Implementing climate finance commitments in 2022 will make-or-break climate policy

Policy Pulse – 26 January 2022 – George Anjaparidze

Key messages:

• Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

• For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

• Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources

Photo by Visual Stories || Micheile on Unsplash

The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.

We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.

Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment 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. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.

The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)

As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.

Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required 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 could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $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 for SDG 7.

Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:

• 2-3 June 2022: Stockholm, Sweden Stockholm+50 https://www.stockholm50.global

• 26-28 June 2022: Elmau Castle, Germany G7 Heads of State https://www.g7germany

• 30-31 October 2022: Bali, Indonesia, G20 Summit https://g20.org

• 7-18 November 2022: Sharm El-Sheikh, Egypt UNFCCC COP 27 https://unfccc.int

Other key policy trends to watch in 2022:

• Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

• Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

• The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

• Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

• Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

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