Why Azerbaijan’s new climate fund may not be enough to plug finance gap | Explained News

The agreement is supposed to include a decision on the amount of money that developed countries must be asked to raise in the post-2025 period to help developing countries fight climate change. The rich and industrialised countries are currently under an obligation to mobilise at least $100 billion annually for developing countries. The Paris Agreement, however, mandates that this amount must be increased after 2025 and every five years thereafter.

The new fund proposed by Azerbaijan, though well-intentioned, is unlikely to make a substantial difference to the availability of climate finance for developing countries.

An agreement on finance

Negotiations on the agreement have been ongoing for months. The idea is not to just replace the $100 billion figure with a higher amount but to finalise a more comprehensive agreement that would bring clarity and transparency to financial flows for climate action.

Currently, there are strong differences over even definitions of climate finance. Bhupender Yadav, India’s Union Minister for Environment, Forest and Climate Change, said last week that to achieve the goal of tackling climate change, an exact definition of climate finance — and what it should entail — must be arrived at.

Developing countries often complain of double-counting and innovative accounting, and say that the actual amount of money flowing in for climate action is significantly lower than the claims made by developed countries.

The other complaint relates to the neglect of adaptation activities. Most of the climate finance flows are directed at mitigation projects, the ones that lead to emissions reductions. This is because mitigation brings global dividends. Any emission reduction anywhere in the world benefits the entire planet.

On the other hand, adaptation has local benefits. Donor countries are less inclined to invest in projects that only benefit the recipients. Developing countries have been demanding that adaptation should receive at least 50% of climate finance, much more than the less than 20% that has gone into it so far. Even this amount has reduced in absolute terms in the last couple of years, according to a 2023 UN report. The finance agreement is supposed to ensure a more healthy balance.

The most important element of the finance agreement, however, is a decision on the new quantum of climate finance, over and above the $100 billion figure. Several assessments have shown that the money required for climate action now runs into trillions of dollars every year. The revised amount — known as the New Cumulative Quantitative Goal on finance (NCQG) — must reflect this changed reality.

Several developing countries, including India, have made formal proposals on the NCQG amount. The figures are mostly between $1 trillion and $1.5 trillion annually — about 1.5% of the combined GDP of the OECD countries, most of which are part of the group that are obligated to provide climate finance. But countries, which failed to meet even the $100 billion targets can hardly be expected to agree to such a large amount. As a result, little progress has been made on working out the contours of the finance agreement.

Expanding the donor base

Many countries which were in the low- or middle-income group when the responsibility for providing climate finance was assigned through provisions of the UN Framework Convention on Climate Change (UNFCCC) in the early 1990s, have now emerged as large economies with high incomes. Developed countries argue these countries too must be asked to contribute. For instance, China, today the world’s second-largest economy, South Korea, and the oil-rich Gulf nations such as Saudi Arabia and Qatar do not have any financing obligations under the UNFCCC.

The demand for expanding the donor base is not without merit, but it is a separate discussion. Moreover, the developed countries have never met their obligations, either relating to emissions reductions or finance. They did not meet their $100 billion commitments any year — a figure they had proposed without any discussion or needs assessment. The argument for expanding the donor base is, therefore, used mainly to continue to evade responsibilities under the international climate framework.

Azerbaijan’s fund

Azerbaijan’s proposed fund is supposed to be financed by oil and gas producing countries, and corporations, but in a voluntary manner. This has raised questions over the amount of money it can attract as even funds to which countries are obligated to contribute have remained undercapitalised. For instance, the Loss and Damage Fund — created at COP27 in Egypt, in 2022, after years of negotiation — has so far received pledges of just $600-700 million.

Azerbaijan’s fund, even if created, would not have the same status. It has not come through negotiations but at the initiative of a host country. Primarily, it is an effort towards making the COP outcomes more meaty, and leaving a legacy, much like similar initiatives by previous COP presidencies in the past.