In May, we wrote about how 2024 is meant to be the year for international climate finance.
We underlined the fact that the UNFCCC and the international climate community are sadly way behind the game on mobilizing climate finance for developing countries to tackle the dual challenges of the energy transition and climate adaptation. We also highlighted how the negotiators on the Global Biodiversity Framework (GBF) are exploring how public and private finance can be mobilized to deliver on the GBF.
This combination of public and private finance is essential if it is to be scaled up – nearly $200 trillion to reach the net-zero targets of 2050, according to a European Commission paper from earlier this year – and at the urgent pace required. However, after a meeting between climate negotiators in Baku which finished on 11 September, it’s obvious that the UNFCCC talks on finance are stuck on the key issues of the amount that needs to be mobilized (the “quantum” in negotiator speak) and which countries should be contributing (the “contributor base”, i.e. should major non-Western economies like China and Saudi Arabia be donors as well.
The over-riding concern is that the goal of agreement on a New Collective Goal (NCQG) on finance at COP29 in November ends in failure. This stalemate is obviously very worrying, given its potential to derail the entire COP29 meeting in Baku in November. But we also believe that these differing views on the quantum and contributor base risk overlooking the central issue: that raising the huge amounts of international climate and nature finance required will only be accomplished by mobilizing the private sector. And for the finance to be mobilized, the private sector needs a full and comprehensive offer from policymakers that presently is not on the table.
Governments could usefully learn from how the renewables market has become a $1.3 trillion global market. This has been achieved – alongside the polluter pays principle for high-carbon energy sources – through a clear focus on the policy frameworks (mechanisms to incentivize investments in low-carbon energy sources), supported by a recognition that governments can help to de-risk those investments through strong political commitments backed-up by judicious, targeted public finance which primes the pump for private sector investment.
On nature finance, there is an equal pattern where the urgent scale up of funding is required: the biodiversity funding gap is a US$700 billion annual finance gap to fill by 2030. At COP16 next month, governments are required to present, via the National Biodiversity Strategies and Action Plans (NBSAPs), strategic plans to support the increase of finance for nature from all sources. So far, only 14 countries have submitted their updated plan: Republic of Korea; Malaysia; Suriname; Italy; Canada; Austria; Ireland; China; France; European Union; Luxemburg; Hungary; Japan; Spain.
So how can this full-throated offer to the private sector on international climate and nature finance be made? We suggest in two mutually supportive ways: through a policy re-framing, and through innovation.
The task of re-framing is probably the less problematic of the two.
Central to this is about changing mindsets. At its core, we think that the entire policy community – Global North governments, the international financial institutions (IFIs) like the World Bank, the regional multilateral development banks (MDBs) – need to shift the debate (and associated differences of opinion) away from arguing about whether individual countries should be a donor.
Instead, there needs to be an acknowledgment that: a) some of the BRICS heavyweights such as China and Brazil are paying into climate finance support via their contributions to the IFIs and the MDBs, and also through bilateral support, eg China’s support for climate-related projects in Africa; and b) while public finance is obviously key to incentivizing private sector investment, in the final analysis, it is private finance which will change the game at scale on financing the transition. Pivoting in this way to a partnerships framing – North/South in parallel with public/private – can, we feel, unlock international co-operation and supersede the zero-sum situation.
This takes us on to the second complimentary approach: a concentration on innovative sources of finance. So many ideas of how and where to mobilise private finance have been floated. In summary, we see these ideas boiling down to a three-part offer:
- First on subsidies, where we make no apology for consistently advocating this theme. Carbon Tracker recently made a strong case for international subsidy reform, predicated on moving government support away from fossil fuel production. A shift in this policy area – which requires comprehensive backing across the international spectrum, combining the political (UN, G20, IEA and regional groupings like the EU) with the economic (World Bank, IMF, the MDBs) – would send a powerful signal to the private sector that they can with confidence fall in behind Article 2.1.c of the Paris Climate Agreement (the objective to shift financial flows from high-carbon to low-carbon energy sources.) Subsidy reform should be top of the policy agenda for the Brazilian Government, as it assumes not only the BRICS chairmanship in 2025, but the Presidency of the all-important COP30 in November 2025. Equally, nature would strongly benefit from a reduction of governmental environmental harmful subsidies (EHS). Target 18 of the GBF, the first quantitative reduction goal for EHS, commits to reduce environmentally harmful subsidies by $500 billion annually by 2030. While research shows the scale of subsidies continues to rise, greater effort is expected by governments. Of course, subsidy reform at the global level is hardly a new concept – but a multi-stakeholder approach bringing together the international political and economic decision-making institutions would be something new;
- Second, a concerted international focus on debt in developing countries could also have a transformative effect on the investment environment for private finance in the Global South. An initiative on debt would also have the benefit of tackling climate and nature finance, given that it is a common obstacle to scaling up private finance in both areas. The debt crisis in itself is crying out for an innovative approach. Think-tanks such as the World Economic Forum as well as Planet Tracker have written extensively about innovative financing models for debt-for-climate and debt-for-nature swaps. Indeed, debt-for-nature swaps – where a country receives debt relief in exchange for committing to protect its forests – have been around for some years. Debt-for-climate swaps have been less utilized; but the principle, which could also be broadened to encompass the energy transition so that a government benefits from concessional finance for decarbonization commitments, is the same. There are question marks about how much finance, debt solutions would raise. But imaginative and urgent policy development around debt could unquestionably serve to create a more favourable investment environment in Global South countries;
- Last, a private sector offer which genuinely leverages private finance innovation. Carbon Tracker and Planet Tracker engage regularly with investors and we know the scope for innovative thinking which resides in the sector. One such example is the insurance industry, who were early movers on pricing in climate and nature risk. Whether multilateral frameworks such as the UNFCCC and UN Convention on Biological Diversity have the flexibility to incorporate private finance into the NCQG process and complimentary processes is uncertain; however, the urgency of the twin crises surely requires a fresh partnership approach to incorporate innovation from private finance and investment sectors.
We suggest these channels be complimented by role modelling good practice disclosure and case studies of innovative sources of finance used to attract capital into and from private sector organizations willing to invest their resources into renewables. This can provide a roadmap and impetus for other organizations to compete through innovation.
In conclusion, the platform for international climate and nature finance needs to be de-risked, so that it can foster the low-interest rate investment climate for emerging market and developing economies, which is essential if the private sector is to make a transformative difference.
A policymaker offer grounded in a new partnership approach and in innovative thinking – and which in the first instance requires a pivot in how governments publicly communicate their needs and priorities – could also help to rebuild the trust between the developed and developing world on finance.
As the faltering NCQG negotiations are demonstrating, the climate of trust between Global North and Global South countries remains seriously eroded – this situation needs to be turned around fast.
