What needs to change to hit the $100B climate finance target?

At COP 26 in November, high-income nations committed to a new promise to hit a target of $100 billion of climate finance by 2023  — after having missed their original target to hit that level by 2020. But climate change experts have said that the rules must change in order to hit the amount and quality of finance needed.

Various measures to tackle a shortfall in climate finance emerged around the 26th United Nations Climate Change Conference, several of them spearheaded by the United Kingdom as part of its presidency — including £100 million ($133 million) to fund a Taskforce on Access to Climate Finance, which it co-chairs with Fiji.

And a Champions Group on Adaptation Finance — which includes the U.K. as well as Ireland, the Netherlands, Denmark, Sweden, and Finland — was announced in September. The group has since expanded to include Germany, Italy, New Zealand, Australia, and the African Development Bank. Its goal is to work with low- and middle-income countries and small island developing states to help them receive more, and more effective finance.

But climate experts told Devex that the level of useful finance being pledged is lower than the headline figures might suggest and that the quality of that finance is poor: It takes too long to access; it is too expensive; it is bureaucratic to administer, and it is not reaching the people who need the most help.

Furthermore, they say it is hard to measure and track the level of finance being delivered, and there are no consistent standards to which international donors can be held accountable. They say that new rules should be agreed upon to categorize what should count as climate finance and to govern who should pay what.

These rules would then allow high-income countries to hold one another to account and would allow third parties to see easily whether donors are keeping their promises.

Promises not kept

One of the biggest issues is that much less money is being delivered than it appears, according to Clare Shakya, director of the climate change group at the International Institute for Environment and Development.

The commitment for high-income nations to provide $100 billion of climate finance to low- and middle-income nations annually was first put forward by Gordon Brown, then U.K. prime minister, in the lead-up to the Copenhagen Climate Change Conference, or COP 15, in 2009.

Shakya said the $100 billion promise should be reviewed in relation to an earlier pledge by most high-income nations to commit 0.7% of gross national income to official development assistance by 2015.

“It was supposed to be $100 billion to help adapt and mitigate, and it was supposed to be new and additional money,” Shakya said.

“What [new and additional] means hasn’t been defined, but the simplest and most authentic explanation would be to say it’s additional to the earlier commitment to 0.7% development funding,” she said. “Our evidence suggests that’s largely not what’s happening.”

Follow the Money, which was released this summer, is an IIED study into climate finance provided to low- and middle-income countries. It showed that money was mostly not reaching these countries, which along with small island developing states are identified as most at risk from climate change.

The study found that over the five-year period between 2014 and 2018, low- and middle-income countries received only $34.9 billion of climate finance from high-income countries or less than 20% of what was needed.

But only $5.9 billion of that could be verified as primary adaptation finance.

“Either we could not identify the program the money had been committed to because the project names didn’t align with their transparency websites, or we looked at the program and it was primarily aimed at something else and had a climate element to it,” Shakya said. “Or in some cases, we couldn’t find a connection to climate at all.”

She estimated that much of what was primarily classified as for adaptation finance was repurposed from other priorities within development budgets, leaving a relatively low amount that was genuinely new and additional.

She said that in many cases, the money provided was also not in the form that recipients wanted it. “It’s highly intermediated, it’s short-term, and small scale,” she said. “Much is in loans, some at above commercial rate. Poor governments are increasingly indebted and seeing their credit ratings dropping due to climate impacts.”

Another study, the “Climate Finance Shadow Report 2020” from Oxfam, published last year, estimated that when the impact of loan repayments was considered, the effective value of climate finance fell by two-thirds.

A further problem, said Sarah Colenbrander, director of the climate and sustainability program at the Overseas Development Institute, is that the target of $100 billion in climate finance will remain fixed for five years, according to agreements made two years ago at COP 24 in Katowice, Poland.

But with gross domestic product and inflation factored in, this represents a significant real-terms cut every year, Colenbrander pointed out. She said a number of countries, such as Australia and the United States, which are seeing growing economies and increasing inflation, may not be increasing their commitments in real terms at all.

Equitable settlements and accountable measures

Both Colenbrander and Shakya identified a lack of accountability as a major reason for the poor quality of climate finance. Colenbrander said that one major problem was lack of collective agreement on how much each country should contribute.

“Right now, there’s just an agreement that developed countries together will contribute $100 billion,” she said. “But a fundamental problem is that there’s no agreement about who owes what. We need a formula to identify that.”

That figure could be based on one or some combination of population, wealth, and emissions, she said: “The preference would be to focus on historical emissions.”

She said that based on that standard, ODI believes only Germany, Norway, and Sweden are hitting the level of commitment they should be reaching.

Systems for reporting needed to be updated, she said. “Right now, access to finance is too onerous,” she said. “Governments need to account to their taxpayers for how it’s spent, but it’s skewed too far. Right now [recipient countries] have to account for every receipt. And the net result is that poorer countries are more accountable to the rich ones than the other way around.”

As well as consensus about who will pay what, says Shakya, a decision is needed about how climate finance should be defined. COP 26 included an agreement to complete the Paris Rulebook, a set of structures that govern how countries must work toward a carbon-neutral future. The rulebook is expected to improve understanding of who is doing what to mitigate emissions and finance low- and middle-income countries.

But it does not set out a definition of climate finance. The result is that different countries have different standards as to what they report as climate finance. One country might report funding for clean coal as climate finance, while another might not.

“With no definition, climate finance providers can count what they want as climate finance,” Shakya said. “We need meaningful transparency. The accountability element is critical.”

She said that countries needed a “powerful and authentic process of verification,” so that everyone can have confidence that other donors are meeting their promises.

“We need global confidence in the process to be high because it encourages donors to do more,” she said. “If particular countries believe they’re doing something but others aren’t, that’s where it goes wrong.”

This coverage exploring innovative finance solutions and how they enable a more sustainable future, is presented by the European Investment Bank.