What Could the New Climate Finance Goal Look Like? 7 Elements Under Negotiation

https://www.wri.org/insights/ncqg-key-elements

May 29, 2024 By Natalia Alayza, Gaia Larsen and David Waskow 

In 2009, developed countries agreed that by 2020, they would collectively mobilize $100 billion per year to support developing countries' climate action. According to the OECD, this goal was met for the first time in 2022 — two years after the initial deadline. But negotiators are already working on developing a new goal. And this time, they're setting their sights higher.

When countries signed the Paris Agreement in 2015, they decided to set a "new collective quantified goal on climate finance" (NCQG) to replace the existing goal of $100 billion per year. The NCQG is meant to be adopted this year at COP29 in Azerbaijan.

The new finance goal will channel greater funds toward urgently needed climate action in developing countries. It will support implementation of low-carbon, climate resilient solutions in energy, transport, agriculture and other vital systems. By increasing financial support, it should enable developing countries to step up their climate ambitions in the next round of national climate plans (NDCs), which are due in 2025.

However, deliberations on the new goal have been slow to date. Negotiators have yet to reach consensus on foundational questions, from the dollar amount of the goal to which countries should contribute.

Here are seven key elements of the NCQG that negotiators will grapple with leading up to and at COP29:

1) Setting an Ambitious Target that Meets Developing Countries' Climate Finance Needs

The $100 billion climate finance target was not needs-based. Rather, it was a political commitment that recognized developed countries' responsibility to provide financial support to developing countries. The NCQG will be different: Parties have already agreed that it should take into account the needs and priorities of developing countries to tackle the climate crisis. But negotiators have not yet decided what this will look like.

Research indicates that developing countries need trillions of dollars annually to combat climate change and address its impacts. One report found that the financial requirements spelled out in countries' NDCs add up to around $5.8-$5.9 trillion cumulatively by 2030. Other estimates put this cost at $7.8-$13.6 trillion for the same time period.

These cumulative estimates — which include all financial sources, both national and international — work out to at least a trillion dollars a year in need. Similarly, the UN Conference on Trade and Development has estimated the necessary annual finance flows at $1.55 trillion by 2030. (Any differences between these numbers are due to the inclusion of different sectors and/or climate models.)

Meanwhile, the Independent High-Level Expert Group on Climate Finance (IHLEG) suggests that emerging markets and developing countries, excluding China, need to invest and spend close to $2.4 trillion a year by 2030 to meet climate and nature goals. That's four times what is currently invested. The IHLEG suggests that around $1 trillion per year of these funds will need to come from international sources of finance. About half of this would come from the public sector (including bilateral, multilateral and other development finance, as well as innovative finance) while the other half would be mobilized private sector investments.

A few countries have proposed specific amounts for the NCQG. For example, India and the Arab Group have called for developed countries to provide around $1 trillion per year to developing nations.

Decisions on other key elements of the goal, such as its time frame, contributors and what climate-related activities are covered, will ultimately help inform its size.

2) Determining Which Countries Should Contribute to the New Finance Goal

Responsibility for meeting the $100 billion goal rests with developed countries, defined in this case as the 24 countries who were OECD members in 1992 when the United Nations Framework Convention on Climate Change (UNFCCC) was signed. However, some developed countries point out that the world has changed a lot over the past three decades. They argue that additional nations are now capable of contributing to a global goal, and moreover bear a responsibility to do so based on their contributions to greenhouse gas emissions.

Many developing countries, meanwhile, argue there is no legal mandate to discuss contributors to the goal. They maintain that contributors are already agreed upon in Article 9 of the Paris Agreement and under the UNFCCC. Both documents state that developed nations have a responsibility to provide climate finance to developing nations.

Developed countries have suggested various indicators to assess who can and should pay into the NCQG. For example, countries' potential to contribute could be analyzed based on their ability to pay (income) and historical responsibility for climate change (emissions). Each indicator could be measured through a variety of metrics, such as cumulative emissions versus per capita emissions, or gross national income with or without purchasing power parity.

Who floats to the top of the list will depend on which factors are prioritized. For example, China is the largest greenhouse gas emitter today if annual historical emissions are calculated for the country as a whole. But it falls to 20th place if emissions are calculated per capita. Meanwhile, the six countries with the highest current per capita emissions are all from the Middle East; they rank above all the developed countries that are currently considered Annex II (contributor) nations. But these countries rank lower for total emissions given their smaller size.

Developed countries are also questioning who should receive the funds. They want to tailor support to countries that are most vulnerable to climate impacts or that have the most ambitious climate action commitments. Meanwhile, developing countries have reiterated that they should all be eligible to receive finance to enable implementation of their NDCs and National Adaptation Plans.

3) Choosing an Appropriate Time Frame

Another topic under debate is what time period the new climate finance goal will cover — that is, how much time developed countries will have to meet the target. The time frame negotiators select will influence the size of the goal and how to monitor progress. Most countries have expressed the need to have clear start and end dates, with proposed time frames varying from five years to 10 or 20 years. There are pros and cons to each.

A five-year time frame could more closely link the NCQG to the Paris Agreement's NDC and Global Stocktake (GST) processes, both of which run on five-year cycles. For example, the next round of the NCQG could be informed by the latest round of NDCs updates in 2025 and the second GST in 2028.

A longer time frame, in the 10-20-year range, could provide countries with a more stable and predictable indication of the targets they need to aim for. But the further-off horizon makes it more difficult to project how much finance will be needed, factoring in inflation, shifting costs of technology and future climate impacts.

One solution to these challenges could be to incorporate interim revision cycles (for example, every five years) within a medium- or long-term time frame. This could offer the stability and predictability of a longer time frame, while also maintaining some flexibility to help account for the evolving needs and priorities of developing countries. But reopening negotiations on the NCQG during revision cycles has the potential to cause additional delays and complexity.

4) Addressing All Three Pillars of Climate Action: Adaptation, Mitigation and Loss and Damage

The $100 billion goal covers climate-related activities under two categories: mitigation (efforts to reduce greenhouse emissions) and adaptation (efforts to build resilience to climate impacts). But even with increased action to curb climate change and build resilience, countries will continue to face losses and damages from climate impacts that are already here. "Loss and damage" refers to the impacts that go beyond what communities can adapt to, such as the loss of homes and lives during severe storms.

Whether or not the NCQG will cover loss and damage is still under debate. Developing country negotiators, in particular, suggest that the NCGQ should cover loss and damage in addition to mitigation and adaptation. They recommend creating subgoals for both adaptation and loss and damage to ensure that these areas receive adequate finance.

The first-ever Global Stocktake showed that developing countries face a significant challenge in funding loss and damage. Economic costs alone are estimated to reach between $447-$894 billion per year by 2030. And that's without factoring in non-economic losses and damages, such as the loss of cultural heritage. The Stocktake "urges" developed countries and "encourages" other countries to provide support for activities to address loss and damage. Many assessments of global climate finance needs, including the IHLEG's, already include loss and damage in their estimates.

Developed nations, however, argue that loss and damage funding is voluntary and covered under a different part of the negotiation process.

5) Defining Scope of the NCQG and Its Relationship to Article 2.1(c) of the Paris Agreement

Article 9 of the Paris Agreement recognizes that developed countries are primarily responsible for providing climate finance to developing nations. But the Agreement also includes another finance goal, Article 2.1(c), which calls for all countries to make "finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development." Countries have already decided that the NCQG will aim to contribute to the achievement of Article 2.1(c) in some way. The question now is how.

A broader alignment of financial flows will need engagement from all governments to shift both international finance and domestic public and private resources. Developed country parties tend to emphasize that the NCQG should recognize this responsibility of all parties — including developing countries — in some way. Meanwhile, developing countries generally argue that this broader 'shifting of flows' is not part of NCQG negotiations and should be discussed in separate negotiations specifically focused on Article 2.1(c).

One way forward, supported primarily by developed countries, involves embedding the core NCQG commitment within a broader commitment by all parties to work toward aligning all financial flows with the Paris Agreement's goals. The inner layer would consist of funds provided by developed countries, along with any new contributors, to a group of recipients (potentially a subset of developing countries). The outer layer, referred to as the "global investment goal," would aim to engage all countries working together to shift financial systems. What this would look like in practice is still under discussion.

The image below outlines a way to view the different types of finance and the role of the different types of governments involved. "Provision" refers to the transfer of international public funds from developed to developing countries for climate action. "Mobilization" refers to governments deliberately shifting private finance toward climate action in developing nations. "Alignment" refers to ensuring, through policy frameworks and enabling environments, that all finance flows in all geographies, regardless of source, support or do not contravene climate mitigation and adaptation efforts.

6) Designing the NCQG to Support High-quality Climate Finance

Beyond the dollar amount of the NCQG, the quality of the finance delivered is also important. "High-quality" climate finance mechanisms ensure that the funding can be used most effectively and efficiently.

Parties have emphasized that the NCQG should consider:

• Concessionality: Concessional finance is funding provided with more attractive rates and conditions compared to the market. This is particularly relevant when about half of the 50 most climate-vulnerable nations globally are in or at high risk of debt distress, restricting their access to market-rate finance. The IHLEG has stated that a five-fold increase in concessional finance is needed by 2030. This includes not only bilateral concessional finance, but also funds from high integrity carbon markets (compliance and voluntary); rechanneling of special drawing rights, international taxation; and philanthropy, including from the corporate sector. Developing countries are calling for more concessional finance compared to what they received under the $100 billion goal, particularly for adaptation.
• Accessibility: Accessibility refers to the ease with which countries can access public and private international climate finance. Many developing countries have pointed out that current processes are complex and time consuming, especially for funding that goes through multilateral institutions like the international climate funds or multilateral development banks. They ask that the NCQG include a commitment to ensuring that funding is made more accessible. This could involve, for example, greater donor coordination at the national level, improved harmonization of standards, reduced transaction costs, reduced processing times and timely disbursement.
• Predictability: Developing country negotiators emphasize that a successful NCQG should be predictable, with clear, quantified financial targets and timelines. They argue that knowing the amount of finance available, when it will be disbursed, and through which potential financial instruments can allow beneficiaries to better plan for the implementation of their climate-related investments in line with national policies and international commitments.
• Effectiveness: Developed countries emphasize the importance of using funds 'effectively,' meaning for climate-related purposes that bring about measurable impact. They stress that funding should be used for its intended climate purposes and that the funds should result in clear impacts on resilience and emissions. Measuring effectiveness, however, remains challenging.

7) Implementing Transparent Processes to Track Progress

When the $100 billion goal was agreed in 2009, there was no institutionalized mechanism to hold developed countries accountable for fulfilling it. This led to significant frustration amongst developing countries when the goal was not met on time.

At COP26 in 2021, the UNFCCC's Standing Committee on Finance (SCF) was tasked with assessing progress towards the $100 billion goal. The new climate finance goal is likely to incorporate such tracking mechanisms from the outset. Countries generally agree that NCQG reporting could leverage existing instruments within the Paris Agreement, specifically the Enhanced Transparency Framework (ETF).

According to the ETF's Modalities, Procedures and Guidelines, developed countries shall provide information on financial support, including the underlying assumptions, methodologies and definitions used in their reporting. This framework would allow the international community, including recipient countries, to monitor progress towards the new goal and seek to hold contributors accountable for their commitments. It may also provide a framework against which those providing climate finance outside of the NCQG — including, for example, through the MDBs and bilaterally — might be able to report their contributions. This could allow for a clearer and more predictable overall picture of financing flows.

For this to work, Parties to the Paris Agreement must adopt a mandate authorizing the ETF to monitor flows toward the new climate finance goal. In addition, the SCF could be charged with developing progress reports on the NCQG, as it was mandated to for the $100 billion goal. Developing countries have also suggested that there should be additional clarity as to what can be reported as climate finance under the NCQG.

Reaching Agreement on the NCQG at COP29 is Crucial to Unlocking More Ambitious Climate Action

The final NCQG needs to have an ambitious and deliverable financial commitment. It should include clear rules defining who will contribute, for what purpose, over what timeframe and how progress will be monitored.

These negotiations are not easy; each element under technical debate comes with its own political challenges. But there are possible paths forward.

One challenge of the NCQG is that the negotiations have surfaced an array of complex topics, not all of which can be addressed within the NCQG context. Some decisions relevant to the new goal will need to be made outside of UNFCCC negotiations, including within fora such as the G20 and through the governance mechanisms of climate funds, development banks and other development finance institutions. In these spaces, greater emphasis is placed on the need to integrate climate, development and nature finance and implementation. But the negotiated NCQG text can provide clear guidance and direction. 

This is a pivotal opportunity for countries to acknowledge challenges, build upon what they've learned from the $100 billion goal, and ensure that increased climate investment goes hand-in-hand with sustainable development and poverty eradication.

Ultimately, increased climate and development finance is key to ensuring that developing countries can make more ambitious climate commitments and deal with loss and damage. Adopting a strong NCQG at COP29 will set the foundation to rebuild and strengthen trust in the international climate finance system. And it will promote solidarity between developed and developing countries at a critical moment for climate action.