COP26 – The Role of Finance

Environmental activists (and I count myself in that number) could argue that we should take whatever action is necessary to safeguard the climate, biodiversity and, ultimately, the human race regardless of the cost.  Most countries managed to find staggering amounts of money to deal with Covid-19, a more rapid but overall much less serious emergency than the imminent collapse of our atmospheric life-support system.  Inevitably however, money will play a very large role in the negotiations at COP26.  Here, we explore the role of finance in the conference.

Wednesday 3 November is when world leaders discuss the provision of finance for lower income countries to help them deal with the climate crisis.  But finance will also be a thread through the whole of the conference.

Climate Finance Delivery Plan

Under pressure from developing countries at the Copenhagen COP in 2009, developed countries agreed to mobilise $100 billion per year in climate finance to the global South by 2020.  This target was missed.  A “Climate Finance Delivery Plan”, prepared by the German and Canadian governments at the request of the UK as hosts of COP26, was published on Monday 25 October 2021.  The report’s authors found that the $100 billion target would not be met until 2023.  But by 2025, according to the plan, the amount flowing to developing countries should reach $117 billion a year.  Some new pledges are also likely to be made by the end of 2021.

Mitigation, Adaptation, Loss and Damage

Up to now, finance from the rich countries has focused on mitigation, that is cutting emissions of carbon dioxide and other greenhouse gases.  More than 60% of the finance has been targeted towards renewable energy generation projects, which are considered easy to fund as they generally make a profit for the donors! 

But as we are seeing, some of the impacts of climate breakdown that we have been warned about for years are now happening.  These events are predominantly occurring in the global South and to people who have contributed little to the crisis.  So, in addition to funding for mitigation, developing countries need funds to help them adapt.

In addition, there is no mechanism in place to raise finance for loss and damage due to climate change.  Examples include the more frequent extreme weather events that have affected Mozambique, Zimbabwe, Afghanistan and Bolivia in the past couple of years.  COP26 is an opportunity for countries to agree to increase funding for adaptation measures and to agree a method of financing loss and damage.  Would a levy on the major polluters, the oil and gas companies, be an idea of how to finance this?

The Climate Finance Delivery Plan, outlined above, suggests that during COP26 existing pledges may be refocused towards helping developing countries cope with the impacts of extreme weather.

Investment in Fossil Fuels

In a landmark report published in May 2021, the International Energy Agency reached the conclusion that to meet emissions reductions targets there should not be any further investment in new oil, gas or coal projects.  Including gas in this statement was significant as many international finance institutions, governments and fossil fuel companies have moved a lot of money from coal into gas power in recent years.  The UK is no exception.  The argument has been that gas is cleaner than coal or oil and can be a transition fuel as we increase the capacity of renewable energy systems.  A wholesale move to using gas would, however, only result in a marginal reduction in emissions and would still lead us to breach the 1.5oC level of global heating that was agreed in Paris.  We still need a rapid transition away from the exploitation of all types of fossil fuels.

Loans -v- Grants

The unmet undertaking to provide $100 billion per year of funding has another twist.  Of the $79 billion that developed countries claimed to have provided in 2018, almost three quarters was in the form of loans that the global South has to pay back.  It is estimated that more than two thirds of the public climate finance delivered between 2013 and 2018 was in the form of additional debt.

This type of finance increases the debt burden on the global South and makes these countries more vulnerable to financial crisis, on top of the climate crisis!

National debts have been growing in recent years, and 52 countries are now in crisis.  In 2020 alone, countries in the global South spent $372 billion on servicing debt, so you could argue that $100 billion additional funding would flow directly back to the donors in debt interest.  This means that many countries are unable to rebuild when hit by disasters such as floods and hurricanes.  They have little room to adapt or transition to a more sustainable economy and are being forced into more debt to pay for the crisis.  The outcome is likely to be further exploitation of their natural resources to pay creditors.

Lower income countries are least responsible for emissions causing the climate crisis, and worst affected.  It is the richer, polluting countries that should pay for the damage caused and to support the transition.  The agreement to provide the $100 billion per year is a partial acknowledgement of responsibility but the failure to meet the pledges sends a different message.

The UN estimates that the impact of the climate crisis is set to cost vulnerable countries up to $300 billion per year.  It would seem that, to claim that the contributions of the richer, polluting countries are based in equity, the pledges should be increased to at least this amount and that the funding should be in the form of grants rather than loans.

Role of the Private Sector

Given the neoliberal economic ideology of the host government of COP26, it was inevitable that private sector finance would also be called upon to contribute to the funds available to help us decarbonise. 

Mark Carney, UN Special Envoy for Climate Action and Finance and the UK Prime Minister’s Finance Adviser for COP26, has recently published a report.  “Building a Private Finance System for Net Zero” outlines some key goals for the private finance sector. 

Mr Carney’s overarching objective is to make sure that private finance to companies can help them realign their businesses towards net zero by funding new initiatives and innovations.  In his opinion, this amplifies the effectiveness of government climate policies and accelerates the transition to net zero, minimises public sector costs and promotes jobs and growth.  If we can do this, Mr Carney believes “the transition to net zero is creating the greatest commercial opportunity of our age”.

While all this sounds very worthy, a couple of points made in the report resonated.  The first is that every financial decision made by companies must take climate breakdown into account.  The second is that scientifically feasible transition paths for each business sector will help expose the companies who can seize the opportunities in the transition to net zero and which will cease to exist.  Recognising that climate breakdown must permeate through every decision made by businesses and that some current business models will not be viable if we are to achieve our decarbonisation goals echoes some points we made in a discussion posted more than 2 years ago.  That business and finance leaders are now recognising this is encouraging.

Less welcome is the conclusion that the attainment of net zero by many companies will be reliant on offsets, particularly funding carbon sequestration projects in emerging and developing economies.  Offsetting is often used by companies as a “get out of jail free” card when it should be a policy adopted after all other options for decarbonisation have been exhausted.  Preventing this will be important.

The other issue highlighted is that successful release of the significant amounts of private finance mentioned in the report (several hundred trillion dollars) will depend on the ambitions of governments’ climate policies.  The previous posts in this series question the commitment of our governments to treat climate breakdown as the emergency it certainly is!

There are clearly several threads to the issue of public and private sector finance that will be discussed during COP26.  A key test of the success or otherwise of the conference will be the amount of money that is committed by those governments most responsible for historic emissions of carbon dioxide.  It is also important that any commitments are real and not just more pledges that may not be fulfilled.  Providing funds in the form of grants rather than loans subject to repayment will also be a key test.