As is well known, the global Climate Assembly – COP28 – began in Dubai on 30 November and will run until 12 December. The success of this meeting will depend on the ability of countries to agree on a gradual phase-out of fossil fuel use. There will also need to be an agreement on providing assistance to low-income countries to pay for it all. As usual, the main issue is money…
Many are sceptical about the success of COP28, as the host country for the assembly is the United Arab Emirates (UAE), one of the world's largest oil producers with undoubtedly significant influence in this sector.
Doubts about reaching the necessary decisions were amplified last week when documents were made public regarding the lead figure of the COP28 assembly, namely the President of the UN COP28 climate change summit, Sultan Ahmed Al-Jaber (Sultan Ahmed Al-Jaber), who is the CEO of the UAE's national oil company Adnoc. It turns out that he is the one planning to talk about fossil fuel deals with 15 countries. So, the question of impartiality arises.
The G7 bloc of wealthy nations and the European Union have called on other countries to strengthen their climate plans for 2030. The EU proposes to gradually phase out the use of “unabated” fossil fuels and reach their peak consumption level within this decade.
According to the Dutch academic think tank Sustainable Finance Lab (SFL), COP28 should acknowledge that the discussion on financing climate change for emerging market economies and developing countries must be about trillions, not billions (in monetary terms). It is estimated that the shortfall in climate financing for 2022 could reach as much as €3.5 trillion.
Special Drawing Rights
One example of such an idea, put forward last year by Barbados Prime Minister Mia Mottley (Mia Mottley), was to allocate 500 billion US dollars [€458 billion] for low-interest trust loans. These would be funded by reallocating the International Monetary Fund's (IMF) largely unused reserve assets – so-called Special Drawing Rights (SDRs). SDRs are a type of reserve asset issued by the IMF to help countries overcome financial crises without increasing their debt burden. Already in 2021, several countries pledged to allow €90 billion of these funds to be directed to low-income countries. So far, less than one billion dollars has been disbursed through the IMF's Resilience and Sustainability Trust. This is insufficient.
In the negotiations held this year, a much greater political will to achieve the implementation of funding can be observed. In August 2023, the IMF announced that 29 member states had agreed to participate in reviving this activity. “On paper,” this could provide an additional €50 billion in loans from the International Monetary Fund's Poverty Reduction and Growth Trust and €37 billion from the Resilience and Sustainability Trust. Together, that is €87 billion – a sum that could help move rapidly towards achieving goals. The question of the correct and skilful use of this funding is becoming topical. These funds can be used as collateral for new loans with a ratio of one to four. Since €375 billion of SDRs remain unused, this scheme could reach the trillion-dollar level. Funding for low-income countries is necessary to start a rapid transition towards implementing “green energy principles”.
There is a hurdle in this regard, namely that the European Central Bank has objected to this plan, arguing that this type of financing is monetary. It would be a direct transfer of money to governments for them to spend. European Union law limits this type of financing method. Meanwhile, institutions including the Rockefeller Foundation and the African Development Bank are trying to convince Australia, Norway and the UAE (which are not subject to the ECB's legal interpretation) to allow the recycling of their SDRs. This would create a precedent that other countries could follow.
Global carbon tax
African leaders, following a three-day summit in Kenya in September, proposed introducing a global carbon tax, under which the biggest polluters would pay more, thereby helping developing countries fund the implementation of green energy systems and adapt to the negative impact of climate change. African leaders will use the Nairobi Declaration, which was signed at the summit in Kenya, as a negotiating document at COP28. The document calls for setting an international carbon price for fossil fuel trade, shipping and aviation. A proposal for a global financial transaction tax is also included.
A report recently published by the Climate Action Network (CAN) includes an estimate that a fossil fuel extraction tax could accumulate 210 billion US dollars [€191 billion] per year. The IMF has previously pointed out that a global carbon price would be one of the fastest and most effective ways to reduce carbon dioxide emissions globally.
French President Emmanuel Macron and Kenyan President William Ruto are promoting these proposals in Dubai and have already convinced 40 countries to sign the relevant agreement. However, the idea of a global carbon tax has not gained traction in several major nations, including the US and Brazil.
Discussions are further complicated by the European Union's introduction of the Carbon Border Adjustment Mechanism (CBAM) (The main objective of this environmental measure is to avoid carbon leakage. It will encourage partner countries to develop carbon pricing policies to combat climate change. To this end, CBAM targets the import of carbon-intensive products, fully respecting international trade rules, to prevent the EU's efforts to reduce greenhouse gas emissions from being offset by importing products manufactured in third countries where climate change policies are not as ambitious as in the European Union. It will also help prevent the relocation or import of carbon-intensive product manufacturing.).
CBAM will enter into force in 2027 and will apply to imports that cause high carbon emissions. Its impact on countries exporting to the European Union will be very uneven. South Africa and India, with indirect support from the US, are already challenging the new tax at the World Trade Organization, stressing that it is a discriminatory barrier to trade.
Replacing (offsetting) national debts with natural resources
It is expected that during the COP28 assembly, France and Kenya will establish a working group on innovative sources of financing, including so-called “debt-for-climate swaps” or “debt-for-nature swaps”.
In such deals, the creditor country either cancels part of the existing debt or offers a new loan with better terms. The debtor country, in turn, undertakes to fund local development projects using its own money. Countries affected by climate change that have large debts, such as Barbados and the Seychelles, are the most active users of this type of financial mechanism.
A group involving 31 non-governmental organisations, joined by researchers and some banks, including the highly influential Barclays bank, has warned that swap deals, which have existed for decades, are often not properly audited, are prone to corruption and may facilitate the greenwashing of funds. It must be emphasised that without new financial commitments, low-income countries may not be willing to agree to far-reaching climate goals. Barbados Prime Minister Mia Mottley pointed out to the delegates of financially strong countries earlier this year: “We need a transformation of the financial system, not just reform”.
To be able to understand this whole tangle of complex requirements, declared commitments and financial gaps, a breakdown of the most important discussions is necessary.
Loss and damage fund (Loss and damage fund)
One of the most important issues at COP28 will be the so-called Loss and Damage fund, which is a long-standing desire of low-income countries.
Last year, the failure of the climate summit in Egypt was avoided at the last minute by agreeing precisely on the need to establish a Loss and Damage fund. How it will be established will be decided in the coming days at COP28.
The expected volume of the fund according to the initial agreement is only 429 million US dollars [€393 million], which causes dissatisfaction among many developing countries. High-income countries are only being invited to become contributors – the European Union will provide €225 million, including €90 million to be funded by Germany. The United Kingdom is contributing £60 million (€68 million), the US 24.5 million dollars (€22.5 million) and Japan €9 million.
It is planned that the fund will be housed at the World Bank. This, in turn, worries the countries that will receive the funding. These countries argue that the World Bank is dominated by the US with the largest share of voting rights; in terms of influence, the United States is followed by Japan, China and EU countries, and, of course, it is clear who will be the decision-makers. To address this issue, World Bank head Ajay Banga (Ajey Banga) announced in late November that he “realises that it is necessary to ensure the proper representation of the group of 77 developing countries on the fund's board…”
Breaks in debt obligations
Multilateral development institutions, such as the World Bank or the European Bank for Reconstruction and Development, could also help low-income countries in other ways, for example by including clauses for disaster response in their loans. They would automatically defer debt repayment for two years, freeing up some of the money needed to provide financial support in cases of floods, hurricanes, earthquakes, volcanic eruptions or pandemics. This approach is needed given that the devastating impact of climate change is exacerbating the chronic lack of money in low-income countries. In Pakistan, the 2022 floods caused 30 billion US dollars [€27 billion] in losses, which exceeded the total annual budget of Pakistan. At the same time, Pakistan has to spend 50% of its budget on debt repayment. Furthermore, 60% of low-income countries face similar debt risks, which leaves minimal (or no) opportunities for “green” investments.
A recent study showed that from 2019 to 2021, 43% of countries in financial difficulty paid more to foreign creditors (debt payments) than they received in the form of climate change funding in the same period.
“From billions to trillions”
An even more contentious issue is the discrepancy between the planned climate funding and the amounts provided by the wealthiest countries.
High-income countries promised in 2009 to invest 100 billion US dollars [€90 billion] annually in climate change financing from 2020 to 2025. The OECD indicated that in 2022 – two years after the set deadline – the promise had been met. It should be noted that there is no public data available to confirm this. Despite efforts, since 2013, countries have been unable to agree on a definition of climate finance. The Philippines' Deputy Finance Minister, M. Joven, representing the country at UN climate change negotiations, called this situation “the Wild West of finance…”. In a sense, this is confirmed by data published by One Campaign, which shows that two-thirds of the commitments reported by the OECD have not been paid out at all or have little to do with climate. For example, Japan reported investments in coal mining as funding for climate change mitigation... and there are many such examples.
One Campaign found that between 2013 and 2021, the volume of missing financial resources reached 343 billion US dollars. Given this “chaos”, the G20 has called for an “ambitious, transparent and traceable” goal for climate change financing to be set in 2024. The “minimum amount” should “start” at at least 100 billion US dollars.
It looks like a real agreement on new reporting standards will likely only be reached at next year's (2024) assembly. In any case, the current projected support figure needs to be higher for its recipients to have a real financial benefit.