As COP 29 approaches, a fragmented international climate finance system in review

The success of COP 29, to be held in Baku, Azerbaijan in November, hinges on the question of finance – climate finance, to be precise. The issue has two essential aspects: Firstly, where will the new and truly additional financing for climate action come from? And secondly, to address the long unaddressed challenge of the complexities of the international climate finance system and how to make it work.

Why is it commonly believed that the international climate finance system is deeply and gravely fragmented? Fragmentation in a traditional sense is defined as decentralization or multiplicity of processes which otherwise is a valuable development. But due to a lack of determination of multilateral climate governance, it has evolved as an epic case of fragmentation and complexity. It is constantly failing to meet the scale, improve diversity and additional funding, unclog the financial management regimes to improve access and leverage public finances for mobilizing private sector capital. As a result, climate financing gaps worryingly widening with no real signs of corresponding financial commitments to address them in an effective manner. 

Let’s take a step back and understand how we ended up in this quandary. Historically, financing has been an essential element of the international climate policy. Several principles of the Rio Declaration and the Climate Change Convention admissibly ensured that the global fight against climate change will have to be economically balanced and inclusive, specifically safeguarding the long-term economic and sustainable development objectives of developing countries. 

A breakthrough on climate finance is desperately needed at COP 29. 

- Bilal Anwar

The principle of common but differentiated responsibilities and respective capabilities (CBDR) along with an emphasis on provision of financial and technical assistance to developing countries in the climate change convention inexcusably ensures the provision of adequate financial resources to these countries for fueling their climate actions. 

In the last 20 years, international policy regimes on these crucially important provisions of international treaties took very different twists and turns. The needs and demands for financing for climate action from developing countries were not heeded other than setting up a number of new funds with indeterminate commitments for their sustainable modes of capitalization. In the absence of credible and additional commitments for new funding, each new climate finance institution added to the already complex and fragmented infrastructure creating more challenges and competition for the meagre money to reach where it was needed most. 

The international community, after having recognized that the financial mechanisms already in place were not up to the mark, launched Green Climate Fund (GCF) with a clearly chiseled mandate for disbursing $100 billion per annum neatly divided between mitigation and adaptation actions in developing countries. The Fund evolved to become a living example of an ineffective bureaucracy. The complexity of its internal and fund approving processes typically takes an average of over two years to pass through the funnel. In its entire operational history, GCF has not even come close to its USD 100 billion target.

All the while, the wrath of climate change has been spiralling in the shape of extreme weather events around the world. These events have disproportionately hurt some of the poorer and more vulnerable countries like Asia and Africa. 

Pakistan was a victim of unprecedented climate induced floods in 2022, which caused over $30 billion in damages and economic losses, and the displacement of millions of people. And still, it remained a small beneficiary of international climate finance assistance.

The large unfilled funding gaps created perfect market conditions for the multilateral development banks (MDBs) to re-label their loan and non-concessional financial instruments as climate finance, further adding to long-term macro-economic and debt challenges of developing countries. Concessional and non-concessional loans accounted for 72 percent of public climate finance (mitigation, adaptation, crosscutting) between 2016 and 2020, with grants providing only 26 percent of financing. 

A breakthrough on climate finance is desperately needed at COP 29. Not an additional fund or a new instrument with no sustainable financing arrangements or a decision to encourage the private sector to come forward. But instead, a systematic overhaul of the entire climate finance infrastructure aiming to streamline the existing processes must facilitate speedy and streamlined access to existing funds. This must happen alongside doubling concessional finance from developed countries through specialized enhanced financing facilities, including special drawing rights for vulnerable countries, leveraging public finances through guarantees and enhancing the scope of carbon markets. 

The writer is an International Climate Policy and Sustainable Development Professional and CEO of the National Disaster and Risk Management Fund.