About Time We Defined Climate Finance

Surya P. SethiDistinguished Fellow at FSR Global, Former Principal Advisor Power & Energy and Core Climate Negotiator, Government of India


Oct 19, 2023

For 28 years, the Conference of Parties (COP) has recognised that Climate Finance is the most critical element dodging negotiations under the United Nations Framework Convention on Climate Change (UNFCCC/Convention). Yet, to-date, there is no agreed definition for climate finance.   

Claims of mobilising climate finance, even by reputable development banks remain highly debatable and the paltry $100 billion/annum being promised will not even deliver 10% of the funding specifically identified under the UNFCCC as an obligation of the Annexe II developed countriesImportantly, the proposed $100 billion/annum, as being discussed, does not conform to the provisions under the UNFCCC. This opinion piece provides a definition of climate finance based on the relevant provisions of the UNFCCC and the 2015 Paris Agreement (PA).  The author hopes that the definition suggested here would, in the very least, inform climate negotiators of the relevant considerations and, at the very best, start a meaningful discussion on this elusive but essential piece of the solution to the vexed climate negotiations. 

Climate Finance Provisions Under the UNFCCC 

1. Article 4.3 of the UNFCCC clearly states that the developed countries shall provide “new and additional financial resources” to fund the: (a) agreed full costs” of meeting the developing country obligations under article 12(1); and (b) “agreed full incremental costs” of climate actions covered by article 4.1, including costs for “transfer of technology.   

Further, Article 4.3 foresees a role for the international entity/entities, tasked under Article 11 of the Convention to deliver such financial resources, to reach closure on the “agreed full incremental costs” of climate actions under Article 4.1 with the recipient developing country Finally, Article 4.3 requires that the implementation of the financial commitments” made therein must take account of the “adequacy and predictability in the flow of funds.   

Thus, taken together with Article 11, the international entity/entities, set up as the implementing agency/agencies under the Financial Mechanism of the Convention, must establish adequacy and predictability of climate finance for developing countries based on the policies, programme priorities and eligibility criterialaid down by the COP or its Standing Committee on Finance (SCF). 

    2. Article 4.7 further clarifies that: “The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.”

    3. Article 4.4 emphasizes assistance for adaptation especially for countries more vulnerable to adverse impacts of climate changeArticle 4.5 re-emphasizes technology transfer and requires support for capacity buildingArticle 4.8 expands funding to include cost of insurance and expands adverse impacts of climate change to include impacts of response measures that address climate change.  A country specific approach is emphasized in establishing the need for Climate Finance. 

    4. Finally, a number of COP decisions provide for specific commitments in regard to Climate Finance from Annex II country Parties Multiple COP’s recognized that Climate Finance is indeed the critical element of the Common but Differentiated Responsibilities & Respective Capabilities (CBDR & RC) principal – the bed rock of the UNFCCC. 

    5. It must be recognized that agreed full incremental cost” of climate actions must include the cost of raising climate finance for those actionsNot doing so will take away from the overriding priority, namely “economic and social development and poverty eradication,” established under article 4.7 for nonAnnexII developing countries. Maximising grants and concessional funding can minimize these incremental costs of raising the “agreed full incremental costs” for funding climate actions by non-Annex II developing countries. 

    What Does the Paris Agreement (PA) Say 

    6. Article 2.1 of the PA clearly states that it is to enhance the implementation of the Convention, including its objective, while Article 2.2 states that the PA “will be implemented to reflect equity and the principle of CBDR-RC. Thus, clearly the PA does not supersede the duly ratified UNFCCC.  

    7. Article 9.1 of the PA states that “Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention.”

    8. Article 9.3 of the PA also provides that developed country Parties should continue to take the lead in mobilising Climate Finance from a wide variety of sources, instruments and channels, noting the significant role of public funds. 

    9. Article 9.8 of the PA provides that the Financial Mechanism of the Convention, including its operating entities, shall serve as the Financial Mechanism of the PA.

    10. Article 13.14 in relation to the Enhanced Transparency Framework under the PA provides that “support shall be provided to developing countries…” for its implementation.  

    Definition of Climate Finance: 

    Given the above background, Climate Finance can be defined as follows: 

    Climate Finance is the “new and additional” funding provided by Annex II/ developed countries to non-Annex-II/developing countries to meet:  

    (a) the “agreed full costs” of the obligations of non-Annex-II/developing countries under article 12.1 of the Convention as well as article 13.14 of the PA; and  

    (b) the “agreed full incremental costs”, of meeting the obligations of non-Annex-II/ developing countries as detailed in article 4.1 of the Convention and further enunciated under nationally determined contributions under articles 3 and 9.1 of the PA. More specifically, such “agreed full incremental costs” relate to defined actions/projects/programs undertaken or outlays proposed/incurred, by non-Annex-II/developing countries, towards mitigation, adaptation, technology transfer, capacity building, addressing adverse impacts or damage caused by climate change, loss incurred as a result of response measures that address climate change, and any transition to defined low emission pathway/(s) and climate resilient economic and social development.  Such “agreed full incremental costs” must also include cost of insurance and the cost of raising and servicing the funds provided by Annex-II/developing countries.   

    Maximising the share of grant funds and concessional funds in climate finance and also the free transfer of technology and capacity will significantly lower the “agreed full incremental costs” to be made available to Annexe-II/developing countries. 

    It is further clarified that the quantum of climate finance, as defined above, must be determined under a country driven process whereby the needs of each non-Annex-II/developing country is assessed, on the basis of individual country circumstances, by the implementing international entity/entities established under the Financial Mechanism of the Convention.  Further, the climate finance needs of every recipient country must conform with the principles outlined in Article 4.7 of the Convention. 

    Such an assessment of “agreed full incremental costs” based on individual country circumstances, must reflect the policies, programme priorities and eligibility criteria established by the COP or the SCF from time-to-time. 

    Specialised accredited intermediaries, paid by the implementing international entity/entities established under the Financial Mechanism of the Convention and the PA, must assist countries that do not have the capacity to assess their Climate Finance needs. 

    Finally, the adequacy and the predictability of funds provided under climate finance as also their deployment and outcome must also be assessed by the implementing international entity/entities established under the Financial Mechanism of the Convention and the PA.  

    The upcoming COP 28 taking place from 30 November to 12 December 2023 in Dubai, United Arab Emirates (UAE), should consider defining ‘Climate Finance’ which will help streamline the long pending necessary actions towards ushering relevant funding and the corresponding actions in meeting the climate goals.  

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