Opinion - 03/August/2021

Surpassing $100 billion in climate finance requires stronger whole-of-government diplomacy

Developing a climate finance plan of requisite scale depends on better joined-up diplomacy by developed countries who must heed the warnings of high jeopardy, says Iskander Erzini Vernoit from think tank E3G

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy

To bend the course of emissions and history at COP26, the world needs trust and ambition


Amid the biggest poverty crisis in decades, fulfilling the 2009 Copenhagen pledge of $100 billion in annual climate finance support from 2020—not yet met—is core to rebuilding and maintaining trust. Rather than charity, this pledge is about honouring commitments, ensuring that poorer countries have the means to pursue clean development and to cope with worsening climate impacts.

Trust is also key for ambition to “keep 1.5 alive”. As long as the $100 billion failure remains, countries like China (with half the world’s coal power plants) will find it easier to excuse a failure to reduce their emissions.

It was therefore good news that at the July 2021 ministerial meeting for COP26, Germany and Canada committed to co-lead a process for developed countries to formulate a climate finance plan for delivering on the $100 billion commitment through to 2025. This responded to prior calls urging developed countries to come up with a plan, from the UN Secretary General, the UK’s President-Designate for COP26 and the V20 group of climate-vulnerable countries, among others.

There are four key criteria for assessing the merits of the plan for it to rebuild trust:
1) Timeliness: Can the plan be released sufficiently ahead of the Glasgow summit to have its intended effect?
2) Scope: Can the plan be more than a roadmap and contain measures to reach the $100 billion with immediate effect?
3) Quality: Can the plan reassure vulnerable countries on the composition of finance, with sub-goals for increasing adaptation finance, grant-based finance and other components?
4) Quantity: Can the plan aim for a higher target, such as $150 billion by 2025, to surpass $500 billion over the five years?

The V20 called for a floor of $500 billion of climate finance over a five-year period, implying significantly surpassing the $100 billion in later years. A higher target is needed to average out beyond $100 billion annually and make amends for initial shortfalls. Indeed, Lord Stern from the Centre for Climate Change Economics and Policy at the London School of Economics, has said $150 billion per year would be feasible by 2025.

Although lawyers may argue there is no legal basis for a higher target or $500 billion expectation, this misses the point. The issue is not a legal obligation, but a political necessity of showing good faith. To permit progress on other agendas—including the post-2025 finance goal and obtaining pre-2030 emissions reductions by all major economies to keep 1.5C alive—ambition on scale is crucial.

 

INTEGRATED POLICY

Various policy efforts must be integrated—requiring enhanced coordination within developed country governments—with the formulation of the climate finance plan in order for it to deliver credible and suitably ambitious scale. These efforts include: country climate finance pledges and fair burden-sharing, recapitalising and replenishing the international finance institutions, managing reallocation and classification of IMF SDRs, and the wider context of ambition on development support, including the G7’s Build Back Better for the World initiative.

Enhanced climate finance pledging by countries is vital—in particular from those lagging in climate finance, like the United States, Italy, and Australia—and must happen ahead of COP26. Key to a credible plan is overcoming a lack of common standards for climate finance and of a framework for dividing responsibility.

The US has a key responsibility—despite being roughly half of developed countries’ combined gross domestic product (GDP) and half their cumulative emissions, it is nowhere near contributing half of the $100 billion. Indeed, it is set to contribute less than Germany, whose GDP is a fraction of the US’s. By combining climate funds replenishment, bilateral finance, imputed Multilateral Development Bank (MDB) climate finance and leveraged private finance, the US can instead aim for a share of $40 billion or higher.

International finance institutions have a pivotal role in providing predictable delivery of climate finance. In 2021, developed country shareholders must commit to a broad agenda of recapitalisation, including climate-specific capitalisation, of MDBs alongside replenishment of international climate funds for the next five years.

This is essential for MDB climate finance to achieve a scale consistent with the global climate action required in the 2020s without coming at the expense of poverty relief and other objectives—and also essential for meeting a $150 billion target by 2025, of which MDBs could mobilise about $90 billion.

Reallocation of IMF-issued special drawing rights (SDRs) could also represent a novel source for potentially closing the gap to $100 billion this year. The G7 alone are expected to receive around $218 billion in SDRs. Various finance ministries have supported creation of an IMF “Resilience and Sustainability Trust (RST)”, to help countries combat climate change and improve healthcare systems.

Depending on accounting, if sufficient contributions to such a new facility are classed as climate finance, this could in theory close the gap to $100 billion on its own in 2021. This would respond to calls from a decade ago, including from civil society, for developed countries to use their SDRs to support climate finance. However, there are important concerns, including from civil society—reallocation of SDRs should not be used by developed countries to meet Official Development Assistance (ODA) targets and any climate financing should be additional money for poverty relief and other objectives.

 

FINANCE PLAN

Lastly, new ambitions in the wider context of development assistance must be harnessed to raise the ambition of this climate finance plan. The G7 meeting in Cornwall in June 2021 signalled leaders-level intention to “develop a new partnership to build back better for the world, through a step-change in our approach to investment for infrastructure, including through an initiative for clean and green growth”. Labelled a “Green Marshall Plan” for developing countries in the press, this is the level of ambition and enlightened self-interest the world needs.

With the original Marshall Plan, agreed in the wake of World War II, the US spent over 2% of its annual GDP versus spending less than a tenth of that (<0.2%) in international assistance today. Post-G7 high-level deliberations on B3W can raise ambition for larger 2020-2025 targets for climate finance, which must be integrated in formulating the climate finance plan.

Formulating a climate finance plan of requisite scale therefore depends on better joined-up whole-of-government diplomacy—and thus stronger leaders-level diplomacy. Developed country leaders, finance ministers, and foreign and development ministers alike must heed warnings of the high jeopardy and long-term ramifications of failure to deliver on the $100 billon.

Former UK prime minister, Gordon Brown, who helped originate the $100 billion goal, warned that developed countries look “poorly prepared and organised”. Meanwhile, Saleemul Huq, of the International Centre for Climate Change and Development (ICCCAD) in Bangladesh, has said that vulnerable developing countries should be shown the $100 billion before November or should not be expected to travel to Glasgow for COP26.

A credible plan to surpass $500 billion in climate finance over five years is needed—not just for trust between countries, but for action to keep 1.5 degrees alive in this decisive decade for human history.•


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