reports under the UNFCCC. The United Kingdom has made a reference to Rio-markers in past reports but has not explicitly referenced Rio-markers in its Fourth Biennial Report. However, the United Kingdom has developed accounting practices for climate finance that build on and go beyond the Rio-markers methods.

The similarity in data sets is also revealed when comparing aggregates on bilateral public climate finance reported in the OECD 2021 Climate Finance Report and the climate-relevant OECD Rio-markers reporting. Between 2013 to 2018, about 91% of the reported data is estimated to overlap (or at least correlate) between these sources (see chart below).

According to the Rio-markers methodology, a project that has climate change as a secondary objective is tagged as climate “secondary/significant,” even if the share of finance supporting climate-specific activities is negligible. Once a project is tagged as climate “secondary/significant” most OECD countries report the finance based on a predetermined share (usually between 30% and 100%) as climate finance. This accounting practice leads to vastly overestimating the scale of bilateral climate finance. Therefore, we consider that it is inappropriate to count “secondary” projects as part of climate finance until a more robust methodology is developed for estimating the proportion of finance that really supports climate activities. To illustrate overestimation, we present an example of a project supported by the Ministry of Foreign Affairs of Iceland. The Buikwe District project in Uganda supports implementation of a program that improves access to water, sanitation and hygiene services, however, the program also has secondary climate change related objectives. Climate change related issues are only one of several activities being financed. Nevertheless, since Iceland uses a predetermined share of 100% to report finance of “secondary” projects towards climate finance, all financial support reported for this project was tagged as climate finance. This clearly leads to over-reporting of climate finance.

Some countries, such as the United Kingdom and Finland have developed more robust methods and report coefficients on a project-by-project basis for Rio-marked activities, including for projects that have climate change as their “principal” or “secondary” objective. In the future it may be appropriate to base estimations for “secondary” projects on these more robust methods but crucially there needs to be a coherent approach across developed countries.

Given the significant (about 91%) overlap or at least correlation in the data sets, we can estimate the proportion of the data in the OECD 2021 Climate Finance Report that corresponds to “principal” and “secondary” activities based on what has been tagged through Rio-markers. Using this approach implies a margin of error of about 10%, which we consider to be reasonable and more accurate than the current practice at OECD.

By not filtering out the finance associated with “secondary” projects from its assessment, the OECD 2021 Climate Finance Report has overestimated the total bilateral climate finance. We used the steps described below to estimate the amount by which the report has overestimated bilateral public climate finance of developed countries in 2019.

Steps to quantifying OECD overestimation

Step 1: Estimate share of bilateral public climate finance reported attributable to activities where climate change is a “secondary” objective.

To estimate the share of finance that supports projects where climate change is a secondary objective, we calculate the proportion of finance for “secondary” projects compared to total finance for “principal” and “secondary” projects in 2018. (The 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.)

Formula:

ShareOfSecondary2018 = ($RMSecondary2018) / ($RMPrincipal2018 + $RMSecondary2018)

Where,

• ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018

• $RMSecondary2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a secondary objective as reported through the Rio-markers of OECD DAC

• $RMPrincipal2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a “principal” focus as reported through the Rio-markers of OECD DAC

Based on the above approach, the share of “secondary” projects was estimated at 70% in 2018.

Step 2: Estimate amount of bilateral public climate finance reported by OECD that corresponds with “secondary” projects

To estimate the amount of finance that is attributable to secondary projects, we apply the “ShareOfSecondary” derived in step 1 to the total bilateral climate finance reported for 2019 in the OECD 2021 Climate Finance Report.

Formula:

$EstSecondary2019 = $TotalBilateralPublicCF2019 x ShareOfSecondary2018

Where,

• $EstSecondary2019 is the estimated US$ reported climate finance for 2019 for activities where climate change is a secondary objective

• $TotalBilateralPublicCF2019 is the US$ total bilateral public climate finance reported in 2019 as aggregated in the OECD 2021 Climate Finance Report

• ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018 (calculated in Step 1)

The amount US$ estimated for secondary projects in 2019 is equal to the amount by which the OECD 2021 Climate Finance Report has overestimated total bilateral public climate finance for 2019.

Results for bilateral public climate finance

Based on the above calculations, the OECD 2021 Climate Finance Report overestimated the scale of bilateral public climate finance in 2019 by about US$ 20.3 billion.

II. Critique of multilateral public climate finance estimates

Context

The OECD 2021 Climate Finance Report quantified multilateral public climate finance estimates using the OECD DAC database. The quantification includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. For climate finance raised by multilateral institutions themselves, the OECD 2021 Climate Finance Report attributes this finance in proportion of the developed country share capital. However, since the US$100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the funds raised by multilateral institutions towards the developed country annual climate finance target. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).

To be clear, the funds raised by multilateral institutions themselves should be reported and tracked as per the accounting modalities agreed at COP 24 because these resources are part of the climate finance ecosystem. However, resources raised by multilateral institutions themselves should not be counted towards the achievement of the US$100 billion climate finance target of developed countries. Only direct contributions from developed countries to developing countries through multilateral channels should be counted towards the US$100 billion climate finance target. In the methodology below we explain our approach to assessing the estimates of multilateral public climate finance in the OECD 2021 Climate Finance Report.

Data considerations

There are no specific data considerations. The same data sources used by the OECD 2021 Climate Finance Report are used for purposes of undertaking this analysis. Data for assessing the multilateral public climate finance is sourced from the OECD DAC database. For calculating attribution shares, the OECD 2021 Climate Finance Report uses the multilateral institutions’ annual reports.

The difference in conclusions between the OECD 2021 Climate Finance Report and our analysis is entirely explained by definitions on what is eligible to be counted towards the US$ 100 billion climate finance target. By counting the funds raised by the multilateral institutions themselves towards the US$ 100 billion target the OECD 2021 Climate Finance Report overestimated the finance provided by developed countries. We used the steps described below to estimate the amount by which the report has overestimated multilateral public climate finance of developed countries in 2019.

Steps to quantifying OECD overestimation

Step 1. Estimate the share of multilateral public climate finance that corresponds to the funding raised by the multilateral institutions themselves.

Using the OECD-DAC data (provider perspective), we filter out data based on imputed multilateral contribution of developed countries for 2018 – which was equal to about US$ 6.5 billion. We subsequently calculate the share of imputed multilateral contributions compared to total attributed multilateral public climate finance in 2018 (US$ 29.6 billion) as estimated by OECD. (Note, the 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.) Based on this assessment, we estimate that about 78% of the multilateral public climate finance in 2018 was overestimated.

Step 2. Estimate amount of multilateral public climate finance reported by OECD that does not correspond to imputed multilateral contribution of developed countries for 2019.

We multiply the OECD estimate for total multilateral public climate finance in 2019 by the overestimated share (78%) calculated in step 1 to obtain the amount overestimated.

Results for multilateral public climate finance

Based on these calculations, the OECD 2021 Climate Finance Report overestimated the scale of multilateral public climate finance in 2019 by about US$ 26.6 billion.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

OECD inflates climate finance estimates ahead of COP26

Policy Pulse – 26 October 2021 – George Anjaparidze and Vicente Paolo Yu

Photo by Pascal Weiland on Unsplash

Key messages:

• The OECD has overestimated the 2019 climate finance provided and mobilized by developed countries by $46.9 billion.

• The total shortfall in reaching the $100 billion target is about $67.4 billion, meaning that only $32.6 billion of climate finance has supported developing countries.

• To avoid failure at COP 26, developed countries need to address the shortcoming in climate finance contributions by announcing a new pledge of $67.4 billion aimed at bridging the shortfall of the previous target.

Background on climate finance targets

Developed countries committed to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation. This commitment was first made by developed countries in December 2009 in Copenhagen under the Copenhagen Accord that was noted by the Parties at COP15. The target was subsequently reiterated through various annual decisions under the UNFCCC beginning in 2010 in Cancun at COP16. This commitment of $100 billion annually has been extended under the Paris Agreement upon its adoption in 2015 to the post-2020 period up to 2025. The finance targets are seen as key enablers for scaling-up climate action in developing countries and more broadly as confidence building measures. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).

OECD overestimates climate finance provided by developed countries

Measuring progress against climate finance targets is not straightforward. The lack of internationally agreed metrics for measuring performance against the $100 billion target makes it difficult to definitively estimate climate finance flows. However, the methodology used by the OECD secretariat to estimate climate finance flows leads to overestimation.

The OECD secretariat estimated that in 2019 the climate finance provided and mobilized by developed countries was equal to $79.6 billion. The OECD figures overestimate climate finance provided by $46.9 billion in 2019. When adjusted for overestimating, the climate finance provided and mobilized by developed countries is about $32.9 billion in 2019. Meaning there is a shortfall of $67.4 billion in reaching the climate finance target. (See chart). There are two main drivers for OECD overestimation:

1. Bilateral climate finance flows are overestimated by $20.3 billion in 2019. For bilateral climate finance, the OECD secretariat includes aggregation of projects that do not have climate change as the principal focus. A project that has climate change as a secondary objective is tagged as climate “significant”, even if the share of finance flowing to support climate specific activities is negligible. Once a project or program is tagged as climate “significant” most OECD countries report the finance based on a predetermined share (usually between 30% and 100%) as climate finance. This accounting practice of “climatewashing” bilateral assistance leads to significantly overestimating the scale of bilateral climate finance reported.

2. Multilateral climate finance flows are overestimated by $26.6 billion in 2019. For climate finance that flows through multilateral channels, the OECD secretariat includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. However, since the $100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the resources mobilized by multilateral institutions towards the developed country annual climate finance target. Only direct contributions from developed countries to multilateral channels should be counted.

Implications for COP 26 and beyond

There is an urgent need to address the shortcoming in developed country climate finance contributions. As explained above, climate finance targets are key enablers for scaling-up climate action in developing countries and more broadly are confidence building measures.

As an immediate step, at COP 26, developed countries need to recognize that the previous climate finance targets have not been met and pledge to make-up for the shortfall. A new pledge, specifically targeting to close the previous shortfall, of $67.4 billion should be made at COP 26. A significant share of this finance should be pledged to flow through the Green Climate Fund. Developed countries should also show progress towards a post 2025 climate finance goal that is based on financial needs for climate action as expressed by developing countries in their NDCs.

In the medium term, there is a critical need to address the shortcomings of the current climate finance system. Improving the metrics and transparency of how developed countries meet their climate finance targets will be critical to restoring confidence of developing countries. Without better metrics and enhanced transparency, there is a risk that future climate finance targets will not be credible. As negotiators start to discuss setting new climate finance goals for 2025 and beyond, they will need to ensure that the approach meets expectations of developing countries with respect to additionality, adequacy, and predictability, and complies with long-standing commitments by developed countries under the UN Climate Convention and its Paris Agreement.

African Ministers of Environment called on the Glasgow COP to “set a new post 2025 climate finance mobilization goal with developed countries committing to mobilize jointly at least USD 1.3 trillion per year by 2030, of which 50% for mitigation and 50% for adaptation and a significant percentage on grant basis from a floor of USD 100 billion, taking into account the needs and priorities of developing countries and in particular the special circumstances of Africa.” The first Needs Determination Report, adopted at the 26th meeting of the Standing Committee on Finance, noted that the costed needs of developing countries up to 2030 amounted to about USD 5.9 trillion (summarized in Table 2 of the executive summary of the report). These estimates offer relevant benchmarks for the scale of the new climate finance commitments that developed countries should pledge.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Catalyzing Stakeholder Action for Affordable and Clean Energy for All

Policy Pulse - 24 May 2021 - Kapil Narula and George Anjaparidze

This article was first published on 13 May 2021 by Development Asia under the title Catalyzing Stakeholder Action to Achieve Affordable and Clean Energy for All. Development Asia is the Asian Development Bank's knowledge collaboration platform for sharing development experience and expertise, best practices, and technologies relevant to the Sustainable Development Goals.

Introduction

Sustainable energy is key to economic development and a better quality of life. Goal 7 of the Sustainable Development Goals (SDGs), which is to ensure access to affordable and clean energy, and its five targets are critical for meeting the SDGs by 2030.

Despite multiple efforts at the international level, about 800 million people still do not have access to electricity, while 2.8 billion do not have access to clean cooking (2018). Energy efficiency improved by 1.7% but lags behind the 3% target, and the share of renewables in the global energy mix is only 17% (2018) and needs to increase substantially to meet long-term climate goals. Hence, consistent effort for scaling up action is essential.

Challenges

Many countries have adopted a cautious approach, prioritizing economic growth over aggressive action toward SDG 7. Low-income countries however simply do not have the natural, human, and financial resources to undertake the transition to clean energy on their own. National action plans look good on paper but are fragmented, and there is lack of accountability. Actions are often uncoordinated, inadequate to fulfil commitments, not backed by a legal framework, and lack citizen engagement.

International cooperation on clean energy, which is restricted by technology transfer issues, is proving to be challenging. Development of clean energy infrastructure in several low- and middle-income countries continues to be plagued by lack of finance and technology. There has been a further setback because of the coronavirus disease (COVID-19) pandemic as governments turn their attention to more pressing public health issues.

Global Momentum for Action

In 2012, the United Nations (UN) declared 2014–2024 as the Decade of Sustainable Energy for All. In 2018, 46 countries presented their progress by undertaking voluntary reviews at the High-Level Political Forum (HLPF) on Sustainable Development. In 2019, a mid-point review was undertaken for accelerating SDG 7, which was informed by various policy briefs. Key outcomes pointed to the need for catalytic actions that address interlinkages between energy and inequality and for strengthening cooperation. Recommendations included strong political commitment in the form of updated nationally determined contributions (NDCs), stepping up private financing and fiscal incentives, use of innovative tracking instruments, such as a multi-tier framework (MTF) for energy access and digitalization.

To further accelerate action on SDG 7, the UN General Assembly resolved to hold a high-level dialogue on energy in September 2021. This is the second time such an event is being convened after 1981, which signifies the importance of SDG 7. It is structured around three main themes: “energy access, energy transition, and enabling SDGs through inclusive, just energy transitions,” and supported by "innovation, technology and data," and "finance and investment" as cross-cutting themes. Within these themes, issues, such as access to clean energy services, energy system decarbonization, inclusive transition, application of big data and digitalization, research and capacity building measures, integrated energy policy making, regulation, mobilizing finance, fossil fuel subsidy reforms, climate proofing investments, risk management, and multi-sectoral interventions, will be addressed.

The preparatory process has started to prepare a global roadmap for scaling up efforts and developing concrete actions. This consists of three main initiatives: ministerial-level thematic forums, technical working groups and a stakeholder e-consultation process. For each theme, five to 10 countries act as global champions and are represented at the ministerial level. Thirty to 50 technical experts were identified for each of the five themes and have co-leads from multilateral development agencies. The groups have prepared annotated outlines that identify several gaps in their initial meetings and will hold cross-cutting discussions. They will present a final thematic report containing substantive recommendations to the ministerial thematic forum in June 2021. To mobilize citizen engagement and participation, stakeholders were invited to provide technical inputs, recommendations, and actionable examples. An inter-agency report will also be prepared as substantive background for the high-level dialogue.

The Need for Voluntary Stakeholder Action

Although national governments are the primary actors with the responsibility of setting the targets and providing an ecosystem for a clean energy transition, other stakeholders must contribute to the effort by undertaking voluntary actions. Sub-national actors, such as states, cities, and municipalities, must commit to take decentralized action, depending on their capabilities. Many cities have formulated a sustainable climate and energy action plan under the European Union Covenant of Mayors, and such efforts need to be globalized. Private businesses also need to contribute by undertaking commitments, such as participating in the UN Global Compact, a voluntary sustainability grouping of more than 12,000 companies. Lastly, citizens need to personally commit to a sustainable environmental footprint as behavioral changes supported by technology are essential for long-term changes.

There are several factors driving voluntary actions in the private sector. There is the realization that clean energy is the way ahead and makes business sense. Businesses earn mileage from projecting a green image, which can boost share prices. Shareholders also demand improved environmental, social, and governance (ESG) performance. These drivers are behind the steady increase in the volume of voluntary carbon markets.

Voluntary action by companies to purchase clean energy results is a market pull factor resulting in increased investment for renewable electricity production. For example, Google, which pledges to become carbon-free 24/7 by 2030, is financing the construction of new wind and solar plants and energy storage solutions so it can procure clean electricity from a nearby grid.

To step up voluntary actions, Energy Compacts are being formed as part of the UN high-level dialogue to get complementary commitments and amplify additional actions, key outcomes, implementation timelines, and tracking frameworks toward achieving SDG 7. Introductory and deep-dive workshops from April to June 2021 facilitate knowledge exchange and encourage member states, cities, businesses and citizen groups to register their voluntary commitments. Self-reporting is planned, and a web-based tool will be used to showcase the efforts of signatories.

Filling the Financing Gap

The overall financing requirement to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap ($800 billion) could have been filled if developed countries had met their commitments to mobilize $100 billion in climate finance annually by 2020 to cover the needs of developing countries under the Paris Agreement. This target for 2020 has been extended up to 2025. In the meantime, the annual shortfall is estimated at $67.1 billion.

Making good on this commitment has the potential to crowd in $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed.

One way is to channel pension funds to finance renewable energy projects as in the case of the Government Pension Fund Global of Norway, which has $1 trillion in assets. It divested $8 billion from oil and gas companies and is investing $5 billion in renewables. Removing consumer and producer fossil fuel subsidies, estimated at $500 billion globally (2017), can also bring fresh funds for clean energy access. Such actions are particularly important at an early stage while oversight provisions on aligning finance flows with climate goals are still being developed.

Revenues from carbon credits can support SDG 7 by aligning incentives for deploying clean energy. A well-functioning international carbon market can also ensure that opportunities are pursued where they are most cost-effective.

Private and public finance hold the key for catalyzing action, and innovative low-interest financing models for clean energy entrepreneurs need to be developed.

Meanwhile, other voluntary actions for accelerating SDG 7 include peer-to-peer trading of decentralized electricity generated from rooftop solar PV, self-generation by industries, and producing electricity from biomass.

For the more challenging SDG 7 target of universal access to clean cooking, sustainable solutions include smart solar PV or hydropowered microgrids using electric induction cooking and biogas for clean cooking, and integrated business models that sell both cookstoves and clean fuel. These ensure recurring revenue streams for companies and make clean fuel easily available to customers. “Pay as you go” financing models, micro lending, and community participation have also proven to be successful for de-risking investment.

Conclusion

Global momentum on energy action is building up as part of the UN high-level dialogue on energy. Apart from governments, it is important that businesses, communities, and individuals contribute to this effort. Energy compacts offer stakeholders an opportunity to participate in effecting widespread change. Financing remains key to achieving SDG 7 by 2030 and needs to be mobilized at scale.

Resources

A. Bhattacharya et al. 2020. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance. The Independent Expert Group on Climate Finance.

United Nations. 2019. Accelerating SDG 7 Achievement. Policy Briefs.

United Nations. High-Level Dialogue on Energy 2021.

George Anjaparidze is managing partner of Veritas Global, a company in Geneva, Switzerland that provides economics and strategy advisory services worldwide with expertise in climate change, infrastructure and international development.

Kapil Narula is a senior researcher at the University of Geneva, Switzerland. He holds a PhD in Development Studies with a focus on energy, economics, sustainability, and policy. He has more than 18 years of work experience in the government, industry, academics and research.