18 January 2023
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Dr Angela Clare
Foreign Affairs, Defence and
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
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
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.
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
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:
public climate finance provided by developed countries’ institutions, notably
bilateral aid agencies and development banks
public climate finance provided by multilateral development banks and
multilateral climate funds, attributed to developed countries
officially supported export credits, provided by developed countries’ official
export credit agencies
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
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.
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
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
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’
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.
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
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.
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.
Overcoming barriers to climate
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
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
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
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.
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.
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
development banks to mobilise US$1 trillion in low-cost loans for climate-compatible
development, including emergency help to countries hit by extreme weather
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
proposal to tax
oil companies to finance reconstruction grants to developing countries
after climate disasters.
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.
report observed that there are ‘trillions of dollars washing around the
world’s financial markets’ that could potentially be harnessed for the global
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
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
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
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
… 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.
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
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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