Blog Post

Question 6 for COP 21: Finance

Nov 19, 2015 | Brian P. Flannery, Raymond J. Kopp, Clayton Munnings

In this blog series, Questions for COP 21, we are posing several questions that should be considered before—and after—the negotiations. Here we address finance: Can financial aid be mobilized and effectively utilized at the scale that may be required to assist and compensate developing nations?

With the negotiation of mitigation efforts taken off the table in favor of voluntary Intended Nationally Determined Contributions (INDCs), many believe that financial aid to Developing Countries has become the central issue in the Paris climate negotiations. Major questions concern areas and scale of aid and approaches to raise and utilize funds.

While politicians, public debate, and media interest in developed nations focus on efforts to mitigate emissions, developing countries focus also on financial aid (and other means of implementation such as technology and capacity building). They argue that developed nations caused the climate problem and have an historical responsibility to assist them in responding to it. Also, that the poor and the least developed nations will bear the brunt both of climate impacts and economic impacts from climate policies that may slow development. 

The pledge by Developed Countries in Copenhagen in 2009—to mobilize $100B per year by 2020 from public and private sources to assist developing nations—appears to set a floor for aid in the Paris talks. However, the commitment remains ambiguous, for example, concerning the meaning of “mobilize” or even the definition of climate finance. Moreover, challenging questions remain:

  • How can governments pledge private funding?
  • On what basis was the $100B per year specified?
  • Most importantly, what happens after 2020?

Negotiators are discussing four separate areas where developing nations seek assistance. They are requesting financial aid to mitigate and adapt to climate risks, and compensation both for the adverse impacts on developing nations from mitigation measures in developed countries and for loss and damages from climate change. Arguments have been made that claims in each of these areas already amount to hundreds of billions of dollars per year, and that they will grow in the future —for example, an analysis of an earlier G8 proposal (to halve global emissions by 2050) reported that financial transfers could reach 400 B$ annually by 2020 and rise to over 3,000 B$ annually by 2050. Other estimates from a variety of analyses conclude that the additional investment in energy-related facilities and infrastructure necessary to transform to a low-carbon future would have to be sustained for decades at approximately $1 trillion more per year.

The discussion on loss and damage has become particularly contentious. Developing nations are making this a red line issue, claiming that nations that fail to agree are acting as climate deniers. Developed nations are pushing back, trying to treat loss and damage as a component under adaptation. No one has yet raised the thorny, fundamental questions concerning how to attribute specific natural events and incremental damages to human-induced climate change.

Pledges for action by developing nations (INDCs) describe both unconditional efforts that they will undertake on their own and other efforts that are conditional on aid. India, for example, states in its INDC: “at least USD $2.5 trillion (at 2014-15 prices) will be required for meeting India's climate change actions between now and 2030.” That request alone (on average more than $160B per year) dwarfs the Copenhagen Pledge. At this scale, finance also raises serious concerns regarding institutional capacity to manage transactions and the competence and integrity of the process across the board. While some funds will flow through existing climate-related institutions such as the Green Climate Fund and Global Environment Facility, developed nations hope to utilize existing mainstream financial institutions to leverage private sector resources.

Developed nations have not yet agreed to the level or types of funds that they will supply or means to disburse them. Transparency processes and compliance (whatever its form) will present major challenges—for clarity of proposed actions, and for measurement, reporting, and verification (MRV). Developing nations seek assurance not only on amounts but also propose that funding from developed nations should be “new and additional, adequate, predictable, accessible, sustained and scaled-up financial resources.” In the meantime the Copenhagen pledge appears at the same time to be far too little and yet unlikely to be approved by electorates in developed nations.

Read more posts in the series, Questions for COP 21: