Mind the gap: Finding the funds at COP29 to fight climate change

Can COP29 secure the trillions needed from wealthy nations and reformed multilateral banks to support climate resilience in developing countries?

As the world prepares for COP29 under the shadow of unprecedented geopolitical challenges — two bloody conflicts and a contentious election in the world’s most powerful economy — one critical issue remains front and centre: financing the fight against climate change.

Annual climate change damages are expected to cost the world as much as $59 trillion a year in 2050, more than half its current GDP. And, while violence and conflict dominate new cycles, the metre for losses caused by human-induced climate change globally continues to tick, at the staggering cost of $16 million per hour. The solutions, although clear, require immense financial mobilisation.

Yet, current climate funding commitments continue to fall woefully short of the trillions of dollars needed to cool the planet by transitioning to a low-carbon economy and to protect the most vulnerable. This makes climate finance critical for the nearly 200 nations attending COP29 in Baku this month.
     

Chasing a collective goal

This year, nations are to set a new finance target to bring much-needed funds to developing countries. Known as the New Collective Quantified Goal (NCQG).

It will replace the previous commitment made in 2009 by wealthy nations to deliver $100 billion annually by 2020—a target that has yet to be met. To date, a list of the 23 mostly high-income countries, including the likes of the United States, Japan and Germany — known as Annex II of the Convention — have been jointly responsible for making financial contributions to help developing countries.

The NCQG is expected to reflect the actual costs of addressing the climate crisis, estimated at between $5.8 trillion and $5.9 trillion annually for developing countries alone, covering both mitigation and adaptation efforts.

The failure of wealthier nations to meet the $100 billion target reveals more than just lack of commitment on their behalf. It reveals structural issues in how funds are allocated and used.

Much of the climate finance under the target came as loans, which worsened debt burdens for vulnerable countries. Over 70% of finance provided to developing nations between 2013 and 2018 was in loans, not grants, deepening their debt instead of providing the necessary support to tackle the climate crisis.

As a result, the main focus at COP29’s NCQG negotiations will be to ensure funds are accessible, equitable, and responsive to the real needs of developing nations.

Given the reticence of developed countries to commit to financial goals and the developing nations’ demand that commitments be aligned with the scale of the challenges they face will ensure the NCQG negotiations remain contentious. For the NCQG to succeed, wealthy nations must do more than merely acknowledge that their historical emissions have been a major contributor to the climate crisis. The key challenge will be to ensure that wealthy nations deliver on their promises.

Structural Changes

Crucial also to the raising of funds, is a reform to global financial structures that disperse the monies. The current global multilateral funding architecture was first put in place at the Bretton Woods Conference, held in 1944, during World War II — years before India, China, Brazil, South Africa or the west and east Asian nations had developed their economies.

The two key financial institutions created under the Bretton Woods Accords had no space for developing economies, many which were then occupied colonies for the developed world to exploit.

The International Monetary Fund (IMF) was set up to ensure global monetary cooperation, stabilise exchange rates, and provide short-term financial assistance to nations facing balance of payments crises. The International Bank for Reconstruction and Development (IBRD), which later became part of the World Bank Group was created to aid reconstruction of war-torn Europe and, only later began providing loans and financial assistance for infrastructure projects in developing countries.

While newer financial institutions were set up in the subsequent decades, the IMF and World Bank continue to hold sway on the global economy. This makes reforms within Multilateral Development Banks (MDBs) another crucial thread to rectify climate funding flows if nations want better lending rates and reduced debt. Also, while MDBs play a crucial role in channelling funds to developing countries, their approach has long been criticised as biased and undemocratic with an unequal distribution of voting share in the institutions. The United States continues to have the largest voting power in the WBG and IMF, holding greater than 15% of the voting power, giving it veto power over decisions. The majority of the WBG and IMF decisions require a 50% majority vote, while some critical matters require a 70% or 85% rate of affirmative votes.

The recent Bridgetown Initiative proposed by Barbados’ Prime Minister, Mia Mottley, brought attention to the limitations of the current global financial architecture and called for MDBs to extend concessional financing, offer debt relief, and scale up grants to climate-vulnerable nations that are unfairly bearing the brunt of a crisis they did not create but add to their unsustainable debt burdens.

MDB reforms were also highlighted by India’s Presidency at the G20 Summit in 2023, with leaders agreeing on the need to mobilise trillions, not billions, in climate finance. The commitment to strengthen MDBs was a step in the right direction, but much work remains to turn these high-level discussions into concrete actions. COP29 will provide another opportunity to push for these reforms, with developing nations expected to demand that MDBs deliver more concessional finance tailored to their needs.

The Asian Development Bank last month approved a new goal to devote 50% of its annual lending to climate finance by 2030 and boost private sector capital mobilisation. The goal comes with a dollar-based target of $100 billion in cumulative climate finance between 2019 and 2030, with only $30 billion contributed so far.

Additionally, the developing nations’ demands for new allocation of Special Drawing Rights and recycling existing SDRs through MDBs as hybrid capital could help leverage up to $80 billion in additional financing for resilience projects, according to reports. Another $250 billion can be raised through international clampdown on tax evasion with a global minimum tax on billionaires, according to the EU Tax Observatory.

The role of the G20 and COP29 cannot be overstated in shaping the future of climate finance. The G20 Summit in 2023 marked a significant moment, with leaders recognising that multilateral reforms and private sector mobilisation are essential for addressing the climate crisis. The agreement to push MDBs to take on more risk and increase climate-related lending was a positive step, but the follow-through at COP29 will be crucial.

Missing Piece of the Puzzle

The New Delhi Leaders’ Declaration acknowledged that the developing world will need $5.9 trillion till 2030 for its Nationally Determined Contributions (NDCs), and an additional $4 trillion each year for clean energy technologies to meet zero-emission goals. That’s a whopping $34 trillion by 2030 – more than the US’ GDP of $28.78 trillion. On an annualised basis, the sum is about 5% of global GDP.

While public financing and MDB reforms are crucial, they will not be enough. Closing the climate finance gap for the approximately 140 lower-middle-income countries worldwide will need all stakeholders — from public lending to private capital to philanthropic participants and beyond — to step up. Global investments in clean energy and adaptation projects need to exceed $4 trillion per year by 2030, yet private capital has been slow to move at the scale needed.

At the IMF meetings in Washington DC in mid-April, discussions centred on the persistence of high funding costs and lack of progress mobilising private capital into this grouping of countries. The private sector currently manages more than $210 trillion in assets, but only a very minor part of it is dedicated to climate investments, according to the Green Climate Fund (GCF), the world’s largest multilateral climate fund set up by the UNFCCC.

Developing countries will also have to finetune their policies to first reduce the currently high perception of risk in regions where political instability, currency volatility, and regulatory uncertainty exacerbate the risks of losing their capital. Governments can work with MDBs to de-risk investments using instruments like blended finance to absorb some of the upfront risks for private investors.

In addition the lack of clear, consistent policies on carbon pricing, regulation, and the overall investment landscape makes it difficult for businesses to plan and invest in long-term climate projects. The problem can be resolved through regulatory frameworks that create stable, predictable environments for private capital flows into climate solutions. There’s also a need to put in place adaptation and resilience action plans in nations to help companies manage risks.

While carbon markets are being touted as a means to unlock billions in finance for climate mitigation projects, these are plagued by concerns over greenwashing and the integrity of carbon credits. Article 6 of the Paris Agreement, which seeks to create a global carbon market, will be a key focus at COP29.  As will discussions on ensuring more bankable projects in developing nations, especially in adaptation.

The NCQG, MDB reforms, and increased private sector participation are all critical for the world to successfully transition to a low-carbon, climate-resilient future COP29 discussions and decisions made there will determine whether we can marshal the trillions of dollars needed to avert the worst impacts of climate change and build a sustainable, equitable future for all.

If the financial commitments do not materialise in the way that science demands, we risk leaving billions of people exposed to the devastating consequences of a warming planet. The world is watching, and the stakes could not be higher.

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Archana Chaudhary

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