What can we expect from climate finance heading into COP27?

With the 27th UN Climate Change Conference, or COP27 as its more commonly referred to, taking place from the 6- 18 November in Egypt, the importance of one of the Paris Agreement’s central proposals, climate finance, becomes even more relevant for discussion. This article summarises what the UNFCCC climate finance initiative is, its benefits, whether it’s sufficient in helping the energy transition globally and what the current international developments are, heading into the conference.

What is climate finance?

Climate finance refers to the financing, at local or national level, that aims to support mitigation and adaptation protocols that will address and have an impact on climate change. The Paris Agreement, established at COP21 in 2015, introduced a new era for climate finance, policies, and markets. The agreement pushed for countries with more economic resources to offer financial assistance to those that are more vulnerable, recognising how contributions to climate change and economical capacity to prevent it, and cope with its defects, vary hugely on a multinational level. The United Nations Framework Convention on Climate Change (UNFCCC) explains that climate finance is needed for mitigation, because large-scale investments are necessary to have any serious effect on reducing emissions. Moreover, the UNFCCC suggests that climate finance is important for adaptation, as significant financial resources are required to adapt to the adverse effects and prevent detrimental impacts of the changing climate.

Creating both environmental and financial incentives

As proposed by the UNFCCC, this protocol serves to ameliorate the imbalances in economic resources that different countries and nations hold in order to fund initiatives mitigating climate change and adapting for its detrimental effects. By creating financial incentives, climate financing will be an attractive prospect for countries around the world. One of its methods that benefits both party and environment is its debt-for-climate swap. This is the process whereby the debt accumulated by a country can be repaid upon fresh discounted terms agreed between the debtor itself and the creditor, arranging that the repayment of funds be redirected to domestic projects that focus on the two key areas of climate finance: mitigation and adaptation.

For example in 2018, The Seychelles undertook a debt-for-nature swap worth $27 million. This was a similar procedure to redirect debt funds to environmental conservation. Brokered through the Nature Conservancy, the funds were redirected to establish marine parks, enhance ocean conservation and ecotourism activities. This method creates a financial incentive that allows nations to repay debt at a discounted rate and at the same time invest in the prevention of further environmental and climate damage.

Furthermore, there are growing disincentives for nations and big corporations to be large consumers of fossil fuels as seen through the adding of carbon taxes and the reduction in subsidies provided to major oil companies. MEPs in the European Union have been pushing for accelerated action and energy independence demanding the Free Emission Trading Scheme allowances to be phased out entirely by 2030. Climate finance has advantages in creating financial benefits for countries and corporations to enter into climate positive ventures whilst simultaneously creating disincentives for climate-damaging business.

Is this enough?

Despite the recent push in climate finance on the back of COP26, the predictions show that the current financial disbursement is not fast enough to protect our future. A recent study by McKinsey suggests that the energy transition to net-zero emissions globally, by 2050, could potentially cost as much as $275 trillion, $9.2 trillion a year. With the most recent Global Landscape of Climate Finance 2021 demonstrating that climate finance flows are currently only at $632 billion, this is a worrying prediction on the safety of our future. However, delving into the report, many flaws arise suggesting worthwhile optimism. The report underestimates the growth of renewable energy options, such as wind and solar whilst equally overestimating the cost of their deployment. Moreover, McKinsey’s analysis assumes the continuity of our current fossil-fuel dependency and consumption, without accounting for our accelerating clean energy innovation. With rapidly falling costs of clean technology combined with the threat of the climate crisis, the rising taxes and the reduction of subsidies, McKinsey’s model feels non-representational of the global push to further innovation in our energy transition.

Notwithstanding, it is clear that globally we need a far more emphatic push in climate finance to commit the sums necessary towards this initiative, but it would be defeatist and incorrect for the push to net-zero and clean energy by 2050 to be considered financially impracticable.

Developments in climate finance heading into COP27

At the end of September, Denmark announced it was going to be the first country to pledge funds to developing countries specifically for “loss and damage” caused by the changing climate. While the pledged amount totals only $13 million, the precedent it sets will hopefully encourage other rich countries to pledge money that addresses the adverse consequences of climate change. This move by Denmark follows the pledge Scotland made at COP26 of £2 million. Denmark’s announcement firmly highlights their intention to develop climate financing, to support more economically vulnerable countries in effective mitigation and adaptation. As the first member of the United Nations to pledge money to loss and damage, one can hope that COP27 and the example set by Denmark results in further pledges of financial aid to undeveloped nations. The yearly conference will, with any luck, continue to encourage nations to commit to climate finance through whatever means possible, increasing the climate finance flow globally and edging ever nearer the targets needed to reach net-zero.

Article by Jeremy Page

Jeremy is currently undertaking the PGDL at BPP University. He provides paralegal and research assistance to the legal team at Prospect Law and has a special interest in commercial and international law.