The need for more climate finance to drive decarbonization is greater than ever. But while progress is being made, it is not fast enough, particularly in emerging markets and developing economies. Negotiations for a New Collective Quantified Goal at COP29 are a critical step towards stronger climate action.
The latest evidence of climate change from climate scientists makes grim reading. In 2023, average global temperatures exceeded 1.5°C above pre-industrial levels for the first time. Sea level temperatures have regularly broken records. Serious climate impacts are occurring much sooner than many models have predicted, with damages resulting from severe regional storms reaching $76 billion in the US and Europe alone in 2023 – of this, $58 billion in damage was insured. The cost of insurance against climate-related damage is rising, and the availability of insurance for certain risks and regions is increasingly constrained. Given the consequences of unchecked greenhouse gas emissions, decarbonization cannot be viewed as in any sense discretionary. Sooner or later, the costs will have to be borne. The faster action is taken, the lower the overall costs from climate warming are likely to be.
Significant progress is occurring on decarbonizing the global economy. Advances are being driven by better information on the risks and opportunities from climate change, by new and cheaper low-carbon technologies, and by government subsidies and regulation. Indeed, some leading experts argue that the low-carbon transition is now irreversible. The problem is that progress is not happening fast enough, particularly in emerging markets and developing economies (EMDEs).
A key reason for this is shortage of finance. The enormous scale of the economic transformation involved in shifting away from fossil fuel-based energy systems makes financing essential. The same is true for investment in measures to adapt to climate change and make countries more resilient to its impacts, and for paying the costs of reconstruction following climate-related ‘loss and damage’.
On the positive side, average annual climate finance flows, driven by accelerating mitigation finance, are rising. Such flows reached $1.46 trillion a year in 2021–22, up sharply from 2020–21, and are estimated to have reached $1.5–1.6 trillion in 2023, according to the Climate Policy Initiative. The International Energy Agency (IEA) has estimated that more than $2 trillion will be invested in clean energy in 2024, compared with $1.2 trillion in fossil fuels.
Average annual climate finance flows, driven by accelerating mitigation finance, are rising. Such flows reached $1.46 trillion a year in 2021–22, up sharply from 2020–21, and are estimated to have reached $1.5–1.6 trillion in 2023.
However, these figures for current climate investment mask the continuing domination of the stock of energy assets by hydrocarbons, and are still too low compared with projected needs. A middle-of-the-range estimate puts the figure for total needs at $8 trillion a year, rising to $10 trillion a year after 2030. Moreover, flows to least developed countries (LDCs) and to most emerging economies are proportionately very small. Less than 3 per cent of total global climate finance in 2021–22 flowed to, or within, LDCs. In the same period, 14 per cent of global climate finance flowed to, or within, EMDEs other than China. As a consequence, the climate financing gap for these countries is very substantial. An independent panel of experts appointed by the COP26 and COP27 presidencies has estimated that EMDEs other than China will need to spend an additional $1 trillion per year (4.1 per cent of GDP) on climate-related goals by 2025, and around $2.4 trillion (6.5 per cent of GDP) per year by 2030.
Against this background, work has been under way in the run-up to the COP29 UN climate conference – taking place in Baku, Azerbaijan from 11 to 22 November 2024 – to negotiate a ‘needs-based’ New Collective Quantified Goal (NCQG) on Climate Finance. This will set out the amount of international public finance and publicly mobilized private finance to be provided by developed countries to developing countries. It will replace the $100 billion a year target figure from COP15.
A key aim of the new goal is to support higher ambition in the next round of updates to nationally determined contributions (NDCs), which set out countries’ commitments to reducing emissions. This next round of NDC updates is due to be submitted by February 2025. Intense negotiations have been under way for some time between developed and developing countries on many key features of the NCQG. The topics being negotiated include: the size of commitments; who should contribute; the time frame for meeting commitments; the types of climate action to be covered; the link between the NCQG and broader efforts to align private finance with climate goals; the balance between the different types of finance to be provided; and monitoring and accountability.
At the time of writing, it is unclear how much of this will be settled at COP29 in Azerbaijan. The uncertainty is increased by the fact that the US government representatives are from a lame-duck administration. There is also an important choice for all parties involved in terms of how ambitious the NCQG should be. Agreement on a highly ambitious goal would not guarantee delivery of funding in subsequent years, despite arguably increasing the likelihood of a large amount of finance being delivered even if the specific goal itself were not met. However, this could come at the cost of much greater uncertainty and further damage to the credibility of the goal-setting process. In contrast, agreement on a less ambitious headline target could realize a smaller figure in terms of actual finance delivered, but could create a more predictable base for planning and for the more detailed NDCs that are seen as critical to general alignment of the financial system with climate goals.
About this paper
This research paper focuses on two of the many factors that may contribute to closing the climate finance gap: (1) the use of public international finance, including as a means for stimulating private climate finance; and (2) the need to reduce the continued flow of private finance to carbon-intensive investments. The first of these factors has been chosen in part because of the uniquely important role of public international finance in supporting climate action, and also because it is the focus of much public debate at present. The second has been chosen because it is attracting far too little attention at present despite its importance.
To keep the scope of the analysis manageable, the role of public domestic finance (and of carbon taxes within that field), the role of domestic and international economic regulation, and the role of carbon trading and carbon-related trade measures are deliberately not discussed in this paper, although such factors are of course also important.
Chapter 2 explains why public international finance is critically important to closing the climate finance gap. It reviews current initiatives and proposals to increase the total amount of public international finance, assessing the viability and scalability of the most significant mechanisms that are either in place or being considered. Chapter 3 discusses how the public international finance that is already available for climate action can be used more effectively, and makes the case for donors to accept higher risk on a clearly delineated portion of the finance they provide. Chapter 4 asks why so much private finance is still going to hydrocarbon-intensive projects, and how this might be reduced. Chapter 5 proposes a political process for delivering recommendations from the earlier sections.
