Grant, loan or investment: Are strings attached to climate finance?

The issue of finance is set to dominate the 29th UN climate summit in Azerbaijan. 

Money is the life blood of climate action; enabling cleaner industries to grow in place of polluting ones, strengthening nations’ resistance to climate change and helping them pick up the pieces when disaster strikes.

These needs are meant to be addressed via a global fund, and at COP29 it’s time for the world to set a new collective quantified goal (NCQG) for climate finance. 

But with countries in disagreement about virtually all aspects of climate finance – from an acceptable total amount, to forms of funding, donors and recipients – the stage is set for a gruelling fortnight of negotiations in Baku. 

Why are countries deciding on a new finance goal?

Under the UN climate convention, developed countries need to provide developing countries with the funds to mitigate and adapt to climate change.

The Paris Agreement, signed by nearly 200 nations in 2015, stipulates that a new target must be decided by 2025. It should build on the previous commitment, in 2009, to mobilise $100 billion (€91.4 bn) of climate finance a year by 2020 – and keep doing so until 2025. 

Developed nations delivered on this pledge two years late, in 2022.

And in recent years, climate-related costs have wracked up enormously. Developing countries now need trillions of euros to manage the crisis. 

There are huge challenges to bridging the minimum that they will be willing to accept in a deal, and the maximum that developed countries are willing to put themselves on the hook for. 

How much climate finance is needed?

The previous goal of $100 billion (€91.4 bn) was the best offer put forward by global-north leaders. This time around, the NCQG must factor in the “needs and priorities of developing countries.”

There have been various assessments to put a total figure on this, with many running into the trillions. 

“Sticking the Global South with an escalating climate bill is not only unfair, it’s a recipe for certain planetary breakdown,” says Teresa Anderson, global climate justice lead at ActionAid.  

“This is why climate-hit countries desperately need COP29 to agree a new climate finance goal that delivers real-worth trillions of dollars in grants each year.”

Such large sums are tricky to visualise. To put climate finance needs in perspective, ActionAid calculates that developed countries provided $28-35 billion (€26-33bn) in grants for climate action in the Global South in 2022. That same year, the world spent twice as much on ice cream ($71 billion or €66.7bn). 

As Anderson says, “We can’t avert planetary meltdown by spending less on climate finance than we spend on ice cream.”

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Climate finance: Who is paying up?

One hotly contested point within the finance agenda is whether the donor base should be broadened to include more countries.

Currently, the contributor list is based on membership of the Organisation for Economic Co-operation and Development (OECD) in 1992, when the UN climate convention was forged. 

This means only 23 countries are obliged to provide climate finance, including western Europe, the US, Japan, Australia, Canada, and New Zealand, as well as the EU on a separate basis to member states. 

This ‘Annex II’ division is premised on a core principle of climate justice: these developed countries are the biggest historic emitters, and developed their economies at the expense of the rest of the world’s climate security.

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But times have changed dramatically in the last 30 years, and the group argues that more recent big polluters and wealthy nations like China and the Gulf states should start officially contributing to climate finance too.

One compromise that has been proposed, CarbonBrief notes, is to have different contributor bases for different “layers” of the NCQG, if countries agree on a “multilayered” goal.

A report produced ahead of COP29 sets out different ways the NCQG could be structured, with some multilayered options having an outer layer of global investment that countries like China could contribute to, without being responsible for the “new $100bn” goal.

Public, private, grants and loans: What form will climate finance take?

What counts as climate finance is another contentious issue – and one that will of course impact the target amount.

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Developing countries are pushing for as much finance as possible to be in the form of public grants, which they consider to be a more reliable source of money, that won’t lumber them with debt. Many want to see “non-concessional” loans – provided at or near market rates – excluded. 

That will take a shift. Since 2016, around 70 per cent of public climate finance has been delivered in the form of loans. 

Developed countries, on the other hand, say that only private investment will be able to get the world close to the trillions needed. 

One issue with this is that climate-adaptation projects in the poorest countries (such as building a sea wall, for example) do not make appealing prospects for private entities, as compared with mitigation projects like clean energy which could generate profits.

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And private companies and banks are not beholden to the UNFCCC and the Paris Agreement in the same way as national governments, which could make them risky contributors to the NCQG.

The majority of the $100 billion goal was funnelled towards mitigation. In order to see more funding for adaptation and loss and damage, some developed countries are seeking sub-goals for these – with the latter likely to be particularly divisive for countries like the US wanting to defend their coffers.  

“There is a fine line between a support goal that stretches contributing Parties and one that is so unrealistic that it actually diminishes incentives and potentially undermines the Paris Agreement process,” the US writes in a pre-COP statement. 

Despite months of negotiations in the run-up to the summit, the NCQG will take plenty of thrashing out in the halls of Baku before an agreement is possible. 

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