Why do we need to talk about climate finance? How is it related to COP27?

05 October, 2022

Posted by: Njango Njung'e

Why do we need to talk about climate finance? How is it related to COP27?

Category : COP27 | tags:

Rich countries under pressure to deliver finance at COP27

The success of this year’s UN climate summit ultimately rests on its ability to get money flowing from wealthy countries to those most in need – at the pace and scale required to match the climate crisis.

The COP27, in Sharm El-Sheikh, Egypt from 6-18 November, follows a year of heightened impacts from climate change, alongside the related effects of rising food and fuel costs, Russia’s war in Ukraine, and COVID-19. Developing countries need finance both to adapt and build resilience to climate change impacts such as droughts, floods, superstorms and locust invasions, and to develop in a low emissions and sustainable manner. 

One of the biggest points of tension at COP27 will be the developed world’s failure so far to fulfil its promise to mobilise US$100 billion per year in climate finance by 2020. As well as meeting that sum, developed countries need to set out how they will increase it. 

Here is what you need to know about climate finance heading into COP27. 


What is it and why does it matter to vulnerable countries and Africa? 

Climate finance refers to the transfer of public and private money from developed to developing countries to help them adapt to climate impacts and cut emissions. Despite years of discussions and promises, climate finance has yet to reach developing countries at the pace and scale needed to confront intensifying impacts and cut emissions. 

Many emerging and developing economies are facing immense debts, with interest rates averaging three times higher than those for wealthy countries. In the last decade, the least developed countries spent an average 14% of their domestic revenue on interest payments, compared with 3.5% in developed countries, according to Brookings. This constrains the countries’ ability to invest in public services and worsens their credit ratings, making it harder to attract foreign investments. 


Even if climate finance reaches the promised US$100 billion per year, that sum is now far short of what is needed to adapt to current impacts and limit warming to 1.5C.

Developing countries are estimated to need just under US$6 trillion up to 2030 to finance less than half of the work planned in their national contributions to the Paris climate agreement, according to the UNFCCC’s Standing Committee on Finance. African climate negotiators said last year that developing countries need US$1.3 trillion per year by 2030. 


What is the difference between green finance and climate finance?

Green finance refers to responsible investments that support a low-emissions, sustainable economy. This can include cutting emissions, pollution and waste, and improving resource efficiency, and mostly comes in the form of green bonds. 

Climate finance must be transferred from  a wealthy country to developing one to tackle the causes and impacts of climate change. It includes more financial instruments, such as grants, investments and insurance coverage. Developing countries are also calling for climate finance to help them recover from the loss and damage sustained from impacts such as floods, droughts and storms – as well as helping them cut emissions. 

Work to reduce greenhouse gas emissions can only go so far in developing countries, since they contribute the least to warming temperatures. Africa, for example, accounts for just 2-3% of carbon dioxide emissions from energy and industry, according to the UN.

Worsening climate change impacts, however, are shaking global economic security – extending beyond the borders of developing countries. India’s extreme heat this year, for example, caused the government to ban wheat exports. Floods in China last year shut down ports and disrupted shipping, while a typhoon in Malaysia caused a break in the semiconductor supply chain.


What can COP27 deliver on climate finance – and what are the obstacles? 

The UK COP26 presidency released a finance delivery plan last year, concluding that developed countries could meet their US$100 billion-per-year promise by 2023 and scale it up thereafter. Failure to show further progress towards the delivery plan, or for scale-up, could fuel tensions between rich and poor countries in Sharm El-Sheikh. 

COP27 also takes place against a more dire economic outlook than COP26, with rising costs of food, fuel and living worldwide, rising inflation and interest rates and a financial distress At a time when multilateral action and coordination is needed to unlock near-term climate finance and action, broader geopolitical tensions – including between Russia and the US and China and the world – risk weakening the multilateral process. 

To catalyse climate finance and action, countries could begin by agreeing to restructure and reduce debt for developing countries most at-risk. They could also drive the development of solutions such as debt-for-nature swaps, in which a developing country commits to investments in nature restoration and regeneration in exchange for a reduction of its debt. The shift towards grants, rather than loans, from developed countries would also alleviate debts. 

Egypt’s COP27 presidency has made clear that tackling the debt burden is a priority for COP27, and intends to drive conversations about solutions. 


How can climate finance be channelled more effectively and made more transparent? 

Egypt says COP27 must help to enhance the transparency of finance flows and facilitate access to African countries, least developed countries, and small island developing states. Progress towards the US$100 billion pledge would help to build trust between rich and poor countries by showing that commitments are being realised, the presidency says. 

Currently, developing countries have little say in, or management of, the finance they are receiving. Finance is often funnelled through aid and export promotion agencies, private banks, corporations, or lending and granting arms from multilateral institutions. 

This makes it hard for developing countries to share their knowledge and understanding of what is needed to adapt to local climate impacts and support local sustainable development. It also reduces transparency and accountability in how the money is used and its effectiveness. 

Clarity is needed around what counts as “climate finance” – for example to ensure that grants are favoured over loans, which can leave a developing country mired in debt. Donor countries need to take into greater account the needs of recipient countries, and design their projects and investments to build long-term capacity – and create jobs – for local supply chains, businesses, banks and governments.  

The International Monetary Fund this year set up the Resilience and Sustainability Trust to help countries build resilience to external shocks, including climate change and pandemic preparedness, and ensure sustainable growth. The trust will channel Special Drawing Rights, equivalent to about US$650 billion, into policy support and affordable longer-term financing to strengthen resilience and sustainability in at-risk countries. 

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