Rahul Mohanty*

Climate Finance, a key enabler of climate change mitigation and adaptation actions, particularly in the global south, has been at the centre of international climate negotiations in the last few years. While it is hoped that there will be a new global climate finance target agreed at the upcoming COP29 at Baku, the previous targets, though extremely modest, proved immensely difficult to achieve. In this context, this short essay takes stock of the international negotiations concerning climate finance and its future directions. It starts by outlining the justifications for climate finance and its brief history and then goes to encapsulate the present state of international climate finance negotiations. The essay then examines the present efforts to negotiate a new climate finance goal and ends with reflections on the potential direction this may take.

Introduction

Climate Finance has been one of the pillars of international climate change action since the early years of climate negotiations, in the late 1980s and early 1990s. In the run-up to the UN Framework Convention to Climate Change (UNFCCC), the Ministerial Declaration at the Second World Climate Conference (1990), discussed the need to channel additional financial resources to developing countries towards mitigation and adaptation activities. The UNFCCC also promoted climate finance in the context of differentiated responsibilities between developed and developing countries, stating that “the developed country Parties and other developed Parties included in Annex II shall take all practicable steps to promote, facilitate and finance, as appropriate, the transfer of or access to environmentally sound technologies and knowhow to other Parties, particularly developing country Parties, to enable them to implement the provisions of the Convention” (Article 4.5). In this context, climate finance is often seen as a corollary of the principle of the principle of common but differentiated responsibilities (CBDR).

Despite the in-principle agreement about the need to channel climate finance to developing countries, there remain considerable ambiguities on the scope and definition of ‘climate finance’. Some have used extremely broad, functional definitions, which include all finance flows for activities that aim to mitigate or adapt to the adverse effects of climate change. These broad definitions ignore the context, source and recipient of the finance flows and are not very useful in international negotiations on the appropriate quantum and source of climate finance towards developing countries. In the context of international climate action, there needs to be clarity on issues like how much climate finance should be channeled to developing countries by developed countries, which finance flows count towards climate finance goals, which countries have a higher claim on climate finance, what forms climate finance should take.

This essay briefly encapsulates the present state of the international negotiations around climate finance negotiations, highlighting the unresolved issues, and the direction in which the ongoing negotiations need to go to achieve their goals.

Multiple bases and justification for Climate Finance

These questions depend on what is seen as the purpose and basis of climate finance. This debate closely parallels the broader debate about climate justice. There are many potential theoretical justifications for climate finance. Firstly, it could be seen as a measure of distributive justice that seeks to account for global inequalities in carbon emissions, adverse effects of climate change, and lopsided global development levels. It could be seen as an extension of the polluter pays principle, fixing responsibility on those countries that have historically contributed the most towards carbon emissions. Climate Finance can also be seen as a form of compensation towards developing countries, particularly formerly colonised states of the Global South, who suffered from economic misgovernance and impoverishment during colonial period and who have the right to development. For some others, it is a means of allocation of responsibility to combat climate change based on present economic capabilities, and present emissions.

Secondly, climate finance is also seen by some economists as a market-based economic tool, to create proper incentives to channelise funds into ‘green sectors’ like renewable energy, adaptation etc. which can promote ‘green transition’ of the economy’. For many countries, particularly low-lying and island states, climate finance, particularly those owed on basis of ‘loss and damage’ is a meagre compensation for their continued violation of human rights due to the adverse effects of climate change. While there may be overlaps between each of these conceptions of climate finance, in practice, they may lead to quite different outcomes. For instance, a reparative notion of climate finance would likely focus on ‘climate reparations’ paid by former coloniser states to their former colonies. This would prioritise former colonies as the most urgent recipients of climate finance and the former colonial states as the primary source. In contrast, a model based on present capabilities and a market-oriented approach would focus on perpetuating a neoliberal globalised order that incentivises private investments to benefit from the green transition in developing economies. It would include the public and private sources of both developed and developing countries as the source of climate finance. The recipients would mostly be decided by the markets, with some nudges from global financial institutions like the World Bank.   

A major reason why the negotiations on climate finance are so contentious is because there are fundamental disagreements between different countries about which of these should be the primary principle guiding climate finance. Many developing countries have focused on the historical aspect and reparative aspects of climate finance, unwilling to shackle their developmental aspirations by agreeing to any binding climate actions and seeking to be compensated financially by developed states for the voluntary climate action that they undertake. Many developed countries have instead argued for climate finance to be guided by a mix of present economic capabilities, present absolute contribution to carbon emissions and market-based mechanisms. Some developing countries, particularly emerging market economies like the BRICS countries, have pushed for a distributive justice model that focuses on per capita carbon emissions rather than absolute emissions; they have simultaneously sought to benefit from market-led climate finance mechanisms. Like in the case of most disagreements within climate negotiations, these differences were initially papered over by using deliberately broad and ambiguous language on climate finance (both in UNFCCC and the Paris Agreement), avoiding precise definitions and postposing negotiations over specific details. Therefore, while over the last almost two and half decades, some first principles like ‘new and additional’ financing, preventing ‘double-counting’ and balancing mitigation and adaptation have emerged in the area of climate finance, it remains a rather nascent area of climate cooperation. 

Recent developments in climate finance negotiations

The negotiations on climate finance have gone through several phases of intense negotiations followed by periods of relative lull. As I have discussed elsewhere, the COPs following the UNFCCC did not see much progress in terms of setting any climate finance targets. While several funds like the Special Climate Change Fund (SCCF), the Least Developed Countries Fund (LDCF), and the Adaptation Fund were set up, they were not backed by any binding commitments and have been plagued by low levels of contribution by developed countries and a lack of predictable flows.

The Copenhagen Accord (adopted by 29 countries) at the COP15 (2009) announced a specific (non-binding) numerical target of raising a minimum of US$ 100 billion annually as climate finance for developing countries by 2020. The Copenhagen Accord has often been highlighted as a turning point in climate negotiations, which departed from the existing model of differentiation between developed and developing countries, thus weakening CBDR, while promoting voluntary ‘self-differentiation’ among different countries, including pledges (non-binding) for climate finance by developed countries. Subsequently, in negotiating the Paris Agreement, the developing countries were presented with a Sophie’s choice—either stick to the previous model of stringent, binding emission targets on developed countries (which were proving to be ineffective due to the withdrawal of major countries like the US and would lead to low participation) or accept a voluntarist, self-differentiation model, which they were told would lead to genuine transfer of climate finance, technology transfer etc. from the developed countries. The compromise in the Paris Agreement chose the latter course of action, which led to the agreement having very few ‘obligations of result’, but with the expectation that there would be a groundswell of climate action from all parties involved, including a major increase in climate finance. To avoid deadlocks over climate finance, the Paris Agreement took a wide approach, which encompassed different mechanisms like market-based mechanisms, private investments, and climate finance through public funds. With an aim to increase the much needed climate financing, the COP in 2015 ratified the $100 billion per year of climate finance by 2020 goal, noted that the needs and priorities of the developing countries must be taken into account and operationalised the Green Climate Fund (GCF) as the primary climate finance fund.

However, as we near the global stocktake (2025), after almost a decade of the coming into force of the Paris Agreement, it is increasingly clear that the hopes relating to climate finance have not materialised. Although as per OECD, the $100 billion each year promise has been fulfilled as of 2022, its accounting methodology has been questioned, in particular treating loans and repurposing official aid money as climate finance has been controversial.

In this context, since COP 26 at Glasgow (2021), countries have started to negotiate the climate finance arrangements for post-2025 period. At the Glasgow COP, the pledge of $100 billion of climate finance towards developing countries was reiterated, and some specific pledges were made to the Adaptation Fund and the Least Developed Countries Fund. The parties also agreed to earmark a portion of the proceeds from the market-based mechanisms under the Paris Agreement towards adaptation in those developing countries which are particularly vulnerable to climate change.

The next COP at Sharm El Sheikh (2022) created a “Loss and Damage Fund” (L&D Fund), to compensate the loss and damage (referring to the irreversible harm caused by anthropogenic climate change which could not be mitigated or adapted to). Loss and Damage, which has resulted from the global failure in preventing anthropogenic climate change, is increasingly causing severe financial and material loss to developing countries, as much as $400 billion annually, as per some estimates. This has led to calls for vulnerable developing countries (like the Alliance of Small Island States (AOSIS), and the V20 Group, a group of 68 developing countries that are most vulnerable to the adverse effects of climate change) for provision of separate loss and damage finance, over and above the existing climate finance goals (which did not account for loss and damage). The L&D Fund was a longstanding demand of many developing countries, to institutionalise Loss and Damage financing beyond the voluntary mechanism of Warsaw International Mechanism for Loss and Damage (WIM) established in 2013. The Paris Agreement did not institutionalise the WIM into a permanent body nor created any liability mechanism for loss and damage, which was unacceptable to many developed countries. The L&D Fund was supposed to financially materialise the promise of loss and damage included in the Paris Agreement. However, there remain many ambiguities regarding the L&D financing.

It was finally operationalised in the COP28 in Dubai (2023). However, the L&D Fund remains a continuation of the voluntary approach (it ‘invites’ developed countries to take the lead, without any obligation or consequences if they do not), without any liability mechanism, with fears that it will face similar issues of inconsistent and low-level funding as the LDCF and GCF and will be ineffective. The voluntary financing pledged so far, to the tune of $700 million, is a drop in the ocean compared to the loss and damage already suffered. The decision to ‘temporarily’ house the L&D Fund at the World Bank, which is seen as a Global North-dominated institution, also led to a lot of criticism. Further, there is still no consensus on issues like which countries would be eligible to receive compensation, how it will be calculated, what its performance parameters would be, etc.

All of the above issues have at times generated considerable skepticism about the possibility of genuine climate finance, in any significant capacity being channelled towards developing countries. However, this does not eliminate the need to continue to engage in international negotiations on this subject, and find ways to increase climate finance ambition, increase the goals and find ways to enforce these goals, through means like climate litigation.

Towards a new Climate Finance goal

Meanwhile, the fifth biennial high-level ministerial dialogue on climate finance, held at the sidelines of the COP28, highlighted the gaps with respect to achieving the $100 billion pledge, even when countries are beginning to negotiate a “new collective quantified goal” on climate finance. It also noted that while there are positive trends about increased climate ambition, climate finance is still misaligned with the needs of developing countries, with serious concerns being raised about loan-based climate finance adding to the debt burden of many developing countries and the need to strike a balance between mitigation and adaptation. The continued difficulty in coming to any agreement on the details of climate finance issues was illustrated in the recent meeting (June 2024) of subsidiary bodies of the UNFCCC at Bonn. Many issues, in context of negotiating a new climate finance goal, were raised, like determining recipient base on basis of vulnerability, macroeconomic circumstances, and regional equity, burden sharing among developed countries, enhancing transparency and accountability, which could not be resolved.

As countries negotiate to come up with a “new collective quantified goal” on climate finance by the next COP at Baku (2024), it is worth noting the large gaps in climate finance architecture that exist even after a decade since the Paris Agreement. The climate finance funds, including the GCF, the LDCF and the Adaptation Fund, continue to be voluntary-donation driven, and have a relatively small corpus (GCF, the largest climate finance fund, has a portfolio of $13.5 billion, with the ‘fundraisers’ being relatively underwhelming). It has been observed that while multilateral institutions (including the climate funds and the multilateral development banks) have played a catalytic role, most of the concessional climate finance has been through bilateral means.

Market-based mechanisms like climate bonds, carbon credits and ‘green investments’ have also increased, led by market demand for renewable technologies. This has many implications. First, climate finance on bilateral basis is often determined by diplomatic factors rather than factors like climate vulnerability, and the need of the developing countries (which are relevant in Climate Funds). Second, it reduces the developing countries’ bargaining power, which lose the support of a cohort (like AOSIS or G77) when negotiating on an individual basis, sometimes turning it into a zero-sum game between the developing countries themselves. It may also come with political conditions attached. Third, the prevalence of market-based climate finance is only likely to be beneficial to countries that have the requisite market leverage, like emerging economies. In some countries, like the case of  cobalt mining in Congo, investments into ‘green sectors’ may exacerbate human rights violations.

Therefore, in the present and upcoming negotiations on climate finance, there needs to be increased focus on the ‘needs’ of the developing countries—climate finance should be driven by developing countries’ self-determined priorities (whether adaptation or mitigation). Greater transparency and consistent and predictable finance flows by developed countries are also an urgent need. This requires greater engagement of the developed countries with the multilateral climate finance mechanisms that have been created following years of intense negotiations. While there are hopes that these climate funds will play a much greater role in the international climate finance landscape, particularly in making climate finance fairer and more easily accessible, the track record leads to scepticism. Whether these hopes will materialise or will it again prove to be an unfulfilled promise, will be apparent in the next few years.

*Rahul Mohanty is an Assistant Professor at O.P. Jindal Global University, India, specialising in the field of public international law. He teaches courses on environmental law, international courts and dispute settlement, and international financial institutions. He is also a fellow of the Centre for International Law Studies at the University and an Assistant Editor of the Jindal Global Law. He is also a convener of the University’s Research Cluster on the Third World Approaches to International Law (TWAIL). His current research interests include third-world approaches to international law, international organizations, international courts, and climate change.

He is a member of the Asian Society of International Law, and the World Commission on Environmental Law, set up by the International Union on Conservation of Nature (IUCN). He has previously taught full-time at the NALSAR University of Law and as a visiting faculty at the National Law School of India University (NLSIU). He has previously taught courses such as Public International Law, International Law and Armed Conflicts, International Climate Change Law, and Theoretical Approaches to International Law to both undergraduate and postgraduate students.