Climate finance – a game of numbers?

With only two days left of the  interim session of UN climate talks in Bonn, it appears one of the most difficult topics on the table for this year’s negotiations is about climate finance accounting. Our new report “An analysis of the climate finance reporting of the European Union”, highlights a number of challenges which must be addressed. If developed countries truly commit to assisting poor and vulnerable countries with climate finance it should not be a game of numbers which distort reality. It should be money flowing to generate climate action.

Talks about accounting, which are linked to the parallel talks about transparency of climate finance, are critical for the success of the summit in Poland in December. With no clarity on financial flows developing countries will hesitate to move forward in talks on other topics. Western countries may spin it as blocking. However, with very few new funds, there will be limited action, and with no agreed action, mitigation and adaptation targets will never be met.

So, what are the problems? The report on EU climate finance identifies four areas where there is need for improvement and agreement.

1. Funds for adaptation are missing

As documented again and again, climate finance from developed countries favour mitigation. There are good signs in the report that the EU is trying to reach a balance of funding for mitigation and adaptation. For example, the European Development Fund, the European Commission and a few EU member states, such as Ireland and Belgium, demonstrate a strong commitment by providing more than half of their support for adaptation. However, despite these good examples the overall picture is clear, only 30% of total climate finance goes to adaptation.

Developed countries are increasing their focus on loans and private finance. However, experience shows that these funds favour mitigation, which means that the balance will be even more difficult to achieve. Notably, the European Investment Bank, which offers loans, only delivered 4% of their support to adaptation in 2016.

2. Climate aid delivered as loans

Loans constitute more than 40% of climate finance, delivered by EU institutions, and for some EU member states, such as France and Spain, loans constitute the bulk of their support. Loans can play an important role, especially in so called “bankable” projects, where investments deliver a return. However, they still contradict the universal principle of “polluter pays”, as loans have to be repaid.

Some loans include a grant element, and if it is bigger than 25% of the total loan, then it can be called concessional. OECD rules stipulate that only concessional loans can be counted as development aid. However, for climate finance there is so far no such restriction. This is strange since developed countries in general argue that climate finance and ordinary development aid in any case should be the same. Consequently, only concessional loans should be eligible as climate finance, following the same practice as for development aid.

And, if we stick to the “polluter pays” principle and the ethical aspect of assistance, only the grant equivalent element of a loan should be counted. For a country like France, where loans constitute nearly all of its support, the amount which could be counted as climate finance would be cut in half.

3. Poor and vulnerable countries are left behind

The report documents how a big part of climate finance is channelled to richer developing countries. In the period 2013 to 2016 total EU support to Turkey equalled that given to all Least Developed Countries combined.  Private investments, which are receiving increasing attention, are more likely to deliver a return in emerging economies. With a bigger focus on loans and private finance, the support to these countries is likely to increase.

This development should be acknowledged and discussed. There are many countries needing support, but the poorest and most vulnerable countries face an urgent need for action. With limited possibilities to attract private investments they depend on support from developed countries. In middle income countries, like Turkey, it is easier to attract private investments and loans, which should not necessarily be reported as climate finance.

4. Funds are counted twice

One of the endless debates about climate finance, relates to the term “new and additional”. Originally it was included in the climate change convention to address a concern from developing countries, that increasing challenges related to climate change would divert funds from existing development needs to climate action. The EU acknowledges the term “new and additional” but its interpretation is different and in contradiction with the recommendations agreed by the UNFCCC Standing Committee on Finance. Furthermore, big parts of EU climate finance are reported to the UN both as development aid and climate finance.

Lack of transparency and double counting undermine trust and make progress in negotiations very difficult. When parties meet to find an agreement about accounting and transparency of climate finance, it is important that they agree on rules which ensure that agreed support delivers concrete results. Debates about climate finance should never be limited to a game of numbers. Instead the primary objective should be how to mobilise the necessary support to ensure that developing countries can deliver important adaptation and mitigation action.