Top of COP: Outcomes for Development Finance and Global Economic Governance

By Rishikesh Ram Bhandary and Katie Gallogly-Swan

Amid a flurry of high-level plurilateral commitments and late-night negotiations, the Glasgow Climate Pact of the 26th United Nations Climate Change Conference (COP26) was agreed on Saturday, November 13 with the drop of the gavel. Additional pledges and commitments put global warming on track to reach between a 1.8C and 2.4C increase from pre-industrial levels. While an improvement from the UN’s 2.7C estimation the week prior to the Conference, it is still far from the 1.5C threshold necessary to prevent the most extreme climate impacts.

Significant milestones, such as the mention of coal and climate-induced loss and damage in the final text, were tempered by resistance to include equity in climate talks. This is particularly evident in the lack of commitment and detail on financing, especially in addressing how low-income countries will pay for the mounting bill of mitigation, adaptation and loss and damage. In all, global climate leaders are moving inches when the distance to travel is miles. 

What does the climate pact mean for global economic governance? Below, see a summary of the major highlights and misses of COP26 with an eye to development finance, including progress on climate finance commitments, pledges from public and private investors and key debates bridging development, finance and climate policy. 

Unkept climate finance promises

COP26 started on the wrong foot when advanced economies announced they would not meet their $100 billion climate finance commitment until 2023 – three years overdue. The announcement coincided with the release of the first ever needs assessment for developing countries to implement climate plans from the UN Framework Convention on Climate Change (UNFCCC). The report estimated the cumulative cost of implementing less than half of existing mitigation and adaptation commitments would total $6 trillion by 2030, making the arbitrary $100 billion target, already delayed and unsatisfactory, pale in comparison. 

Meanwhile, the Africa Group and Like-Minded countries used Glasgow to call for a new financing target of at least $1.3 trillion per year by 2030. A massive scale up from the original target, this proposal is a far more realistic estimation. Indeed, the United Nations Conference on Trade and Development (UNCTAD) has previously argued $2.5 trillion annually for two decades is the necessary investment target for securing Paris Agreement commitments and the UN 2030 Sustainable Development Goals. 

While reaching finance targets took center stage at COP26, developing countries and civil society also raised persistent issues with the definition and delivery of climate finance. As it stands, the majority of climate finance is delivered as loans and is often not additional to Official Development Assistance. Furthermore, it is not making best use of established national climate funds (NCFs) that would support countries to deliver integrated national strategies. In November 2021, the Boston University Global Development Policy Center launched the first-of-its-kind interactive National Climate Funds (NCF) Tracker and complementary policy brief, identifying dedicated climate finance vehicles at the national level, capturing 46 NCFs in 39 countries. 

Raising adaptation ambition 

A noteworthy development in Glasgow was the commitment by developed countries to double finance for adaptation by 2025. Using 2019 as the baseline year, a doubling of public finance for adaptation would put it in the range of $40 billion to $48 billion. This commitment reflects the standing pledge to achieve balance between mitigation and adaptation finance as expressed in the Paris Agreement, and the attached timeframe provides a hook for accountability. 

Unfortunately, while a vast improvement, using existing commitments as a baseline means the target is still far from need: the UN’s Environment Programme estimates current annual adaptation costs for developing countries are $70 billion, reaching as high as $300 billion by 2030 and $500 billion by 2050. 

Loss and damage: Facility or dialogue?

The most vulnerable countries have long called for a dedicated focus on loss and damage, which entails climate impacts that go beyond what is adaptable for societies and ecosystems. Though the need for a new stream of funding to avert and minimize climate damage has been emphasized, it has so far gone unheeded. 

At Glasgow, the Group of 77 (G77) and China coalesced around a proposal to create a loss and damage finance facility, with modalities to be adopted at the next conference, COP27. Additionally, a compromise proposal was floated that would create a technical assistance facility, but without a financing commitment this was unacceptable to developing countries, it collapsed into an agreement for ‘dialogue’ on loss and damage at COP27. While it is important to have the loss and damage issue raised to this level, vulnerable regions are left waiting for material assistance, as climate disasters continue apace. 

Aligning private financiers 

The flagship announcement on ‘Finance Day’ at COP26 was the launch of the Glasgow Financial Alliance for Net Zero (GFANZ), a club of more than 450 banks, insurers and asset managers across 45 countries that together manage or own $130 trillion in assets and have agreed to align activities with the goal of getting to net-zero. While bringing these powerful actors together is no small feat, the lack of mandatory measures could turn GFANZ into another exercise in greenwashing. 

Many of its members are major financiers of fossil fuels, and even if they do meet their net-zero commitment, they can do so without closing out high emitting investments. Indeed, the only mandatory commitment for membership is to disclose ‘net-zero transition plans.’ Such voluntary approaches have been criticized for stalling action, with some economists arguing for stronger regulation, including policies to make dirty lending more expensive.

As well as being an ineffective vehicle to decarbonize global finance in the near-term, the GFANZ announcement also poses a danger to the financing targets yet to be met. Leader of the project, former Bank of England Governor Mark Carney, commented that the $130 trillion is now ready to be mobilized for climate initiatives, which was soon criticized for lacking credibility. However, if the $130 trillion figure is seen as a substitute for public climate finance commitments from advanced economies, GFANZ may do more harm than good in the near-term. The UN Secretary General Antonio Guterres’ announcement that he would create an expert panel to create standards to ‘measure and analyze’ net-zero commitments of non-state actors will hopefully help bring accountability to rhetoric. 

Turning point for public finance

While private finance’s commitments left more questions than answers, new mitigation commitments from governments and public financial institutions gave a more concrete indication of change. 

In the past year, development finance institutions have been moving away from coal and scaling up investments in renewables. A recent policy brief from the Boston University Global Development Policy Center found that 99 percent of internationally available development finance is now committed to shift to renewable energy while lowering or halting support for coal.

On ‘Energy Day,’ 190 countries and institutions signed the Global Coal to Power Transition Statement to phase out coal “in the 2030s” for rich countries and a decade later for low-income countries. As well as ceasing new permits, the statement committed countries to increasing renewable support and establishing just transition support for affected communities. 

In a separate commitment, 34 countries and institutions, including the US, pledged to end public financing for “unabated” fossil fuel projects abroad by the end of 2022. With this commitment, the annual average of potential public finance shifted out of fossil fuels and into clean energy is at least $24.1 billion per year. This equals 38 percent of annual public finance for fossil fuels provided by Group of 20 (G20) countries and multilateral development banks (MDBs) between 2018 and 2020. But this number pales in comparison to the $750 billion in fossil finance the 60 biggest private banks provided in 2020 – more than twice the climate finance from the private sector that year – highlighting the scale of the challenge of reigning in private investor activities. 

On a less ambitious note, ten major MDBs agreed to a Joint Nature Statement that was light on detail, with no commitments on limiting fossil fuel support or timelines for action. 

Special Drawing Rights for climate finance

Raising recognition of the financing need was central to Barbados Prime Minister Mia Mottley’s speech at the World Leaders’ Summit, where she made the case for yearly International Monetary Fund (IMF) allocations of Special Drawing Rights (SDRs) worth $500 billion annually for the next 20 years. Prime Minister Mottley noted this ambition is still far less than the trillions of dollars unleashed by quantitative easing in advanced economies in response to the economic shocks of the last decade – a policy choice not available to poor countries. 

Prime Minister Mottley wasn’t the only person to mention SDRs at the Conference, with interest noted by development bank heads and the Green Climate Fund. These comments come in the aftermath of the unprecedented allocation of $650 billion of SDRs in 2021 in response to the economic pressures of the COVID-19 pandemic. Since SDRs are allocated according to IMF quota share, the majority of the allocation will flow to advanced economies who are unlikely to use them. This has sparked an ongoing debate on the potential of re-channeling unused SDRs to support pandemic recovery, climate action and alleviate fiscal stress in developing countries. While the Glasgow Climate Pact did not endorse Prime Minister Mottley’s call for $500 billion annually in SDRs, the final agreement does ask MDBs to incorporate climate vulnerability into the use of SDRs, leaving the door open for SDRs to be part of financing discussions in coming years.

Taken together with the Group of 20 (G20) calling on the IMF to establish a new trust to “provide affordable long-term financing… to reduce risks to prospective balance of payment stability, including those stemming from pandemics and climate change”, there is also a strong basis to establish climate vulnerability as an important criterion for accessing SDRs via a new Resilience and Sustainability Trust (RST). 

The sovereign debt tsunami 

Locating new sources of financing is not just about keeping past promises but addressing present crises. In the aftermath of the pandemic shock, national debt levels are at a decade-level high and economic growth prospects for the poorest countries are on track for another lost decade. UNCTAD has shown that regions facing higher vulnerability to climate change are more likely to suffer from severe indebtedness: less fiscal space means less capacity to respond to disasters, perpetuating a vicious cycle that forecloses debt sustainability and therefore, climate action.

This reality led the Vulnerable Group of 20 (V20) to release a pre-COP statement calling for debt restructuring for climate vulnerable nations. Earlier in the year, the IMF Managing Director Kristalina Georgieva had expressed her intention to present a debt swaps proposal at COP26, but ultimately it did not materialize. Considering the need to marshal all possible tools to achieve development and climate goals, the question of debt relief can no longer be separated from climate diplomacy and will necessarily feature in 2022 priorities. 

A new trend in country deals?

Amid specific calls from countries, such as India and Indonesia on the financial support needed to meet climate commitments, the Just Energy Transition Partnership focused on South Africa was launched at Glasgow. This $8.5 billion deal – supported by the US, the UK, France, Germany and the EU – will help South Africa achieve its climate targets while directly addressing the need to support communities that depend on coal. The political declaration of the partnership also mentions the need to manage the South African utility company Eskom’s debt in a sustainable way, support local value chains and spur technological innovation, while engaging with the private sector. 

Although country-specific plans like this could bring much needed holistic approaches to mitigation and adaptation strategies, they also pose a challenge to multilateral methods. As a member of the G20, South Africa has greater access than most lower- and middle-income countries to donor and lender nations. Fragmentation and politicization of economic multilateralism has an unfortunate recent history, risking sidelining less powerful low-income countries in climate diplomacy.

Carbon markets 

One of the pending items from the Paris Rulebook talks was Article 6 of the Paris Agreement, which includes carbon markets. According to the Organization for Economic Cooperation and Development (OECD), carbon markets, such as cap-and-trade emission trading schemes, “are crucial to price carbon emissions and keep the costs of climate action low.” At COP26, countries were able to agree on language that largely reduces risk of double counting, that is, the same carbon credit being used by multiple countries towards their climate commitments. Carbon markets have the ability to unlock finance but without the necessary safeguards, there is significant risk that the environmental integrity of the Paris Agreement will be undermined.

The Glasgow agreement allows credits issued under the Kyoto Protocol’s Clean Development Mechanism (CDM) to be used towards nationally determined contributions (NDCs) with two caveats. First, the projects must have been registered on or after January 1, 2013 and countries are allowed to use carbon credits from the CDM only towards their first NDCs. While this provision provides a measure of confidence to investors who have a stake in CDM projects, it reduces the level of ambition that the carbon markets provision of the Paris Agreement could have provided.

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While COP26 fell far short of delivering the finance needed to tackle climate change, the outcomes in Glasgow helped to clarify critical elements of a systemic transformation towards low-carbon growth. These elements, such as debt relief, SDRs and financial regulation, go beyond the usual realm of climate finance and COP diplomacy. To this end, Glasgow sends a clear call to actors across the global economic order that there is no future in silos and the international community must rise to the climate challenge, collectively.