International climate finance and COP27: a quick guide

18 January 2023

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Dr Angela Clare
Foreign Affairs, Defence and Security


Few expected to see significant progress at the November 2022 COP27 climate summit (the 27th Conference of Parties), held in Sharm El-Sheik, Egypt. The destabilising effects of Russia’s invasion of Ukraine and mounting global economic pressures are thought to have ‘pushed climate change down political agendas’ in many countries, with Australia one of the few to have increased its emission reduction ambitions since COP26.

COP27 disappointed those hoping to see a stronger commitment to the goal of limiting the temperature increase to 1.5 °C above pre-industrial levels set in the 2015 Paris Agreement, and a response to the stark warnings of global temperature and sea-level increases which preceded the meeting.

However, the summit did see progress on mobilising finance to help lower-income countries respond to the damaging effects of climate change and transition to clean energy, an issue seen as crucial to meeting global emissions targets.

The agreement to establish a ‘loss and damage’ fund to support developing countries that are particularly vulnerable to the adverse effects of climate change was welcomed by many as a historic breakthrough in climate negotiations.

The issue has been contentious in international climate debates, raising questions of fairness and equity, and historical responsibility for climate change. The US-based Center for Global Development estimates that developing countries (including China and India) are responsible for 63% of current annual global emissions, but that developed countries are responsible for most historical emissions – 79% of emissions between 1850 and 2011.

Developed countries have long rejected calls for reparations in regard to loss and damage caused by climate change, fearing the potential liabilities that could follow any such agreement. Decades of pressure by developing countries finally paid off at COP27, but much remains to be decided on how the fund will operate before any funding flows.

COP27 also saw added momentum to the push to transform the international financing system, widely seen as not fit for the purpose of addressing the global climate emergency. Global leaders called for reform to multilateral development banks’ practices and priorities to greatly increase the finance available to developing countries to address climate change.

Climate finance under the UNFCCC

The United Nations Framework Convention on Climate Change (UNFCCC) came into force in 1994 and has near‑universal membership, with 198 parties having ratified the convention. The UNFCCC binds member states ‘to act in the interests of human safety’ to stabilise greenhouse gas concentrations ‘at a level that would prevent dangerous anthropogenic (human induced) interference with the climate system’.

‘Climate finance’ in the context of the convention refers to the ways developed countries support lower-income countries mitigate and adapt to climate change. The UNFCCC does not provide a single definition of what counts as climate finance, but allows for this funding to come from a ‘wide variety of sources’. The OECD monitors climate finance flows and identifies 4 distinct components, provided and mobilised through public interventions:

  • bilateral public climate finance provided by developed countries’ institutions, notably bilateral aid agencies and development banks
  • multilateral public climate finance provided by multilateral development banks and multilateral climate funds, attributed to developed countries
  • climate-related officially supported export credits, provided by developed countries’ official export credit agencies
  • private finance mobilised by bilateral and multilateral public climate finance, attributed to developed countries.

The obligation for developed countries to provide support to developing countries is tied to the founding principles of the UNFCCC, including that of ‘common but differentiated responsibilities’.

The convention places an onus on wealthy countries to reduce their emissions as ‘they are the source of most past and current greenhouse gas emissions’, and calls for ‘financial assistance from Parties with more financial resources to those that are less endowed and more vulnerable’. The convention also recognises that ‘the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously’.

Under the UNFCCC, only the 24 ‘Annex II’ nations – countries that were part of the OECD when the treaty was signed in 1992, also referred to as developed countries – are obliged to provide climate finance to lower-income, or developing countries. While the UNFCC makes extensive use of the term ‘developing countries’, it does not provide a clear definition or reference point for the term.[1]

A background and history of UN climate negotiations can be found in the Parliamentary Library’s The Paris Agreement: a quick guide.

Current climate finance commitments

Climate financing has always been a part of UNFCCC negotiations, but is now mostly associated with the goal of mobilising US$100 billion per year by 2020 for climate action in developing countries. At the Copenhagen COP15 in 2009, developed countries – including Australia – agreed to the target ‘in the context of meaningful mitigation actions and transparency on implementation’ (p. 3). The goal was confirmed in the 2015 Paris Agreement and extended to 2025.

Developed countries have not yet reached this target, providing only US$83 billion of climate finance in 2020, and are not expected to reach US$100 billion until 2023, or later. According to OECD figures, around 81% of the funds provided in 2020 came from public sources (bilateral and multilateral funds), 16% from private sector investment, and 2.4% from export credits.

In its latest analysis the OECD provides a breakdown of the climate finance provided by developed countries between 2016 and 2020, including concessional and non-concessional loans and grants. It shows that loans made up the largest share of overall bilateral and multilateral funding, but that grants represented a larger share of climate finance for small island developing states, least developed countries and fragile states, compared to developing countries overall.

Carbon Brief points out that the actual level of developed countries’ contributions to the goal is ‘up for debate’ because ‘there is no clear, universal definition of what counts as “climate finance”’. It also argues that while the US$100 billion pledge is ‘somewhat arbitrary and far short of the actual needs of vulnerable nations’, it has become ‘an important yardstick by which to measure developed countries’ overall commitment to climate action’.

A 2022 Center for Global Development report found that climate-related development finance faced a number of challenges relative to other aid flows, and that ‘there is almost no high-quality evidence’ of its impact (p. vi).

Climate finance commitments are distinct from countries’ domestic climate targets – their Nationally Determined Contributions (NDC) – which all parties to the convention are required to act on.

The case for a ‘loss and damage’ fund

The case for reparations for climate change-related loss and damage in lower-income countries – over and above mitigation and adaptation – rests on the argument that developed countries have amassed their wealth by industrialisation based on cheap fossil fuels, and their resulting historical emissions are largely responsible for the current climate crisis. While developed countries can afford to invest in mitigation and adaptation, lower-income countries that have historically contributed the least to climate change cannot, and are now disproportionately bearing the brunt of its burden.

Analyst Saskia van Wees argues that the inequities are stark:

World Bank data shows the average Bangladeshi citizen […] is responsible for 1/24th of the carbon dioxide emissions when compared with the average citizen in countries like Australia, Canada, and the United States. Despite its comparatively low emissions, however, the Bangladeshi government estimates that it spends around seven percent of its overall budget on addressing the effects of climate change, while poor families in rural Bangladesh spend even more – an estimated US$2 billion a year – on climate change prevention and mitigation efforts.

The COP27 ‘loss and damage’ agreement

To date, most climate finance under the UNFCCC has focused on cutting carbon dioxide emissions (or mitigation efforts), and helping developing countries adapt to future impacts (adaptation efforts).

The COP27 agreement to establish a loss and damage fund adds a third pillar to UN climate negotiations. Such a fund would compensate low-income and vulnerable countries for climate-related costs they cannot avoid or ‘adapt to’ through mitigation and other measures, such as disaster risk management.

A major sticking point at COP27 was developed countries’ concern that a loss and damage fund would extend support to large emitters and major economies – countries such as China and Saudi Arabia – that are still classified as developing countries under the UNFCCC. During negotiations on the fund, the EU argued that it would only provide funding if the donor base was expanded.

A compromise was eventually reached, with parties agreeing to prioritise funding for those countries deemed ‘particularly vulnerable to the adverse effects of climate change’ (para. 41) and ‘recognizing the need for support from a wide variety of sources, including innovative sources’ (p. 3).

The fund may not be operational for some years. The hard-fought agreement only set out a roadmap to establish arrangements, leaving a number of questions yet to be decided – including who should contribute to the fund, what kind of oversight mechanism should be used, how funds would be dispersed and which countries should qualify for compensation. While analysts believe China (the world’s largest annual carbon emitter) will not be a recipient, it is unclear whether China would contribute to the fund.

There is also no agreement as yet on what should count as loss and damage in climate disasters, ‘which can include damaged infrastructure and property, as well as harder-to-value natural ecosystems or cultural assets’ such as burial grounds. The Heinrich Böll Stiftung observes that loss and damage:

… has both economic and non-economic costs and results from both extreme weather events like hurricanes and floods and slow onset climatic processes such as sea level rise, glacial retreat and salinization. Loss and damage includes permanent and irreversible losses such as to lives, livelihoods, homes and territory, for which an economic value can be calculated and also to non-economic impacts, such as the loss of culture, identity, ecosystem services and biodiversity, which cannot be quantified in monetary terms.

Potential costs under a loss and damage scheme could be considerable. A June 2022 report by 55 vulnerable countries estimated their climate-related losses over the last 2 decades to be US$525 billion, or about 20% of their combined GDP.

Financing the global transition

A recent study estimates the overall cost of meeting developing countries’ climate goals to be far higher than existing climate financing commitments. In its November 2022 report, the Independent High-level Expert Group on Climate Finance (co-chaired by Vera Songwe and Nicholas Stern) estimated that the world needed to mobilise US$1 trillion per year by 2030 to support emerging markets and developing countries (excluding China) ‘drive a strong and sustainable recovery out of current and recent crises, transform economic growth, and to deliver on shared development and climate goals’.

Around half of the required financing could be sourced domestically, the report suggested, leaving the world needing ‘a breakthrough and a new roadmap on climate finance’ that can mobilise the US$1 trillion per year needed in external finance over the next 5 years and beyond. This scale of investment would require strategies to address ‘festering debt difficulties’, especially in poor and vulnerable countries, and ‘a major expansion of both domestic and international finance, public and private, concessional and non-concessional’ (p. 7).

The US$1 trillion figure ‘is a very different concept’ to the existing US$100 billion commitment, the report contends: whereas the former was arrived at through negotiations, the US$1 trillion figure was ‘based on an analysis of the investment and actions necessary and the domestic finance potentially available, for an internationally agreed and vital purpose’ (p. 8).

Overcoming barriers to climate finance

Many developing countries have become increasingly frustrated at their inability to access the finance and technologies needed to respond to global warming, and argue that the international financing system is not working for poor and middle-income countries.

Under development banks’ current lending practices, many low-income countries face far higher borrowing costs than developed countries, leaving them exposed to unsustainable debt burdens and without the finance they need to respond to growing social, economic and environmental challenges. The World Bank has warned that debt repayments in low-income countries have risen to ‘levels not seen in two decades’, and that an estimated 60% of low-income countries are at risk of debt distress or already in distress. One analyst argues that without ‘a better debt restructuring system’, poverty will increase and action on climate change will be negatively impacted.

The COP27 cover agreement, the Sharm el-Sheikh Implementation Plan, reflected a growing demand for reform of the World Bank’s and the International Monetary Fund’s (IMF) lending practices to better respond to the global climate emergency. The plan called for scaled-up funding for climate action, simplified access and the mobilisation of climate finance from ‘various sources’ (para. 37). Australia’s Minister for Climate Change, Chris Bowen, joined leaders’ calls for reforms, noting in his national statement to COP27 that the existing international financing architecture was ‘built for a different time’ and that multilateral banks needed to step up.

Unlike discussions about loss and damage reparations, which has not yet seen large amounts of financial support, reform of the World Bank – the world’s largest development bank – and the IMF is seen as an ‘immediate and practical way’ to help the developing world face the threats posed by climate change. A New York Times report notes that some of the most important changes being discussed include reforms to risk ratings and interest rates lower-income countries must pay on loans from the World Bank.

Other development banks are also stepping up their ambitions. The Asian Development Bank (ADB) is undertaking major reforms to streamline its lending practices in 2023, aiming to increase its capacity ‘as the region’s climate bank’. The ADB has committed to providing US$100 billion in climate financing to developing countries by 2030, and to align 100% of its sovereign operations with the 2015 Paris climate agreement in 2023.

The Asian Infrastructure Investment Bank (AIIB) has committed to ensuring that 50% of its overall approved financing will be directed towards climate finance by 2025, and has also pledged to align its operations with the Paris Agreement by July 2023.

The Bridgetown Initiative

One of the highest profile advocates for change at COP27 was the Prime Minister of Barbados, Mia Mottley. Prime Minister Mottley laid the blame with the World Bank, the IMF and their developed country shareholders for a world that ‘looks still too much like it did when it was part of an imperialistic empire’. Her plan for financial reform – dubbed the ‘Bridgetown Initiative’ – attracted considerable attention and support at COP27. Its key initiatives include:

  • requiring development banks to mobilise US$1 trillion in low-cost loans for climate-compatible development, including emergency help to countries hit by extreme weather events
  • establishing a new IMF-hosted Global Climate Mitigation Trust fund which would use $500 billion in IMF Special Drawing Rights to attract private capital of $5 trillion by reducing investment risk and offering other guarantees
  • a proposal to tax oil companies to finance reconstruction grants to developing countries after climate disasters.

Other deals

A number of other climate financing deals were pursued at COP27, including under the UK-led ‘Just Energy Transition Partnership’ between the European Union, the UK, France, Germany, the US, Italy, Canada, Japan, Norway and Denmark, first launched at COP26. The partnership mobilises both public and private funds to support developing countries’ transition to clean energy. It has so far announced 3 major agreements, including in 2022, US$15.5 billion to support Vietnam’s transition to clean energy and US$20 billion over the next 3–5 years for Indonesia, announced at the G20 Summit held in parallel with COP27.

A Reuter’s report observed that there are ‘trillions of dollars washing around the world’s financial markets’ that could potentially be harnessed for the global energy transition.

But finding ‘shovel-ready’, effective projects in which to invest is challenging. A May 2022 World Bank blog argued that the key challenge for sustainable infrastructure investment is not a lack of finance or a lack of engineering ideas, but rather a lack of ready-to-fund projects. The authors suggested reframing debates on how to advance the climate transition around the ‘need to significantly scale up investments in project development’.

Australia and the Pacific

In our region, many Pacific Island countries are already facing the dual challenge of high debt levels and increasing costs from climate change. Surging commodity prices and the ongoing economic impacts of COVID-19 are adding to the already high cost of infrastructure in the region, undermining countries’ ability to invest in the public services needed for economic recovery and development and to respond to climate change.

The IMF has estimated that Pacific countries need to invest 6–9% of their GDP each year for 10 years to climate-proof their infrastructure and increase coastal protection. Their access to international climate finance has fallen well short of this level, however. Analyst Keshmeer Mekun has argued that Pacific Island countries need long-term financing, but the ‘existing international financial architecture and particularly the debt architecture do not adequately consider the vulnerabilities of the Pacific Island countries’.

As part of its contribution towards the US$100 billion climate financing commitment, Australia provided A$1.4 billion to support emissions reduction and promote climate change resilience in partner countries from 2015–20, and has pledged a total of $2 billion over 2020–25. This includes $700 million to support Pacific climate change, disaster resilience and renewable energy. The Albanese Government has also announced a Pacific Climate Infrastructure Financing Partnership to support climate and clean energy infrastructure projects, and an Australia‑Indonesia Climate Resilience and Infrastructure Partnership with an initial $200 million in grant funding.

The bulk of Australia’s climate finance is provided through the aid program, as Terence Wood, Research Fellow at the Australian National University’s Development Policy Centre, has explained.

In line with its election commitment, the Government has announced a review led by the Department of Foreign Affairs and Trade into ‘new forms of development finance to support Australia’s foreign policy, trade, security and development objectives and help countries in our region achieve their development and climate objectives’. The review was expected to be completed by the end of 2022.

While the 2022 increase in Australia’s Nationally Determined Contributions (NDC) target under the Paris Agreement to a 43% reduction in emissions below 2005 levels by 2030 (up from 26–28%) was widely welcomed, climate advocates argue that Australia’s contribution to international climate finance is inadequate. Climate Action Tracker rates Australia’s contributions to international climate finance as ‘critically insufficient’. A recent Oxfam-ActionAid study also highlighted a shortfall:

… Australia’s international climate funding is currently just a tenth of our international fair share. Australia’s fair share of international commitments would be AUD$4 billion per year; however, our average contributions sit at only AUD$400 million per year between 2020-2025.


Climate advocates were encouraged by COP27’s progress on finance for loss and damage, and its acknowledgement that existing climate financing mechanisms are unable to deliver the funding needed for the global transformation to a low-carbon economy.

It remains to be seen how quickly agreement can be reached on core issues such as who will pay into the fund and how it will be spent. It also remains to be seen how far reforms to the international finance system might extend, and whether they will meet developing countries’ needs.

1.     There is no universally agreed definition of what constitutes a ‘developing’ country, a term often used to refer to low and middle-income countries, with a lesser developed industrial base and a lower Human Development Index compared to other countries. The UN has no formal definition of developing country status, but since 1971 has recognised least developed countries (LDC) as a category of countries that ‘are deemed highly disadvantaged in their development process’. The UNFCCC refers to Annex I and II countries as industrialised countries, while non-Annex I Parties are classified as ‘mostly developing countries’. The convention does, however, give ‘special consideration’ to the 49 LDCs.


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