Despite timid progress, climate finance discussions are just starting after COP26 came to an end. Despite pushing for an increase in financial aid for their green transition, developing countries —particularly in Africa— left COP26 with some of the same problems.
On the African continent, grants for projects to reduce carbon emissions have been scarce, with most of the funds coming from private sources, said Global Finance Practice Leader at WWF, Margaret Kuhlow.
“In countries where credit rating is not high, indebtedness is high and there are high levels of poverty, it’s very hard to get purely financial interest in investment. Frequently, these countries need a risk mitigation measure to encourage financial institutions to come in,” Kuhlow said.
Developing countries committed to ambitious climate targets expect ambitious finance, said Dr Linus Mofor, a Senior Environmental Affairs Officer with the United Nations Economic Commission for Africa (UNECA). However, this has not happened.
“African countries have to think beyond $100 billion,” Dr Mofor said. “If we continue to depend on climate financing alone and it does not come, the clock is ticking! Developed countries need to show trust and credibility.”
Developed countries previously promised $100 billion per year from 2009 to 2020 to cushion the costs of adapting and mitigating the climate crisis in developing countries.
However, rich nations have fallen short. So far they have repeatedly missed the target, and do not expect to meet it until 2023, according to the Organization for Economic Cooperation and Development (OECD). In 2019, they raised $80 billion in climate finance, mostly through loans.
To be better prepared for the climate crisis and decarbonise their economies, India and the African continent called for an increase in finance at COP26, stating the need for $1.3 trillion a year from 2025. This proposal, however, was not adopted in the final text.
Instead, developed countries committed to fulfilling the “beyond” the $100 billion per year by 2025 in the Glasgow Climate Pact. They also pledged to double finance for adaptation by 2022.
As the financial discussion remains open for further climate negotiations, blended finance could be a solution for African nations seeking to meet their climate action targets, Kuhlow said. This type of finance instrument would involve both private and public funding.
For example, under this scheme, countries would seek grant funding to kick off a renewable energy project. Once the project starts to show promise, private funding can be sought to further the project, Kuhlow explained.
Due to the inadequate or complete lack of infrastructure to process such funding in developing countries, multilateral banks play an important role in managing these funds, acting as a sort of intermediary, she said.
As an example, in the Southern Africa region, the Development Bank of Southern Africa (DBSA) is a crucial player in ensuring that countries are able to meet their climate goals by investing in initiatives aimed at adaptation and mitigation.
South Africa’s efforts to lower emissions and transition to cleaner energy have been supported by the DBSA, with the bank playing an instrumental role in the country’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
This programme was also supported by Power Africa, a USAID project and an example of blended financing.
But South Africa is unique on the African continent due to its middle-income country status, which many countries in Africa do not achieve.
This can make it difficult to secure sources of blended finance in order to meet ambitious climate action goals, making climate funding even more pivotal, the finance expert said.
Mofor, of the UNECA, added that developing countries have been forced to think differently, since the $100 billion as their share of climate finance was no longer enough.
Between 2014 and 2018, rich nations provided $5.5 billion per year for adaptation projects in Africa, according to data from the Organization for Economic Cooperation and Development (OECD). This is equivalent to $5 per person, per year, an amount split among 54 nations.
Mozambique, Zimbabwe and Malawi ranked first, second and fifth, respectively, in Germanwatch’s Global Climate Risk Index 2021. Yet these countries rank 32nd, 108th and 75th in terms of climate finance received.
Dr Mofor said developing countries had to explore alternatives, such as partnerships with rich nations, in order to lower the risk of private sector investment.
One such example is South Africa’s partnership, announced at COP26, with the United Kingdom, United States, European Union, France and Germany, in order to fund the country’s just transition to renewable energy sources and away from its 80 per cent reliance on coal-powered energy.
Updating Nationally Determined Contributions (NDCs) as a means of developing bankable projects (projects that private institutions can invest in) is also a way of encouraging the private sector to invest in developing countries, the climate finance expert said.
“African countries can look at their NDCs and revise them so that they include more bankable projects. If they are more bankable, this means they will attract money from the private sector so countries don’t have to use funds from the public sector,” Dr Mofor said.
During COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) — composed of 450 financial institutions and led by former Governor of the Bank of England Mark Carney — announced an additional $130 trillion for green projects in developing countries.
The banks, which own about 40 per cent of the world’s financial assets, pledged the funds for countries to meet their net zero targets by 2050. However, this funding excludes major issues for emerging economies, such as adaptation and loss and damage.
It remains unclear who these funds are targeting, who is prioritized to receive them or how the funding will be allocated. It is also unclear whether this private funding will be counted as part of the rich nations’ commitment of $100 billion per year.
Covid-19 saw developing countries mobilise almost $20 trillion to tackle the pandemic, according to the OECD, highlighting that developing countries are indeed able to meet demands and deliver where necessary.
A coalition of more than 40 countries recently announced a coal power phase-out at COP26, a decision backed by $20 billion in funding. Phasing out coal power is one of the key actions to keep the world on track for a 1.5°C warming scenario.
However, an International Energy Agency report said the world will need around $4 trillion in investments by 2030 to reach that goal.