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September 22, 2022

Climate finance gap worse than feared, says research

Not only have developed countries missed their COP15 target, a new study shows climate finance is still patchy and reporting inaccurate.

It is no secret that richer countries have failed to stump up the cash to help poorer nations adapt to and mitigate climate change. New research, however, suggests the funding gap is even worse than previously suspected.

During the COP15 international climate negotiations in Copenhagen in 2009, developed countries agreed to mobilise $100bn a year in climate finance for developing nations by 2020. This target has not been reached. Last year, the OECD said climate finance had reached $79.6bn in 2019, up 2 per cent from $78.3bn in 2018. 

“We might be even further off than we think – at least for the bilateral part that we analysed, which is the largest chunk,” warns Florian Egli, senior researcher at ETH Zurich, and one of the authors of the research published today in a report titled ‘Consistent and replicable estimation of bilateral climate finance’. He and his colleagues used an artificial intelligence (AI) tool to determine whether the bilateral international climate finance declared by counties around the world between 2000 and 2019 has fully gone to financing climate change adaptation and mitigation projects.

Climate finance is a complicated business. Funds to help countries build out renewable energy or make infrastructure resilient in the face of increasingly extreme storm surges or flooding can come though many channels: bilateral, multilateral or private finance. Monitoring this flow of cash isn’t easy, as there is no agreed definition of what constitutes climate finance or consistent accounting rules.

Over and underestimates

The research shows mixed results, with countries under and over-reporting the amount of money they have sent abroad to help reduce emissions and increase resilience. Under the Rio markers – the standard set-up under the aegis of the UN in 1998 for reporting climate finance – projects are classified as having a principal or significant focus on climate change. For the period following the Paris Agreement (2016-19), countries declared $84.9bn of bilateral overseas development aid as climate finance via the Rio markers, says Egli. “We found they actually delivered $30.3bn of bilateral climate finance: an amount 64 per cent below what countries reported.”

Thirty-two countries finance climate action in 141 countries on all continents. The top five contributors – Germany, the UK, France, Japan and the US – provide 78 per cent of global bilateral climate finance, while the top recipient countries include India, Morocco, Mexico, Vietnam and Indonesia

While Austria, Canada, Portugal and the UK “seem be doing quite well” at reporting their climate finance accurately, other countries are “very optimistic in their reporting”, Egli says. For example, the AI tool’s figures tally with those approved by Latvia and the Slovak Republic only if all sorts of environmental projects are included as climate finance.

There may be “cross benefits” from biodiversity initiatives, but “probably they should not all be included” as climate finance, says Egli. From the projects described as core climate finance by France, the AI tool concluded that less than 40 per cent fully met this criteria. Once under-reporting was also taken into account, the total climate finance for France amounts to 48 per cent of what is reported. For Ireland this figure was 18 per cent and for Japan 12 per cent.

Egli says you can’t rely on the algorithms alone “but they can help see what has been classified wrongly.” Governments, civil society organisations, the OECD and financial institutions could all use AI to check climate finance spending. Given their “low cost”, such tools could also help “developing countries hold international communities to account in a transparent way”, he adds. 

Adaptation finance

One positive finding is that adaptation finance seems to flow to where it is most needed, Egli says. Recipients include Vietnam, whose coastal communities are increasingly vulnerable to the impacts of storm surges; Ethiopia, which is facing its worst drought in 40 years; and island states such as Fiji, the Philippines and Samoa, which are on the front line of rising sea levels. The research also shows, however, that most mitigation finance goes to large, often renewable energy, projects in middle-income countries such as Brazil, India, Mexico, Indonesia, Egypt and Morocco. 

Getting to $100bn of climate finance a year is not the only challenge – just as important is solving the conundrum of how to spend significant amounts of money on adaptation in poorer countries, says Egli. “Financial actors need standardisation to spend large amounts of money regularly,” he adds, but this is often not the case in developing countries, which can have more chaotic administrations. 

Yet the EU itself appears to suffer from unreliable climate finance accounting. According to the European Commission, the bloc met its self-imposed target of spending at least 20 per cent of its 2014-20 budget (or €216bn) on climate action. However, in a May 2022 report, the European Court of Auditors found the amount reported as climate finance inside the EU was overstated by at least €72bn. The auditors also fear a similar problem could emerge for the 2021-27 period, when the EU’s new climate spending target rises to 30 per cent. 




A service from the Financial Times