Why is the OECD report important?
The OECD is largely a group of rich countries including the U.S., the U.K., Germany, France, Switzerland, Canada, and others.
The report, as such, offers a peek into their idea of climate finance ahead of the COP28 climate talks.
COP28 in UAE next week, where the topic is expected to be a key bone of contention.
The report also comes against the backdrop of a pledge by the bloc of developed nations at the COP26 talks in Glasgow, in 2020, to double adaptation finance.
Parties to the UNFCCC had also said at Glasgow, “with deep regret”, that the developed nations bloc hadn’t met the $100 billion climate finance goal in due time in 2020.
The failure to mobilise adequate climate finance lowers capacity in developing countries to address climate mitigation (like emissions reduction with renewable energy) and adaptation needs (like developing and incentivising climate-resilient agriculture), and reduces trust among the world’s poorer countries that the developed world is serious about tackling the climate crisis.
What counts as climate finance?
The OECD report showed that of the $73.1 billion mobilised in 2021 by the public sector via bilateral and multilateral channels, $49.6 billion was provided as loans.
While the report doesn’t classify them in terms of the rates at which they’re provided.
The data available elsewhere sheds light on the extent to which rich countries rely on loans at commercial rates to fulfil their climate finance obligations.
For example, an assessment by the American non-profit research group Climate Policy Initiative of global climate finance flows between 2011 and 2020 found that 61% of climate finance was provided as loans, of which only 12% was at concessional interest rates.
When the OECD report states that two-thirds of public climate financing was provided as loans.
It means the conditions attached to such financing could further exacerbate debt stress in poorer countries.
This is also a critique of the OECD report as it considers loans at face value, not the grant equivalent.
This means that while poorer countries shell out money towards repayment and interest, the loan is still counted as climate finance provided by the developed world.
How much financial assistance do developing countries need?
The UNFCCC states that developed countries “shall provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations under the convention”.
This means that developed countries cannot cut overseas development assistance (ODA).
In real-world terms, it would mean cutting off support for healthcare to reallocate that money to, say, install solar panels.
The “new and additional finance” also means that developed countries cannot double-count.
For example, a renewable energy project could contribute to both emission reductions and overall development in a region.
As per the UN Convention, donor countries cannot categorise such funding as both ODA and climate finance because it wouldn’t fulfil the “new and additional” criterion.
What role can the private sector play?
To meet the scale of the challenge, people like the U.S. climate envoy John Kerry and World Bank President Ajay Banga have routinely emphasised the role the private sector could play.
But the OECD report itself threw cold water on such hopes, showing that private financing for climate action has stagnated for a decade.
While public funding from multilateral channels, both multilateral development banks (MDBs) and multilateral climate funds, increased in the same period.
In 2021 in particular, it showed that private funding reverted to its 2019 level following a slight dip in 2020.
The OECD report suggested de-risking with government intervention and called on MDBs to integrate private finance mobilisation strategies as part of their core objective.
Its reasoning is that the private sector can help enable climate action but that it “requires the proactive involvement of governments and international institutions to support, incentivise and de-risk individual projects, as well as to create the necessary conditions for investment in developing countries more generally”.
But as of today, there aren’t any signs that the private sector is interested in massively scaling up its climate investments.
The problem is particularly worse for climate adaptation, because investment in this sector can’t generate the sort of high returns that private investors seek and which the mitigation sector.
At the end of the day, the ball rolls back into the court of public funding, that is governments in the developed world plus multilateral development banks.
The OECD report shows that even those who place hope in higher private funding for climate action in the future recognise that it is governments and MDBs that are the enabling parties here.
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