Climate finance at COP29

Good afternoon from New Economy Brief.

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Though an agreement at this year’s international climate negotiations –  COP29 –  was reached at the 11th hour, some have judged the final deal as a ‘betrayal’. Many developing countries have received a climate finance pledge far lower than needed to decarbonise their economies, adapt to the increasing impacts of extreme weather and limit global warming to a 1.5°C trajectory.

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This week’s New Economy Brief hones in on the main focus of this year’s COP: the New Collective Quantified Goal on climate finance, looking at what was agreed and what gaps remain. We then turn attention to next year’s COP30 in Brazil, where there are hopes for progress despite fears that Trump will pull the USA out of the Paris Agreement. 

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Climate finance discussions dominated the agenda, but an agreement was also reached on carbon markets. Limited progress was made on other programmes, such as on adaptation and the Loss and Damage Fund, but we don’t have space to explore those or the carbon market agreement here; read Carbon Brief’s excellent explainer instead.

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The Finance COP?

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COP29 in Baku was billed as ‘the finance COP’. This was meant to be the year  industrialised “Annex 1” countries agreed a new, higher target for transferring trillions of dollars of climate finance to help developing countries decarbonise and adapt to the growing impacts of climate change. (Read our previous coverage of COP28, COP27 and COP26 for a timeline of progress of the international climate talks.)

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The importance of climate finance. ECIU’s Gareth Redmond-King reminds us that the UNFCCC COP process is the “only global process where the poorest nations have a seat around the table with the rich”. Industrialised countries’ ability to reach their agreed climate finance targets is also widely seen as an acid test for whether they are serious about tackling climate change, and essential for keeping trust in the process amongst developing countries. Next year all countries must also update their Nationally Determined Contributions – their emissions reduction pledges – so the level of climate finance directly affects developing countries’ abilities to cut emissions in line with a 1.5°C pathway. 

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Why do developing countries need finance? Developing countries argue that since the industrial revolution, developed countries have become wealthy by burning fossil fuels (and exploiting colonies in the Global South) and emitting vast amounts of greenhouse gases into the atmosphere, creating the climate crisis in the process. It is unfair to prohibit poorer nations, they maintain, from developing their economies in the same way that richer ones have done. For example, some countries oppose phasing out fossil fuels because they need the money from selling them to reduce poverty domestically. This means climate finance from developed countries plays a crucial role in allowing developing countries to industrialise and diversify their economies and tackle poverty while also decarbonising and adapting to climate impacts.

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Climate justice. Developing countries are already suffering disproportionately from the already very significant impacts of climate change, even though they bear limited historic responsibility for it and can least afford the costs of adaptation and mitigation. The IPCC finds that North America’s 4% of the global population is responsible for almost 24% of global emissions since 1850. In contrast, South Asia’s 25% of the global population is responsible for only 4% during the same period. Despite China now being the biggest emitter annually, their emissions since 1850 are still only half of the US, even though China has four times the population, many of whom are still in poverty.

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The history of negotiations. The idea that richer, industrialised nations have a responsibility to provide finance to poorer, less industrialised ones to help them mitigate and adapt to climate change has been agreed since the 1992 UN Framework Convention on Climate Change. At COP15 in Copenhagen in 2009, developed countries first proposed paying $100 billion a year by 2020, which was subsequently included in the Paris Agreement at COP21 in 2016. At the time this target was very substantially below what developing countries said was needed. This target was reached – albeit two years late, in 2022 – and included a mix of public funding and private money that had been ‘mobilised’ or ‘crowded-in’. However, Oxfam calculated that the true value of climate finance provided to developing countries is much lower than reported, once “dishonest and misleading accounting” is considered. The 2015 Paris Agreement included a mandate to assess and agree to an updated finance goal 10 years later. So since 2023, negotiators have been working to develop a new climate finance target – the ‘New Collective Quantified Goal’ (NCQG) –  to galvanise more climate finance from developed countries from 2025 onwards.

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The New Collective Quantified Goal (NCQG) on climate finance

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This year’s final COP29 text states that developed countries would aim to triple COP21’s nominal target of $100 billion a year in climate finance to ‘at least’ $300 billion a year to developing countries by 2035. It also agreed on a vaguer goal to ‘work together to enable the scaling up of financing...from all public and private sources to at least [$]1.3 trillion per year by 2035’. So why have campaigners and representatives from developing country governments branded the agreement a failure? 

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$1,000,000,000,000 a year short of what’s needed. Tripling the current goal of $100 billion a year in climate finance might initially sound impressive, but it is far less ambitious than what developing countries were calling for and falls $1 trillion a year short of what the Independent High-Level Expert Group on Climate Finance thinks is needed. Economists also pointed out that the real value of finance delivered may be far lower as it is not pegged to the rate of inflation. 

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Mixture of public grants and private loans. Developing countries wanted a higher target of around $600 billion of climate finance from developed governments in the form of publicly funded grants and ‘grant equivalent’ loans. A mix of additional public and private finance would be needed to reach the $1.3 trillion goal. In the end, however, the final COP text specified that the agreed $300 billion goal could come from “a wide variety of sources, public and private, bilateral and multilateral and alternative sources”. Debt Justice calculated that 71% of climate finance committed so far has been in the form of loans (and only 26% in grants). The final pledge means that much of the climate finance needed to decarbonise developing economies risks being heavily reliant on expensive loans from private finance institutions, leading to the further outflow of funds from developing countries to Global North financial institutions. 

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Why are public grants better than private finance? Developing countries' aversion to loans, particularly from private sector institutions, is very justified and well documented. Faced with huge development and poverty eradication needs, and with rich countries failing to honour aid and climate finance commitments, many governments in the Global South have had no choice but to take expensive loans from international capital markets. Many developing countries already spend more on debt repayments than on education, health and responding to the climate crisis. Relying on high-interest loans from private creditors for climate finance enables  richer governments to avoid their obligations to provide international climate finance and saddles poorer countries with more debt. A coalition of global justice organisations has highlighted the urgent need for debt cancellation and grant-based climate finance instead. (Read our previous New Economy Brief on the global sovereign debt crisis for more.) 

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Looking ahead to COP30

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Under the Paris Agreement, every five years the COP negotiations include a ‘global stocktake’ which reviews the progress that has been made to inform the next round of ‘Nationally Determined Contributions’ (NDCs) - countries’ emissions reduction pledges. At COP28 in 2023, this stocktake called on all countries to contribute to “transitioning away from fossil fuels” and to treble global installed renewable energy generation capacity, double energy efficiency, and halt and then begin reversing deforestation. COP29 was supposed to decide how to do this, and provide guidance for countries to develop their next climate pledges to keep global warming below 1.5°C. But agreement wasn’t reached, pushing the discussion to COP30 in Brazil next year.

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More ambitious Nationally Determined Contributions. All parties must update their NDCs by February 2025. The ‘roadmap’ to $1.3 trillion of climate financing will also have to be worked up in advance of COP30. If agreement can be found on a realistic way to secure a larger climate finance package, then countries will be more able to adopt more ambitious emissions reduction targets in line with a 1.5°C pathway. However, this will require trust from developing countries that industrialised  countries will provide the money. And experience to date provides very little reason for them to have this trust.  Last week, almost a quarter of the Parties objected when the COP29 Presidency forced through the NCQG decision, including India, Nigeria, Bolivia, and 45 Least Developed Countries. So some countries are refusing to accept the outcome of the talks, given there was no clear commitment to any amount of core public funding, no limits on lending instruments nor guarantees to keep countries from going deeper into debt.

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A multipolar world? The climate finance deal was eventually pushed through out of fear of a Trump presidency, which will likely be hostile to any climate finance and has signalled its intent to once again pull the US out of the Paris Agreement altogether. James Meadway has argued that we are entering a ‘multipolar world’, in which the US has less control over global politics than it used to and other nations step into a larger climate leadership role. 

‍All eyes on Belém. Next year’s COP will be hosted by Brazil, in the city of Belém. Brazil is currently governed by the centre left Partido dos Trabalhadores (Workers’ Party) and its President, Luiz Inácio Lula da Silva, has styled himself as a climate leader. However, he has faced challenges on this front since being re-elected in 2023. Lula has called COP30 “our last chance to avoid an irreversible rupture in the climate system”. The stakes couldn't be higher.