This Thursday (30 November) is the kickoff of the planet’s most-critical climate assembly in Dubai. It will last until mid-December, and the success of this year’s summit will hinge on whether countries can agree on phasing-out fossil fuels and how to help low-income countries pay for it all.
Hosted by the United Arab Emirates (UAE) — one of the world’s top oil-producers — many are sceptical about what can actually be achieved.
And doubts deepened this week when leaked briefing documents exposed the president of the UN COP28 climate summit, Sultan Ahmed Al-Jaber, also the CEO of UAE’s national oil company Adnoc, plans to talk about fossil fuel deals with 15 nations.
The G7 of wealthy countries and the EU have called on all economies to strengthen their 2030 climate plans. The EU is pushing for a phase-out of ‘unabated’ fossil fuels and a peak in fossil fuel consumption this decade.
However, without significant new financial commitments, low-income countries may not be willing to subscribe to new climate goals.
“We need a transformation of the financial system, not reform,” Barbados prime minister Mia Amor Mottley told wealthy country delegates earlier this year.
To make sense of the complex jumble of demands, stated commitments and financial gaps, here is a breakdown of the most crucial discussions:
Loss and damage fund
One major issue will be the so-called ‘loss and damage fund’ — a long-held wish from low-income countries.
The failure of last year’s climate summit in Egypt was prevented at the last minute with the agreement of a fund for Loss and Damage. How it will be operationalised will be decided in the coming days.
But the expected initial size is only $500m [€455m], leaving many developing countries unhappy. High-income countries are only “urged” to become contributors.
No hard commitments have been made in the past year. The EU has promised a “substantial” contribution to the fund, although it is still unclear how much.
The World Bank will host the fund, to the dismay of recipient countries who argue the bank is dominated by the US, which has the most voting power, followed by Japan, China, and EU countries.
To deal with this issue, World Bank boss Ajay Banga said last week he was “mindful of the need to include a good representation” of the Group of 77 developing nations on the fund’s board.
Multilateral development institutions like the World Bank or the European Bank for Reconstruction and Development could also assist low-income countries differently by integrating disaster clauses into their loans.
These would automatically halt debt repayment for two years, freeing up some of the cash needed to deal with environmental disasters such as floods, hurricanes or pandemics.
This is needed because the destructive effects of climate change amplify the chronic lack of money in low-income countries. The 2022 flood in Pakistan caused $30bn [€27bn] in damages — exceeding its total annual budget — but it has to spend 50 percent of its budget on debt.
And 60 percent of low-income countries are at similar risk of debt distress, leaving minimal room for green investment.
Recent research revealed that between 2019 and 2021, 43 percent of debt-distressed nations paid more debt payments to foreign lenders than they received in climate finance between 2019 and 2021.
‘From billions to trillions’
An even more contentious issue is the gap between committed climate finance and the sums delivered by wealthy countries.
In 2009, high-income countries promised to invest $100bn [€90bn] in climate finance annually between 2020 and 2025.
The OECD hinted this was met in 2022 — two years after the deadline — but no public data is available to confirm this.
Despite efforts, since 2013 countries have not been able to agree on a definition of ‘climate finance’. “This is the wild, wild west of finance. Essentially, whatever [providers] call climate finance is climate finance.” Mark Joven, the Philippines’ finance undersecretary representing the country at the UN climate talks, told Reuters in June.
This is confirmed by data published by the ONE Campaign that show two-thirds of the commitments reported by the OECD are not disbursed or have little to do with climate. Japan for example reported investments in a coal mine as climate finance.
The One Campaign found a financial shortfall of $343bn between 2013 and 2021.
Amid this confusion, the G20 has called for ‘an ambitious, transparent and trackable’ climate finance goal in 2024 from a “floor” of at least $100bn.
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However, new reporting standards will likely only be agreed on at next year’s summit. In any case, the figure now considered needs to be higher for the beneficiaries.
According to the Sustainable Finance Lab (SFL), a Dutch academic think tank, “COP28 needs to acknowledge that the discussion about climate finance for emerging and developing countries should be in the trillions, not billions.”
It is estimated that the climate finance gap could amount to €3.5 trillion in 2022 alone.
Special drawing rights
One example of an idea that has this scale floated by the prime minister of Barbados, Mia Mottley, last year was to establish a $500bn [€458bn] trust for low-interest loans, paid for by rechanneling the International Monetary Fund’s (IMF) mostly unused reserve assets — the so-called Special Drawing Rights (SDRs).
SDRs are a type of reserve asset issued by the IMF to help countries weather financial crises without adding to debt burdens. Several countries in 2021 pledged to allow €90bn of these funds to be rechannelled to low-income countries. So far, less than one billion dollars have been disbursed through the IMF’s Resilience and Sustainability Trust.
But there is much political momentum to try and make this work during this year’s negotiations. In August, the IMF announced 29 members had agreed to go along in the renewed effort. On paper, this could provide an additional €50bn in loans through its Poverty Reduction and Growth Trust and €37bn through its Resilience and Sustainability Trust.
These funds can be used as collateral for new loans at a ratio from one to four. With €375bn in SDRs still sitting unused, this scheme could amount to the trillion-dollar level low-income countries need to ignite the green energy transition.
There is a snag, however. The European Central Bank has objected to the plan because it says it constitutes monetary financing — direct transfer of money from a central bank for a government to spend — which is restricted under EU law.
But a crack team that includes the Rockefeller Foundation and the African Development Bank is trying to convince some countries, including Australia, Norway and the UAE, that are not beholden to the ECB’s legal interpretation to allow for the recycling of their SDRs and set a precedent for others to follow.
A global carbon tax
African leaders have proposed a global carbon tax where major polluters pay more to help developing countries finance the rollout of green energy systems and prepare for the damaging effects of climate change following a three-day summit in Kenya in September.
The Nairobi Declaration that was signed at the summit in Kenya will be used by African leaders as a negotiating document at COP28 and calls for a global carbon price on fossil fuel trade, shipping and aviation, as well as a global financial transaction tax.
A recent Climate Action Network (CAN) report estimated that a fossil-fuel extraction levy could raise $210bn [€191bn] a year.
The IMF has previously said a global carbon price would be among the fastest and most effective ways to cut carbon dioxide emissions worldwide.
French president Emmanuel Macron and Kenya’s William Ruto spearhead the effort in Dubai and have convinced 40 countries to sign up. But the idea of a global carbon tax has struggled to gain traction among larger countries, including the United States and Brazil.
Muddying the debate is Europe’s Carbon border levy that will come into force in 2027 and will be applied on carbon heavy imports. The effects on countries exporting to the EU will be very uneven.
South Africa and India, with the discreet support of the United States, are challenging the new tax at the World Trade Organization arguing that it constitutes a discriminatory trade barrier.
Debt swaps for nature
During the conference, France and Kenya are expected to launch a task force on innovative sources of financing, including so-called debt-for-climate or debt-for-nature swaps.
In these swaps, the creditor country either forgives some of the existing debt or offers new debt with better terms. The debtor country then commits to financing local development projects using its own currency.
Climate-vulnerable and heavily-indebted countries such as Barbados and Seychelles have been the mechanism’s keenest adopters.
But a group of 31 NGOs, echoed by researchers and even some banks, including Barclays, have warned that these swaps which have been around in some form for decades, are often badly scrutinised, are prone to corruption and could facilitate greenwashing.