The failure by developed countries to deliver on an earlier goal to provide US$100 billion annually in climate finance by 2020 has eroded trust in overall negotiations. — AFP
WHEN it comes to climate change, United Nations (UN) secretary-general Antonio Guterres does not mince his words.
“If money makes the world go round,” he remarked on World Environment Day, “today’s unequal financial flows are sending us spinning towards disaster. The global financial system must be part of the climate solution.”
Asia is facing climate change vulnerability at the same time that many of its economies are industrialising.
To achieve cost-effective clean energy transitions and limit global warming to 1.5 degrees Celsius above pre-industrial levels, a key guard rail under the 2015 United Nations Paris Agreement, countries need incentives and support from international financial institutions.
This includes common standards for measuring needs, as well as platforms for sharing best practices in implementing solutions.
These considerations could ensure that finance is channelled to where it is needed most, and should drive international financial architecture reform to meet the climate change challenge in the 21st century.
This year has been dubbed the “year of climate finance” by the UN Foundation and other experts who track climate negotiations. Momentum to reform the international financial architecture continues to grow.
And, in the UN system, countries are tasked with agreeing on a new goal for global climate finance by the end of the year.
The failure by developed countries to deliver on an earlier goal to provide US$100bil annually in climate finance by 2020 has eroded trust in overall negotiations.
The 2024 COP29 climate talks are an opportunity to patch this deficit by structuring the new climate finance goal in a way that incentivises financiers to meet the scale and complexity of the challenges at hand.
Big numbers have already been floated. The Dubai Consensus – agreed at the COP28 climate talks in 2023 – notes that nearly US$6 trillion will be needed by developing countries to implement their climate action plans for 2030.
A high-level expert group headed up by economists Vera Songwe and Nicholas Stern reckons that emerging and developing economies, apart from China, will need US$2.4 trillion annually by 2030, with US$1 trillion coming from external sources outside these countries.
Reform proposals
Multilateral finance reforms will be critical for scaling up climate finance to such levels.
Yet, little discussion has focused on how reform proposals can serve Asia’s unique needs. This is especially important given the region’s diversity – encompassing rich donor countries, major emerging economies, least developed countries suffering from debt, and highly vulnerable island states, among others.
To address this gap, we conducted a deep dive into Asia’s climate finance-related challenges and opportunities in the context of global financial architecture reform.
Taking stock of existing flows and specific needs could build consensus around actionable steps for moving forward on reform efforts from an Asian perspective.
Asia is receiving more climate finance than other regions globally, but its needs are far from being met. The Asia-Pacific region saw significant growth in climate finance for energy transition, with flows increasing 38% since 2020.
Current flows are in the hundreds of billions at most, but the region’s estimated needs are projected to range from around US$1 trillion to US$2 trillion per year from now to 2030.
Finance for adaptation to the impacts of climate change is particularly lacking because it is more difficult for such projects to turn a profit.
One of the biggest barriers to making reform efforts effective is the lack of standard processes for reporting on climate finance needs and flows.
The current status quo puts the onus on developing countries to seek and obtain the climate finance they require to meet their goals. This process can be complex and competitive, requiring substantial capacity and technical expertise to navigate effectively.
A unified, bottom-up mechanism for countries and sub-national jurisdictions to estimate the finance needed to meet certain climate benchmarks could reduce the burden on developing countries. It would also help climate donors better tailor their funding structures.
Capacity building and support could be provided to developing countries to produce high-quality, reliable and comparable data.
If designed in a bottom-up way, this mechanism could create a “race to the top” dynamic by incentivising countries to increase their climate ambition in exchange for more financing.
Luckily, there is an opportunity on the horizon to address this gap. Countries are expected to be updating their national climate goals, with new targets due by early 2025.
Investment plans
Developing countries in particular could approach these targets as investment plans by outlining specific financial needs for such economies to develop cleanly and sustainably.
Updated climate targets are also a chance to build trust all around. For instance, the host of COP29, Azerbaijan, has called for developing countries to be transparent about their climate spending.
And the COP presidencies “troika” of Azerbaijan along with the United Arab Emirates and Brazil have said that high-ambition targets from developed countries should include finance for developing countries.
Expanding donor-side transparency could also enhance flows.
Take the case of China as an example. Analysis by think-tank E3G estimates that China may be contributing as much as US$1.4bil annually on average in bilateral climate-related development finance – but China does not currently publish its own figures.
The same study estimates that nearly 40% of this finance goes towards developing Asia. Greater disclosure could help host countries gauge investor interest in green projects and assess the quality and scale of climate impacts achieved.
Additional reforms could address concerns about availability and accessibility of finance.
Regional multilateral development banks such as the Asian Development Bank and the Asian Infrastructure Investment Bank are playing an increasingly important role as “climate banks.”
They could work with countries to adopt a “whole of economy” approach to climate finance, rather than a project-by-project approach. This could better tailor resources to countries’ needs, including debt burdens, while helping to mainstream climate into planning processes.
Moreover, multilateral banks could deploy blended finance to not only catalyse investments in reducing emissions, but to also increase countries’ resilience to climate-induced disasters.
And repurposing fossil fuel subsidies towards clean energy would remove a perverse incentive for inefficient fossil fuel production and consumption while accelerating the clean energy transition.
As the UN secretary-general said, this is our moment of truth. It is up to all countries to improve transparency of needs and flows, and for climate finance donors to think more innovatively and creatively to meet the moment – especially in a region as diverse and critical for climate transition as Asia. — The Straits Times/ANNDeepali Khanna is vice-president for Asia at The Rockefeller Foundation and Rorry Daniels is managing director of the Asia Society Policy Institute. The views expressed here are their own.
