Developing nations battle for clarity as climate finance remains inadequate

No one can yet reliably say which grants or loans to a poor country are truly meant to fight climate change, and which ones are merely greenwashed to claim credit 

By 2024 countries are to set a new climate finance target – money that developed countries should provide to poorer nations to fight climate change. India has demanded that it be revised upwards of USD 1 trillion annually.

It’s a tall order considering the developed countries have failed for the last ten years to provide the mere USD 100 billion annually that they promised in 2010. In 2015, the goalpost was extended to 2025 which means that we are still talking about their 2020 goal in the year 2022. 

But the target in itself may mean little unless developed countries heed the warning scientists gave in the recent report of the Intergovernmental Panel on Climate Change (IPCC): For more than 28 years, countries have not got around to even defining what constitutes climate finance. 

The IPCC report hit the headlines across the world on its release in February 2022 but this significant bit from it – which matters most to developing countries – got lost in the din. 

The scientists on the panel concluded, “The measurement of climate finance flows continues to face definitional, coverage and reliability issues despite progress made by various data providers and collators.”

This means that no one can yet reliably say which grants or loans to a poor country are truly meant to fight climate change, or which ones are merely greenwashed to claim credit despite their unfulfilled promises. 

Take the example of a grant from Italy to India in 2020. A school in Telangana’s Warangal received USD 224,502 for the expansion of a school opened for hearing-impaired students. This was classified as both adaptation-related and mitigation-related finance. The description of the grant, however, makes no mention of climate-related work to be undertaken. 

Another grant of USD 341,000  from the United Kingdom was given to the National Housing Bank to provide loans for low income families. This was labelled as mitigation-related development finance. Another grant to India from Japan meant for “Iran and other neighbouring developing countries” earmarked for Covid relief has featured in the list of climate-related development finance. Japan has also provided a grant to the underprivileged in Mathura for procuring eye medical equipment. 

This data released by the Organisation for Economic Co-operation and Development (OECD) was used in its report measuring where countries stand on their USD 100 billion goal. 

How did these expenses, which are at the most development-related finances, pass off as climate finance? Even as developed countries push for the term to remain ambiguous, what does science have to say about what qualifies as climate finance? 

Land Conflict Watch, an independent network of researchers studying land conflicts, climate change and natural resource governance in India, looked beyond the summary of the IPCC report that most politicians, policymakers and climate activists often read, to find what the scientists have said about climate finance. 

The summary is drawn up after haggling between governments and scientists before a short document called Summary for Policy Makers (in this case of 40 pages) is prepared. 

In reaching consensus, often important scientific findings which may not favour one or the other country’s political stance are left out. The full report – written only by scientists contains truth bombs that get buried.  

What do IPCC scientists have to say on defining climate change?

In its chapter on ‘Investment and Finance’, the IPCC report states that from a climate policy perspective, climate finance refers to finance “whose expected effect is to reduce net GHG emissions and/or enhance resilience to the impacts of climate variability and projected climate change” (UNFCCC 2018a). The report goes on to say that adaptation financing is difficult to define as it ultimately boils down to fulfilling SDG goals. 

Even current estimation methods are not sufficient to be the basis for global negotiations, conclude scientists. They warn that this needs to be resolved to avoid getting into a ‘climate investment trap’, especially in the case of developing countries. Due to their growing energy demand, a huge portion of the world’s climate investment requirements are in low and middle income countries in Africa, Asia, Latin America and the Middle East. Current estimates also do not include information on how climate policies impact the growth of countries and the importance of fiscal and financial policies to nullify their adverse effects. 

Would development-related finances then qualify as climate finance such as the grant from Italy to build a school? 

A later part of the chapter makes a clarification. Scientists observed that the finance provided for climate change must be new and additional, and not at the cost of United Nations-adopted Sustainable Development Goals. In fact, a recent study by CARE shows that merely six per cent of the climate finance flows that they had studied were ‘new and additional’. 

While the Summary for Policy Makers makes only a brief mention that countries are below their collective goals, the IPCC report goes on to say that it is actually difficult to estimate where countries stand due to the lack of a universally accepted definition for climate finance. 

This absence of a definition, has made it impossible to gather accurate data on climate finance flows.    

Currently, the only measure of climate finance flows is the USD 100 billion yardstick. Since the adoption of the goal, several independent reports show drastically different climate finance numbers.

Despite the “significant room for interpretation”, climate finance commitments are nowhere close to what scientists’ estimates of what is actually needed to combat climate change.  The IPCC report warns that  the financial community continues to underestimate climate-related financial risks which is limiting capital reallocation necessary for low-carbon transition. Even investors do not opt for climate-friendly options despite the increased awareness of climate change and its effects.  

Two reports published by the UNFCCC and IPCC in 2018 have estimated that more finance would be required between 2020 to 2035 to contain global temperature rise at levels below 2°C and 1.5° C respectively. While the biennial assessment estimates that 1.75 trillion USD would be required to cap temperature levels below 2°C, the IPCC’s Special Report on Global Warming estimates that 2.4 trillion USD yr-1 would be required for the energy sector alone. In fact, independent reports show that a gap of 67% in mitigation financing was reported in 2015 and was 76% for the energy sector alone in 2017. The gap would be greater if other sectors are included, and their inclusion could also increase finance requirements to curtail global temperature levels by three times the USD 2.4 trillion amount.  

Why is the term ‘climate finance’ open to interpretation?

Scientists observed that since the term climate finance is open to interpretation, differences arise due to what the independent author accepts as “climate” and the different types of “finance” that they take into account. 

If authors are more conservative on what qualifies as activities combating climate change, the number would be much lesser. If the author decides to include loans at market rates as finance, the overall numbers would be much higher. 

The report also mentions that defining climate finance flows is critical to ensure just transition of climate finance. It mentions that countries must agree on key definitions as soon as possible in order to build greater confidence levels. The report also points out that every other public international good finance provision under the SDGs accounts for only grants and net finance flows.

It notes that the nature and volume of finance  varies according to whether the finance was measured at the stage when it was pledged, committed or disbursed. This could determine whether it counts as private or public finance and also which country it is measured in. 

The IPCC looks at what two independent reports say on the USD 100 billion goal. While the OECD report mentioned before shows that a target of 78.9 billion USD was achieved in 2018, a report by Oxfam showed a lesser figure. This is because the Oxfam report considered only grants and grant-equivalents as climate finance flows. 

In the OECD report, however, almost 74% of the finance flows consisted of loans. Though scientists mention that the new framework under the Paris Agreement may lead to improvement wrt to transparency around climate finance flows, they note that analysis measuring the USD 100 billion goal remain rare. Even the UNFCCC’s Biennial Assessment does not exactly measure it. 

How much of this made it to the Summary for Policymakers? The issue around climate finance definition, which is expected to be one of the key fights in this year’s COP in Egypt, finds no mention in the summary. In fact, the summary mentions climate finance barely three times, with no mention of where countries stand in quantifiable terms.  

In fact, according to a report by Third World Network, when the SPM was being finalised, developed countries contested the mention of their failure to meet the USD 100 billion goal. They called it the ‘politicisation’ of the IPCC, and so the final line that was adopted was heavily watered down. This is part of the efforts by developed countries to undermine their climate finance commitments. In the Glasgow CoP held last year, recommendations by developing countries to decide on a definition for climate finance were bitterly contested by developed countries, and finally watered down in final decisions adopted. 

At a side event at the Bonn Climate talks this June, G77 and China’s coordinator on financial issues Zahir Fakir stated in Bonn that the real financial obligations of developed countries was captured in Article 4.3 of the UNFCCC which stressed on the provision of new and additional financial resources. He added that while the UN Convention refers to ‘provision’ of climate finance, the USD 100 billion has become about ‘mobilization’ and that it is important to understand the difference between the two. ‘Without provision of finance, terminologies such as ambition, tipping point and urgent climate action do not matter’ he added. 

“Climate finance definition is important because it is linked to accountability,” says Indrajit Bose, Senior Researcher, Climate Change at Third World Network. “How do you assess if this finance is actually coming through, when there is no definition of climate finance? Developed countries have not engaged in the issue because it helps their cause at the end of the day.” 

“After several years of negotiations, the Standing Committee on Finance, a technical body of the UNFCCC, is discussing the matter and the issue is expected to be contested in COP 27 in Egypt.“ says Indrajit Bose. 

“The IPCC describes itself as a policy relevant organisation and is not policy prescriptive. It’s not therefore IPCC’s role to define what is climate finance,” he added on why nothing has changed wrt definitional clarity between AR5 and AR6. 

IPCC scientists have warned that there is still some distance to go before the USD100 billion goal is achieved. Going by this, India’s USD 1 trillion demand remains a distant hope.

Mrinali is a researcher with Land Conflict Watch, an independent network of researchers studying land conflicts, climate change and natural resource governance in India. 

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