Unpacking Climate Finance at COP28 and Beyond: Insights from New Data on Climate Negotiations and National Climate Funds

Colleton, Barbados. Photo by Scot Goodhart via Unsplash.

By Rishikesh Ram Bhandary

As delegates gather in Dubai for the 28th United Nations Climate Change Conference (COP28), climate finance is expected to dominate the agenda. While the $100 billion goal is likely to be met this year (though, at least two years behind schedule), climate finance needs remain tremendous. Estimates show that emerging markets and developing economies will have to mobilize $2.4 trillion annually by 2030 to achieve development and climate change goals.

Updates to two data interactives maintained by the Boston University Global Development Policy Center – the Climate Negotiations Database and National Climate Funds (NCF) Tracker – seek to provide critical context to the issue of climate finance ahead of COP28. The Climate Negotiations Database categorizes negotiation agenda items starting at the first UN Conference of Parties in 1995. The NCF Tracker presents an inventory of 154 NCFs across 99 countries and tracks their major attributes, including scope, legal form, host country and more. It seeks to provide more transparency and better understanding of the role these national-level funding mechanisms play in the climate finance landscape.

The Climate Negotiations Database, now updated to include the COP26 Glasgow and COP27 Sharm el-Sheikh agendas, reveals that while finance has been a consistent issue in international climate change negotiations since 1995, a significant gap persists in terms of actually delivering that finance. The NCF Tracker reflects growing interest in NCFs, but a key challenge for governments and stakeholders will be to adequately empower these NCFs so that they can play an effective role in mobilizing domestic and external resources. Drawing on this data, it is clear that there are three trends to watch on climate finance at COP28: the growing adaptation finance gap, underwhelming private finance mobilization and the impacts of debt distress on climate ambition and action.

Climate negotiations prioritize finance but progress lags

The updated Climate Negotiations Database shows that mitigation was not officially on the COP26 agenda in 2021, but in Sharm el-Sheikh mitigation took center stage with the first Global Stocktake under the Paris Agreement, which will officially report at COP28 how country actions are stacking up against needed levels of ambition.

Yet, climate finance remains well below need in meeting nationally determined contributions (NDCs). This gap is compounded by the fact that even newly updated NDCs do not reflect the level of ambition required to remain below 1.5C. In response, at COP26, governments decided to set up a dedicated work program to scale up ambition by urging governments to revisit their climate pledges as often as possible rather than once every five years as originally envisioned in the Paris Agreement.

In Dubai, country negotiators will have three main goals: furthering discussion on a climate finance new target, or “the new collective quantified goal,” which will be decided in 2024; reviewing progress made in achieving the $100 billion goal; and providing guidance to the climate funds like the Green Climate Fund (GCF), and beyond. These conversations will be informed by the concluding Global Stocktake.

Understanding the current landscape of NCFs

At the country level, many countries have established NCFs as a part of domestic resource mobilization efforts, of which $1.4 trillion is needed. The latest update to the NCF Tracker finds that there are now 154 climate funds across 99 countries.

Over the 2022-2023 period, seven new funds were established. These include the Blue Green Bank of Barbados, the Barbados Environmental Sustainability Fund, Belize Fund for a Sustainable Future, the Egypt Climate Resilience Fund, the Niger National Fund for the Management of Oasis Ecosystems, Papua New Guinea Biodiversity and Climate Fund, and the Saudi Arabia Sustainability Fund. The NCF Tracker also features funds that were originally established as conservation trusts or forestry funds but have gradually expanded their scope of activities to include climate change.

The GCF, as the largest multilateral climate fund, approved an allocation to help capitalize the newly established Blue Green Bank in Barbados. The GCF was established as a multilateral fund that supports climate change programs and projects around the world. It is backed by financial contributions from governments and is undergoing its second replenishment exercise with the goal of raising $50 billion by 2030.

The Blue Green Bank will help the Barbadian government reach its target to achieve 100 percent renewable energy by 2030. The Blue Green Bank benefited from earlier GCF support through the project preparation facility that helps GCF implementation partners develop funding proposals. This is one of the few examples of how the GCF, by helping to capitalize a national financing vehicle, is directly helping to support domestic efforts.

In making its case for GCF funding, the Barbados proposal highlights two reasons why development banks should reform their lending policies. First, climate vulnerable countries need access to concessional finance to build climate resilience. Barbados, however, does not qualify for concessional finance through the World Bank. The World Bank Evolution Roadmap does recognize the need for concessionality to be broadened to include vulnerability; however, the World Bank has not yet articulated a full proposal on how vulnerability will be used in addition to income-based indicators to determine eligibility. Second, Barbados has limited fiscal space, and it is implementing an IMF program to achieve fiscal and financial sustainability. Therefore, taking on additional debt to finance climate change is a tough proposition. To that end, multilateral development banks (MDBs) should include climate vulnerability as a criterion in their resource allocation frameworks and provide access to concessional finance to those climate vulnerable economies that breach income-based cut-offs.

Three climate finance trends to track at COP28

There are three important trends to track on climate finance during COP28. First, the adaptation finance gap is growing. Adaptation finance fell by 15 percent in 2021 whereas mitigation finance grew by 1.4 percent in 2021. With intensifying climate impacts, the adaptation finance gap has grown wider. The Adaptation Gap Report updated the finance gap estimate, reporting that developing countries need $215 billion to $387 billion a year this decade for adaptation. This revised estimate suggests that adaptation needs are 10-18 times greater than the existing flows of international public finance for adaptation. Even if countries do in fact double adaptation finance commitments, as they agreed to do in Glasgow, the resulting total will only reflect 5-10 percent of the total adaptation finance needs.

While mitigation finance is generally more considerable, research shows that renewable energy capacity growth has been heavily concentrated in Europe, the United States and Asia, especially in China. What is more, the cost of capital for renewable energy investments is twofold higher than the cost in advanced economies. Renewable energy capacity is the lowest in the poorest countries, which is also where the weighted average cost of capital for renewable energy is the highest.

Second, private finance mobilization continues be underwhelming. The International Monetary Fund’s (IMF) October 2022 Global Financial Stability Report found that multilateral development banks (MDBs) were able to only mobilize an additional $1.2 for every dollar they spent. Private finance mobilization in emerging markets is likely to be even lower. In fact, the World Bank on its own only mobilizes 80 cents from the private sector for every dollar it spends. Blended climate finance, according to the State of Blended Finance report, has been on a declining trend, sinking to $14 billion in the 2019-2020 period from $36.5 billion in 2016-2018. Since the blended finance report captures non-concessional finance, it underscores the overarching challenges facing private capital mobilization. With a higher for longer interest rate environment, private finance mobilization will continue to be difficult. In other words, the needs estimates have increased, finance flows have decreased and ambition has significantly fallen short.

Third, debt distress has a direct bearing on climate ambition and action. Sixty-nine countries need immediate debt relief. An IMF working paper estimated that just seven of 29 low-income countries had the fiscal space to meet their adaptation needs; 22 countries did not. Yet, the debt restructuring negotiations have been protracted – creditors and debtor governments have struggled to come to agreement. For example, Zambia’s debt restructuring deal took almost three years, and there are concerns that Zambia has not received meaningful debt relief from its bondholders. This macroeconomic context directly impacts not just the implementation of existing climate commitments but the appetite of countries to do more.

MDBs, by design, are poised to provide low-cost, long-term financing for climate investments. At the prodding of Group of 7 (G7) members and beyond, led by the United States, the World Bank initiated the ‘Evolution Roadmap’ process that aims to make the World Bank better equipped to help its client governments tackle challenges of the 21st century, including climate change. At the 2023 IMF/World Bank Group Annual Meetings in Marrakech, the World Bank reported on the progress it had made in formulating and implementing the Evolution Roadmap. Most notably, reforms to the World Bank’s capital adequacy framework will unlock lending amounting to $50 billion over a decade. This development is significant because MDBs have provided most of the climate finance accounted for under the $100 billion goal. Given the arithmetic laid out in the Group of 20 (G20)-commissioned Strengthening MDBs report, a capital increase will be a necessary complement to the capital adequacy framework reforms if World Bank lending is to truly reach the magnitude needed to fill the climate finance gap.

At COP28, governments will have the opportunity to reflect on these trends and take stock of the progress made over the last year. While the relatively heavy presence of finance on the agenda provides governments with the space to reflect on the financing challenge, it will not be enough. If climate change goals are to be met, leadership from the highest levels of government at COP28 must speak directly to the urgency to reform international financial institutions to better enable countries to finance their climate and development goals.


Never miss an update: Subscribe to the Global Economic Governance Newsletter