Tag: Climate Finance

COP27 Week1: A Laggard in Loss and Damage

What is Loss and Damage? 

Loss and damage is not a new topic at the Conference of Parties (COP), yet it is the first time to be an agenda item at COP. According to the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, loss and damage refer to the destructive impacts of climate change that can not be prevented by adaptation efforts. The concept of loss and damage was first proposed in 2007, and it was not until the 2014  Warsaw International Mechanism that the issue became prominent. The slow progress on loss and damage was mainly because many developed countries feared that the ideas of compensation and liability underlying loss and damage could set off a wave of lawsuits by developing countries.

Why is Financial Mechanism for Loss and Damage Needed?

Climate-vulnerable countries express the need to establish an independent loss and damage fund since the existing mechanisms do not provide adequate financial support. The existing mechanisms for loss and damage, such as Warsaw International Mechanism and Santiago Network, mainly provide non-financial support, such as risk management and technical support. Even though Glasgow Dialogue requires parties to discuss the financial arrangements for loss and damage every two years, no financial mechanisms have been developed yet. 

Currently, the funds for loss and damage mainly come from developed countries’ donations. For example, Scotland, Belgium, Canada, Denmark, and Germany, have committed to providing over a total of 195 million euros to the loss and damage fund. However, there is a huge gap in the funding arrangements. Assuming the temperature rises to 2.5°C and 3.4°C by the end of this century respectively, the loss in developing countries is estimated to fall in the range of 290 to 580 billion in 2030, and the amount of loss will reach up to 1.1 to 1.7 trillion in 2050 (Markandya et al., 2019).

During the Negotiation: What Has been Made, What Has been Blocked?

Most countries have agreed that the funding source of loss and damage should be predictable, adequate, accessible, and transparent. However, little progress was made on the funding structure for loss and damage during week one. Divergences revolve around the following few points. 

First, some countries, including the European Union, stated that the loss and damage fund should be independent of current climate finance mechanisms. Countries that support an independent loss and damage fund are worried that loss and damage funds may be crowded out by other funds if the funds are under current financial facilities. However, some countries, including the United Kingdom, Canada, and Norway, disagree with the argument. Those countries argue that current financial mechanisms have supported some projects for addressing loss and damage; thus, setting a new mechanism will spend more time and administration costs on discussing the operation of the new funding facility.

Second, developing countries, such as Ecuador and the Philippines, stated that the form of the funds should be grant-based finance. Developing countries are worried that more loans will let them fall into a quagmire of the debt crisis. According to the International Monetary Fund (IMF) estimates, around 60% of low-income countries will be facing debt difficulties in 2021. However, developed countries, such as the United States and Switzerland, argue that the form to be in-kind donation, bilateral, or multilateral aid. 

Third, developed countries, such as the United States and European Union, argue that developing countries should quantify the needs and elaborate on the use of the fund. However, measuring non-economic loss is challenging and time-consuming. Loss and damage can result from short-term extreme weather events, such as floods or hurricanes, or long-term climate change, such as rising sea levels. Before counting the loss, economists will need to specify the time frame and the value of the goods. For the loss caused by long-term climate change, it is hard to specify when the starting point was. In addition, the values of the loss of non-economic goods, such as the loss of traditional culture, loss of biodiversity, and mental health, are subjective and difficult to generalize the methodology. Thus, even though each developing country has the capacity to do the evaluation, it might take years to finish the assessment. 

Personally, I hope progress could be made in the second-week negotiations.


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.

COP 26: A Missed Opportunity to Meet the Moment

A depiction of the hopelessness and urgency of climate action by artist Vincent J.F. Huang in Tuvalu’s Pavilion at COP 26. Tuvalu is a small island state in the Pacific.

The expectations to deliver urgent climate solutions had never been higher at a COP. COP 26 had arrived after a two-year hiatus in the annual COP sessions due to the COVID-19 pandemic. Never before had the world witnessed a series of climate effects from the worsening climate crisis as we did this summer. From flooding in China and Germany to wildfires in the US and Canadian West, summer 2021 gave us just a glimpse of what the new normal could look like. COP 26 thus arguably carried more responsibility to take meaningful climate action than previous COPs. The renewed public awareness of climate issues presented an opportunity to rally governments. Although there was incremental progress made on a few fronts, COP 26 failed to meet the moment.

A lack of commitment in urgently phasing out fossil fuels, inadequate climate financing, and exclusion of voices from climate-vulnerable communities in the Global South are the biggest disappointments from this COP. The last-minute change by India and China on their commitments to transition away from coal was framed as a larger disappointment. The tearful moment from COP 26 President Alok Sharma captured by media only strengthened this perception. However, the continued failure of rich countries in doing their own part and facilitating the energy transition for developing countries forms the bulk of the problem.

COP 26 failed to provide a near-term path for drastic emission cuts from our current record-breaking emission levels. The urgency of halving emissions by 2030 is critical to avoid catastrophic environmental disasters this century. The pledges made at COP 26 for reductions over the next decade take us down a path of 2.4-degree Celsius warming, per analysis by Climate Action Tracker. With existing policies, we are headed to a disastrous 2.7-degree Celsius warming scenario.

Far-fetched Net Zero goals by major polluters do little to sizably cut emissions by 2030. The diluted language around target dates for fossil fuel transition and capping the level of warming grant immense flexibility to both developed and developing countries to delay their emission reduction goals. Even in the areas of methane reduction and coal-based power transition, touted as successes of this COP, most big polluters didn’t sign the agreements. Only after countries provide their updated NDC (Nationally Determined Contributions) targets at COP 27 in Egypt next year will we fully understand the extent to which COP 26 fell short.

Rich countries failed to deliver on transitioning their own economies and meeting their long-promised commitments on climate financing. The agreement to phase out fossil fuel cars by 2040 was not supported by major economies such as US and Germany. Developed countries left out a proposal to compensate developing countries for loss and damage due to climate-related disasters. The commitment to provide $100 billion/year in adaptation funding starting 2020 to least developed nations has now been delayed by three years to 2023. Without just reparations from rich countries who hold the greatest responsibility for climate change, the developing world will be unprepared to confront the inevitable climate crisis.

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.

COP 26: Commitments on Fossil Fuel Phase-out, Climate Financing, and a Just Transition Should Determine the Success of this COP

Summer 2021 Floods in China, Source – The Washington Post 

Aptly termed throughout media as ‘The Last Chance’, COP 26 will be pivotal to humanity’s fight for survival. Although COPs have been an annual affair for over two decades, the significance of COP 26 has not been lost on the media. The postponing of last year’s COP due to COVID-19 and the devasting impacts of climate change seen this summer have only added to the expectations from COP 26. The myriad of issues discussed over the two-week-long COPs can be disorienting. So what do we watch out for at COP 26? In this opinion blog post, I present the importance of commitments on fossil fuel phase-outs, adequate climate financing, and a Just Transition for climate-vulnerable communities as barometers for the success of COP 26.

A universal agreement that limits warming to 1.5 degrees Celsius will demonstrate the commitment of countries towards climate mitigation. The world came together in 2015 to sign the Paris Climate Accord to lower carbon emissions and prevent the planet from warming ‘well below’ 2° Celsius. Six years since then, the world is generating record-breaking emissions. The flexibility in the agreement’s language gave too much liberty to parties to procrastinate reducing emissions. The 2020 IPCC report gave the world just a decade to halve our carbon emissions. The most recent 2021 IPCC report presented a stark reality. Even if emissions were sharply cut today, Earth is likely to exceed 1.5 ° Celsius warming. In light of these ominous signs, COP 26 needs to cap the level of warming deemed as acceptable to 1.5 degrees.

Net Zero commitments far out in the future are nowhere enough for climate change mitigation. Abating the incessant production of fossil fuels is critical to meeting the 2030 target for halving carbon emissions. We (through Exxon Mobil nonetheless) have known the precise cause of global warming since the 1980s – the rampant consumption of fossil fuels for human activity. No COP has acknowledged the continued use of fossil fuels as a problem and the urgent need to transform our energy and transportation systems away from fossil fuels. Given that our fossil fuel emissions have only consistently increased, despite the call to the contrary in the Paris Agreement, this COP should commit to halving fossil fuel emissions by 2030.

Many of the climate change effects are already happening. The brunt of this inevitable climate crisis will be borne by poorer nations and climate-vulnerable communities. The $100 billion/year adaptation funding committed to developing countries has consistently fallen short of its target. Investigative reports from earlier this year have rather asserted that much of the funding was offered as loans rather than grants. Allegations of misclassification of ordinary funds as adaptation funds have been leveled. Developed countries haven’t been receptive to demands from developing countries to start paying loss and damage for climate-related disaster events. Commitments backed with substantial financing will also go a long way in incentivizing developing countries to advance their NDCs (Nationally Determined Contributions).

Adoption of a Just Transition framework will safeguard the economic, environmental, and social rights of residents and workers who are from climate-vulnerable communities. The fast pace of energy transition required by science-based targets needs to be matched with economic opportunities for workers’ participation.  Climate financing commitments that support workers’ transition to an inclusive green economy should be made at COP 26. COPs are notorious for the exclusion of climate-vulnerable populations like Indigenous communities, worker unions from the Global South, women, the disabled, and people of color. Challenges due to COVID-19 will only exacerbate the gulf between the privileged and disadvantaged groups in their access to decision-making at COPs. It remains to be seen how this COP will address the historical inequities as well as the exclusionary challenges from the pandemic.

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.

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