Experts offer 5 priorities for establishing climate finance after 2025

Trade-offs in setting a new global climate finance target should focus on 5 elements, according to the group of climate finance experts. They have written the Perspective "Post-2025 climate finance target: how much more and how much better?" which appears today in Climate Policy. Lead author Pieter Pauw recently started at TU/e as a climate finance researcher in the Innovation & Society group at the Department of Industrial Engineering and Innovation Sciences and at research institute EIRES.

In the Paris Agreement governments committed to setting a "new collective and quantified target" for climate finance by 2025. Last year, at the UN Climate Summit in Glasgow, consultations began on how to approach that process. At previous UN Climate Summits, developed countries agreed to mobilize an annual USD 100 billion in climate finance between 2020 and 2025. With good reason, because climate finance is a necessary condition for many developing countries to prevent worsening climate change and to enable them to adapt to climate change.

According to a recent OECD report, this target was not met in 2020. That year, only USD 83.3 million was raised by developed countries. Despite divided opinions on how climate finance should be calculated, in their Perspective the researchers urge policymakers to critically examine whether current climate finance is effective in solving the problems in recipient countries.

Considerations for 2025 and beyond

"Climate finance has had to overcome a lot of opposition. That's precisely why the new finance goal should be about more than only a higher number," says Pauw. "We have identified the difficulties of the past. In our view, the focus of the negotiations should be on five critical success factors to establish a meaningful climate finance goal beyond 2025." The five focus points are presented below:

1. Link the new target to Article 2.1 C of the Paris Agreement. This seeks to green all financial flows worldwide, not just those of climate finance.
    
2. In the new target, split the money for preventing climate change (mitigation) and enabling a country’s resilience to climate change (adaptation). The latter, in particular, often falls by the wayside at present. Only a third of current climate finance is now spent on adaptation, according to the UN report.
   “Negotiating the post-2025 climate finance target offers an opportunity to take onboard new insights into the needs of developing countries,” says co-author Richard Klein, Senior Research Fellow at Stockholm Environment Institute (SEI).
    
3. Subject the financial instruments used to sub-targets. “Public climate finance mainly takes the form of loans, with loans making up 71% and grants 26% of climate finance in 2020,” says co-author Zoha Shawoo, Research Associate at SEI’s US Center: “From a climate justice perspective, grants are more appropriate than loans because many of the countries that are in need of climate finance, particularly for adaptation, are highly indebted at the same time as they have done very little to cause climate change.”
    
4. Consider whether and how private investment should be counted. There has not yet been sufficient study of how public funds or measures can be used effectively to encourage private investment. For example, by reducing investment risks.
    
5. Finally, it is about securing new and additional finance. After all, everyone has agreed to make new money available for climate finance, but too often the money is transferred from other budgets, for example for development work. As a result, the recipient countries receive the same net amount as before, which runs contrary to the agreements. A fair system for monitoring and reporting on consistent climate finance flows is therefore necessary.

Outlook

Negotiations on climate finance targets beyond 2025 will only really start at the UN Climate Summit in November in Egypt. Therefore, the authors also offer suggestions on how the parties could agree among themselves. They also both offer practical ways to set and achieve the new quantitative climate finance targets.

But, for that to happen, the international rules for tracking and reporting on climate finance must be tightened. This, according to the authors of the Perspective, is a prerequisite for greater transparency and mutual trust.

The Perspective "Post-2025 climate finance target: how much more and how much better?" appears today in Climate Policy.