SustainaWeekly - Why climate solidarity matters

Economist

Climate solidarity is one of the big topics on the agenda at COP27. New estimates suggest developing countries will need a trillion dollars annually by 2030. This amount dwarfs the 100bn target, which is not even currently being met. Progress at the summit is very limited so far and the US plan of finance via carbon credits still lacks detail.

Strategist

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Sectors

The share of environmental investments in industry and the energy sector has been rising. With pressure from society due to the climate crisis and pressure on profits emanating from the current energy crisis, environmental investments are becoming more interesting. The climate investment share should rise further in coming years.

ESG in figures

In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.

Climate solidarity the focus at COP27

• Climate solidarity is one of the big topics on the agenda at COP27

• New estimates suggest developing countries will need a trillion dollars annually by 2030

• This amount dwarfs the 100bn target, which is not even currently being met

• Progress so far is very limited and the US plan of finance via carbon credits still lacks detail

Climate solidarity is one of the big topics on the agenda at COP27. The Secretary General of the UN has called for ‘a historic Pact between developed and emerging economies – a Climate Solidarity Pact’, in which ‘wealthier countries and International Financial Institutions provide financial and technical assistance to help emerging economies speed their own renewable energy transition’. He said that the US and China ‘have a particular responsibility to join efforts to make this Pact a reality’ and the choice for humanity was to ‘cooperate or perish’.

Investment and spending needs total USD 2.4 trillion per annum by 2030

The calls for climate solidarity reflect the major financing needs of developing and emerging economies outside of China, which exceed those of the advanced economies. Indeed, this is a point we highlighted in this publication last week. However, a new report, underlines this point. The Report of the Independent High-Level Expert Group on Climate Finance (see here) – commissioned by the UN and the COP26 and COP27 Presidencies - sets out the broad financing needs of these economies related to transition and climate change to be consistent with a 1.5 degree scenario.

It estimates the total annual investment and spending needs for climate action per year by 2030 for emerging markets and developing countries (EMDC) other than China at around USD 2.4 trillion (see charts below). This covers what is needed to transform the energy system, coping with the loss and damage from climate change, investing in adaptation and resilience and investing in natural capital. As such, it constitutes a comprehensive estimate of the financial need.

External financing need around USD 1 trillion

So how much extra money do EMDCs need and where might it come from? The report notes that there is not a large amount of additionality in the investments required to align energy systems in EMDCs (other than China) with climate objectives. The authors estimate that only around USD 550bn of the roughly USD 1.5 trillion total annual financing need for the energy transformation by 2030 will be additional investment. This is because the growth and structural change agendas in EMDCs already entail substantial investment requirements in the energy sector. However, investment requirements in natural capital, adaptation and resilience, and spending on loss and damage will be additional. This leaves the additional needs at just under USD 2 trillion. The report concludes that around half of the required financing can be reasonably expected to come from local sources, leaving an external financing need of around USD 1 trillion. This is ten times the USD 100bn financing target to be provided and mobilised by developed countries for climate action in developing countries by 2020 (which still has not been met). The authors clarify that ‘USD1 trillion is not the new USD 100 billion’ as the latter was negotiated, not deduced from analyses of what is necessary for a purpose.

Potential financing mix

The report sets out a four pronged strategy that could secure the size of financing flows set above. First, each country should set out its own strategy for investment aligned with the Paris agreement. Second, the scaling up of finance from multilateral development banks (MDBs) and other development finance institutions (DFIs). It estimates that flows from these institutions should triple by 2025 (from USD60bn to USD 180bn) and that decisions to this end need to be taken very quickly, with the annual meetings of the MDBs in 2023, COP28, and G20/G7 crucial. Third, private sector investment and finance at scale, achieved via partnerships with countries and international financial institutions. It notes that the setting up of the Glasgow Financial Alliance for Net Zero (GFANZ) initiative - a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy – was a big step forward, but it was important now to translate the commitment into action. Fourth, bilateral official development assistance for climate should be doubled by 2025 (USD 30bn to USD 60bn). To this end, donor countries need to take decisions now to incorporate this into their budgets. This could be supplemented by an international financing facility, which could expand the availability of low-cost finance through use of guarantees.

Progress at COP27 very limited so far

Given the scale of the challenge set out above, progress at the COP27 summit has been very limited so far. The UK said it would allow some debt payment deferrals from developing countries, while Austria and New Zealand put forward funding for loss and damage. Meanwhile, the US proposed a new carbon trading scheme to boost investment in developing countries. The initiative – named the Energy Transition Accelerator (ETA) – is intended to attract finance for developing countries to support their clean energy transitions. The ETA would produce verified greenhouse gas emission reductions, which participating jurisdictions (at the national or subnational level) can issue as marketable carbon credits. The scheme is at a very early stage in terms of design, so that perhaps explains the very modest expressions of interest at this stage (two developing countries, two banks and two multinationals).

US carbon trading proposal difficult to evaluate at this stage

The lack of detail also makes an evaluation of the potential of the scheme difficult. Although it could help to attract private sector financing for the transition in EMDCs, therefore reduce emissions in these economies, the risk is that it comes at the expense of real carbon emission reduction by the multinationals. Therefore, for such a scheme to be effective, the emission cuts financed by projects in the EMDCs would need to be deeper/quicker that implied by 1.5 degree scenario to be an effective carbon offset.

EMDC transition crucial

Carbon emissions of the EMDCs amount to around a third of total global emissions. So the decarbonisation of these economies is crucial if we are to see global warming limited to 1.5 degrees. The lack of impetus so far to help these countries finance the energy transition looks to be a major obstacle for the global economy achieving a Net Zero scenario.