Mapping the road to $1.3 trillion at COP30

Developing countries, excluding China, account for less than 15% of global climate finance flows. Enhancing flows to these countries will drive the next wave of global energy and material demand

The leadership of the upcoming COP30, being hosted in Brazil, has signalled that implementation will be the mantra of COP30 to advance the multilateral climate agenda which has emerged over a decade of negotiations. At its core lies a critical and overdue task: delivering on the high-level climate finance commitments for developing countries, as agreed at COP29 in Baku, Azerbaijan. To this end, the Baku to Belém Roadmap to 1.3T was launched as a work programme that will identify various levers to deliver $1.3 trillion per year in international climate finance to developing countries by 2035. 

According to the World Bank, developing countries, excluding China, which represent a quarter of global GDP, account for less than 15% of global climate finance flows. Enhancing flows to these countries will drive the next wave of global energy and material demand as they pursue development. This is critical for the success of global climate action. Developing countries also host some of the most renewable energy resource rich sites in the world, which can generate low-cost clean energy if investment risks are mitigated. 

Yet the ability of developing countries to mobilise finance for climate action remains severely constrained. According to the United Nations Conference on Trade and Development (UNCTAD), 3.4 billion people live in countries that spend more on interest on sovereign debt than on either education or health. Servicing such elevated levels of sovereign debt limits fiscal space for developmental expenditure, including on climate action. Smaller domestic financial systems (as a percentage of GDP) and higher costs of capital in these countries further limit their ability to meet investment requirements by themselves. 

Creating healthier economic environments

Over and above domestic constraints, shifting global priorities have fueled uncertainty regarding international climate finance. This year, key developed countries announced plans to review multilateral commitments and slash foreign aid budgets. These developments have only compounded concerns of developing countries, adding to those pertaining to the quantum and quality of climate finance historically delivered. Therefore, a credible Roadmap becomes critical to dispel uncertainty over the availability of external climate finance for developing countries. Based on analysis from the latest study by the Council on Energy, Environment and Water (CEEW), here are six steps to enhance climate finance for developing countries: 

First, foster enabling investment environments in developing countries to attract capital flows. One step in this direction is putting in place policies for transition in key sectors such as power, transport, and industry that address sector-specific bottlenecks in the flow of capital. This should be complemented by cross-cutting policies such as taxonomies and disclosures that link capital with credible investment opportunities. 

Further, domestic financial regulators should accelerate the greening of their financial systems by pricing climate risk considerations into capital flows (e.g., lower regulatory capital requirements for holding green assets). Peer-to-peer learning could also play a key role. Emerging economies that lead in climate action could set up centres of excellence to facilitate capacity building for policymakers and regulators from other countries.    

Second, free up fiscal space in developing countries and optimise public expenditure towards the sustainable development goals (SDGs), including climate action. Levers such as debt-for-climate swaps, sovereign debt refinancing on preferential terms and debt restructuring with principal reductions may be applied on a case-by-case basis, to create fiscal headroom. 

Immediate debt relief should be complemented by measures that address underlying structural problems (e.g., through IMF supported programs under its Poverty Reduction and Growth Trust or the Resilience and Sustainability Trust) to prevent another cycle of unsustainable debt. Once fiscal space is created, SDG-aligned budgeting could help direct capital flows towards development, including mechanisms to support climate finance flows.

South-South outlook

Third, leverage South-South cooperation, particularly through South-led multilateralism. Emerging international finance hubs in developing countries like India’s Gujarat International Finance Tec-City International Financial Services Centre (GIFT-IFSC), Rwanda’s Kigali hub, or Vietnam’s upcoming centres should be developed as conduits of capital to the Global South. This can serve countries beyond their immediate jurisdictions. Regional development banks, such as the Asian Infrastructure Investment Bank (AIIB) or Asian Development Bank (ADB) in Asia, could anchor green banks in these international finance hubs. These banks can help create viable investment pipelines by offering project preparation services, aggregating and de-risking project portfolios. 

Investable project pipelines could also facilitate investment from one developing country into another’s markets. Cross-investment in each other’s sustainable bond markets and expanding sustainable bond issuances in local currencies, as proposed by the BRICS countries, should also be considered.   

Fourth, for climate adaptation, scale international public capital, preferably on concessional terms, across developing countries. Current international climate finance flows are heavily skewed towards mitigation. That must change. Public capital should increasingly target climate adaptation, including through mechanisms that offer climate risk insurance. Examples include pooling risks such as CEEW’s proposed Global Resilience Reserve Fund (GRRF), funded by Special Drawing Rights (SDRs). This will ensure affordable, effective insurance solutions that shield developing countries from worsening climate impacts.

Fifth, international capital for climate mitigation should be deployed in a targeted manner for maximum impact. Offering protection against risks in developing countries at the intersection of high energy requirements and high clean energy potential could advance global decarbonisation at low costs. Utilising multilateral development finance institutions’ (DFI) callable capital, largely untapped thus far, could bolster capacities of these institutions to undertake such endeavours. 

Clean energy thus produced beyond host country requirements may be exported through mechanisms such as India’s One Sun One World One Grid initiative, now also endorsed by International Solar Alliance member countries. This would generate revenues for host countries and help buyer countries advance their climate objectives. Finally, capital may also be drawn in from innovative sources such as carbon markets, solidarity levies, and the voluntary rechannelling of SDRs by developed countries.

Sixth, bolster DFI capabilities to deliver finance at all levels – domestic, bilateral and multilateral. Domestic DFIs in developing countries are best placed to understand local financing opportunities and bottlenecks and can help develop investable project pipelines. Reforming multilateral DFIs requires political will from sovereign shareholders to act on  recommendations from the Indian and Brazilian G20 presidencies, such as balance sheet optimisation, recapitalisation, and SDR rechanneling. 

As a complementary measure, MDBs should institutionalise private capital mobilisation through ring-fenced funds that are funded by private capital and managed by MDBs. Such structures would offer private investors the benefits of MDB project selection, governance and quality assurance. All this, while facilitating greater capital flows without expanding MDB balance sheets. 

Implementing this six-point framework requires actions by developing countries themselves, those that leverage South-South cooperation, as well as support from the Global North. Presciently, the COP30 Presidency has called for mutirão, or collective global effort to combat climate action. Here’s hoping the Presidency’s call does not go in vain. 

Arjun Dutt is a Senior Programme Lead at the Council on Energy, Environment and Water. Views are personal.

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Arjun Dutt

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