Climate Finance Outcomes from COP 26: The Need for Climate Reparations to the Global South and the Emerging Role of Digital Finance

This photo was taken by the author. The image highlights a key demand from countries of the Global South to rich countries for ‘Loss and Damage’ compensation from ongoing climate change-related disasters.

Climate pledges without financial commitments are a recipe for failure. COP 26 produced mixed results on climate finance: setbacks in committing funds to the Global South but a breakthrough on Article 6. Financing climate adaptation and paying for ‘Loss and Damage’ (climate reparations) are two key instruments of financial transfers from rich countries to the Global South. There was little progress made on either. The finalization of Article 6 creates market-based opportunities to fund climate mitigation and adaptation efforts in the Global South. Digital finance can play an important role in ensuring that international carbon markets remain transparent, accessible, and equitable for climate-vulnerable populations.

Climate reparations are necessary for building climate adaptation and resilience systems in the Global South and for offsetting losses from ongoing climate-related disasters. Climate change is being caused by cumulative GHG emissions and rich countries owe a moral responsibility for climate reparations. The climate adaptation commitment of $100 billion/year to developing countries is far from adequate. The target year to meet this commitment was pushed to 2023 at COP 26. Rich countries haven’t budged on a key demand from countries of the Global South to fund ‘Loss and Damage’ from ongoing climate change effects. COP 26 host Scotland set a new precedent by committing to climate reparations but the announcement didn’t find any international support. Scotland’s First Minister Nicola Sturgeon tripled the country’s commitment to its climate justice fund to £36 million. She remarked, “Finance is key to this not as an act of charity but as an act of reparation” and called on world leaders “to pay the debt owed to the Global South”.

Agreement on Article 6, a major unfinished work in the 2015 Paris Accord, can partially fill the gap in climate financing for the Global South. Article 6 establishes international carbon markets and paves a way for their robust future growth. A recent McKinsey report estimated the market size for carbon credits to be over $50 billion by 2030. Carbon markets are expected to create economic incentives for countries to increase the ambition of their climate goals, known as NDCs (Nationally Determined Contributions), and accelerate the pace towards Net Zero. Article 6 provides guidance on carbon credits accounting to avoid double-counting of GHG emission offsets. It was agreed to dedicate 5% of all non-bilateral carbon credit transaction proceeds to support climate adaptation efforts in the Global South.

Digital finance can address issues related to access, transaction costs, financial transparency, and inequity in the distribution of climate adaptation funds and carbon market-based payments. Investigative reports from earlier this year found climate adaptation financing from rich countries was misclassified and exaggerated. Apart from offering financial transparency, digital finance can accelerate payment transfers from Government to Person (G2P) and Government to Business (G2B), per IMF’s research findings. Digital finance transfers can lower transaction costs in building climate adaptation projects and incentivize individual behavioral changes needed to make progress on climate mitigation. The Digital Finance for Climate Resilience Framework has identified carbon marketplaces for delivering income opportunities for climate-vulnerable populations.

Almost all carbon market transactions are carried out digitally. This presents an opportunity for digital finance institutions to offer inclusive solutions. Several private sector players promoted their digital platform-based solutions to access carbon markets. Emerging players that I had an opportunity to connect with include NCX (based in the US and supported by Salesforce CEO Marc Benioff’s investment arm) and CTX (based in the EU). NCX has positioned itself as a unique organization trying to democratize access to carbon financing for small landholders.

Disbursement of adaptation finance from governments and multilateral institutions to project developers and communities in the Global South – especially for community-led solutions – is fraught with challenges. Digital finance can offer its wide reach for the distribution of adaptation funds. From a racial equity standpoint in developed countries like the US, Black communities receive far less aid through disasters recovery payments than white communities. The average wealth for a white household in counties hit with a disaster increases by five times while the average wealth for a Black household decreases. With inherent advantages in payments transparency, pace, cost-effectiveness, and reach, digital finance can play a catalyzing role in enabling disaster shock recovery for climate-vulnerable communities.

Written by Indraneel Dharwadkar. The author is an MBA/MPP Candidate at Duke University. He is interested in environmental justice and advancing a just transition through equitable climate financing.

1 Comment

  1. Bruce Ernst

    Excellent article Neel. Both insightful and inciteful. In particular the way digital finance can “address issues related to access, transaction costs, financial transparency, and inequity in the distribution of climate adaptation funds and carbon market-based payments” and ” offer inclusive solutions”. Also, how Article 6 “provides guidance on carbon credits accounting to avoid double-counting of GHG emission offsets”. A lot to watch as so may commitments have been pushed to 2023. Please keep updating us all.

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