The $300 Billion Question Ahead of COP30

The climate finance target set at COP29 highlights ambition, but bridging the gap demands political leadership and structural innovation, not just funding pledges, writes Labanya Prakash Jena

$2.3 to $2.5 trillion – this is the amount of capital Emerging Markets and Developing Countries (EMDCs), excluding China, need per annum to meet their climate goals, according to the Independent High Level Expert Group (IHLEG). By 2035, that figure will climb to $3.2 trillion annually, with $1.3 trillion expected from international sources. But the reality is sobering. By 2023, EMDCs mobilised only $196 billion in 2023, as per the latest study by Climate Policy Initiative (CPI). To stay on track, they’ll need to increase their capital mobilisation elevenfold. Here, financial support from developed countries — politically known as climate finance — can bridge the financing gaps. But it needs political willingness, reform of multilateral institutions, a change in form and types of financing, and removal of institutional bottlenecks. 

From targets to delivery

Over the years, climate finance has been getting increasing attention at intergovernmental platforms, particularly at the annual Conference of the Parties (COP). Last year’s COP29, dubbed the “Finance COP”, was where the climate finance target increased from $100 billion per year, applicable until 2025, to $300 billion by 2035. Although the incremental number is attractive on paper, it is far from adequate to meet the funding needs of EMDCs.  

Moreover, there are no concrete plans for how to mobilise these, who will provide how much, and what kinds of finance. 

Developed countries committed to provide $100 billion of climate finance by 2020 in 2009, but it took them 13 years to fulfil commitments, even if we assume that climate finance is a tangible support to developing countries. The upcoming COP30 in Belem, Brazil, must lay down a pathway and a concrete roadmap with a firm commitment by developed countries to provide support within a defined timeline. 

The quality problem

For a long time, developing countries have complained about the quality of climate finance. India complained several times that private climate finance, even if attributed to public climate finance, cannot be considered as support. There is no clarity on how public finance is really used to drive private finance. A major source of distrust is the opaque reporting by OECD [Organisation for Economic Co-operation and Development] countries, which rely on voluntary submissions with little verification. Also, loans and equity, often at a market rate, are also considered as climate finance, which are contested by developing countries. Here, the important point is how much of this $300 billion will be really concession capital and how much private capital will be market-determined. 

In addition, how much of them is in the form of loans, which will further increase the debt of EMDCs. Even if it is concessional debt, it will increase the debt of countries, consequently affecting their credit profiles, which are not in their best interest of EMDCs. It is recognised at various global forums that the debt  burden of several EMDCs is not sustainable, and a significant portion of debt must be forgiven or delayed, providing additional headroom to them to invest in climate actions and meet public needs of other developmental priorities, such as education and healthcare. This is why debt relief must become a part of the climate agenda. Financial instruments such as Debt-for-Climate (DFC), that substitute climate actions for debt restructuring, can be implemented. Debt restructuring can be based on efforts to reduce carbon emissions and restore natural capital — both are global public goods and also provide much-needed debt relief to EMDCs. 

Reforming the system

Institutional bottlenecks are another drag. Bureaucratic hurdles to approve and disburse climate finance in multilateral financial institutions, and a lack of risk-taking ability and willingness of these institutions, stifle climate flows. Institutional innovation and removing unnecessary bureaucratic hurdles is crucial.. Another major challenge is the lack of integration among various institutions that provide climate finance; their operational boundaries and institutional processes of selection, approval, and disbursement are different. These differences create inefficiency in climate finance mobilisation and disbursement. The Finance for Development (FfD4) draft calls for greater integration among existing mechanisms on climate finance.

Adaptation: The neglected half

Historically, climate mitigation projects have received a large chunk of climate finance due to their inherent clear business model and financial viability in several segments. But climate adaptation, which is equally important and more urgent for EMDCs, is not getting its due share of climate finance. 

As per the last report of CPI, climate adaptation finance received only 2.4% of total climate finance in FY2023, i.e. $46 billion, compared to the requirements of $222 billion per year over 2024-2030. Here, long-term financial programs such as the International Monetary Fund’s Resilience and Sustainability Trust (RST) can provide long-term concessional capital. 

Investment in resilience doesn’t just protect lives and infrastructure, it also safeguards a country’s debt servicing capacity. In addition, suspending debt servicing during a climate disaster will allow EMDCs  to spend on rehabilitation, which will enable them to recover from economic downturn quickly. 

Making capital affordable 

For most developing economies, the terms of capital, particularly the cost of capital, remains a major barrier. It is more problematic for economies importing capital for climate actions as they face currency risk, which further increases the cost of capital.  

Multilateral Development Banks (MDBs) can offer concessional financial solutions to reduce the cost of capital (e.g. subsidised credit guarantee, currency hedging, equity), and regional development banks (e.g. AIIB) can also offer these financial solutions. As MDBs climate finance support is not effective and adequate, and international climate finance support is far from required, EMDCs can collectively bargain for better from these global institutions. The bargaining points must focus on more grants for extremely vulnerable countries, interest-free or concessional loans, flexibility in loan terms and conditions (e.g. financial support for local governments without sovereign guarantee), and more risky capital at a lower rate (e.g. subsidised credit guarantee fee, equity capital).

The bottom line

The recent withdrawal of the United States from international climate agreements, trade barriers, and war in the Middle East and Europe are transitory hurdles to global efforts on climate change. Climate finance is essential for EMDCs, and developed countries committed to climate actions must increase their support many times to meet global needs and ambitions to limit global warming within the desired level. Besides, there is a dire need for institutional innovation in multilateral institutions that can enable bridging EMDCs’ green funding gaps. 

Labanya Prakash Jena is Director at Climate and Sustainability Initiative (CSI), and Advisor at Climate Trends. Views expressed are personal

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