International cooperation in financing responses to climate change is written into the Paris Agreement. Article 9 of the Agreement states that “Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation.” This page provides a basic overview of international obligations; describes ‘fair share’ approaches; looks at financing mechanisms of the climate convention; and updates on the use of ‘market mechanisms’ for complying with international obligations. We also introduce the question of ‘conditionality’ in NDCs – where some countries indicate what activities they can pursue with domestic resources, and what more could be done with available international financing.
The Paris Agreement reiterates the concept of “equity and the principle of common but differentiated responsibilities and respective capabilities”, which has been an important principle in international climate policy since the establishment of the Climate Convention (UNFCCC) in 1992. This principle is also the basis for what civil society calls “Fair Shares” — equitable burden sharing.
Fair Shares refers to both moral and practical importance of recognizing the different historical responsibility that countries have for causing climate change. It also recognizes that the economic situation of countries varies, and so too then their ability to address climate mitigation and adaptation. Some countries therefore have a higher Fair Share of the international climate effort than others, and should “pay” accordingly, in the form of BOTH faster and deeper emissions reductions AND financial support to vulnerable and least-developed countries.
So, a key element for a fair and effective implementation of the Paris Agreement is substantial financial support from countries with a high Fair Share (i.e. developed countries) to countries with a lower Fair Share (i.e. developing countries). And because some developing countries have great potential to address mitigation through ending deforestation and degradation, some developed countries have sought to get credit for their own ‘Fair Share’ effort by investing in less-expensive mitigation options in the Global South. The mechanisms for this are still under debate – see next section.
The Paris Agreement reaffirmed that wealthier countries should collectively contribute at least 100 billion USD annually to developing countries to support their mitigation and adaptation efforts, from 2020. But so far, the $100 billion / year target has not been met, while most of the funds counted towards this target are in the form of loans, which adds to the debt burden of many developing countries. ActAlliance EU has made some good recommendations to EU countries about their climate finance obligations.
- OXFAM: Report on Progress toward the $100 Billion climate finance commitment
ActAlliance EU: Setting the Standard
Paris Agreement Article 6
Article 6 of the Paris Agreement suggests the development of a global carbon market. That proposed market would allow countries to ‘trade’ emission reductions as a means to fulfill their own obligations (NDC) and/or support sustainable development in developing countries. Negotiations on the rules for Article 6 mechanisms have NOT been completed.
There is a long and complicated history of negotiations around carbon markets and ‘border adjustments’ for counting emission reductions. The 1997 Kyoto Protocol included several ‘flexibility mechanisms’, including a mechanism that allowed developed countries to buy credits from mitigation actions in developing countries. Under the Kyoto Protocol, only developed countries had binding emission-reduction targets. So, if it was cheaper to meet that reduction commitment by investing in another country’s emission reductions, the developed country could do that – and count those ‘carbon credits’ toward its own mitigation target.
The basic idea of these ‘flexibility mechanisms’ — that allow one country to invest in mitigation activities in a different country – continues in the Paris Agreement under Article 6. But now, all countries have mitigation commitments, as reflected in their NDCs. So, if one country invests in mitigation activities in another country, who gets ‘credit’ for the emission reduction? And – can private businesses invest in emission reductions and get a carbon credit, which that business can use to reach its own emission reduction targets? Should that action then be counted as part of the country’s NDC? Which country – where the action took place, or where the private business is registered?
The problem – and the continued disagreement in Article 6 negotiations – is, what happens when mitigation projects in one country ‘excuse’ or allow continued emissions in another country:
- Do all the ‘carbon credits’ go to the country that invested in the project, leaving the host country for the project with no mitigation benefit to apply towards its own NDC? If both the investor and the host country counted credits, that would be ‘double-counting’. The term environmental integrity is used in the negotiations, and the Paris Agreement, to refer to mechanisms for avoiding double-counting (that is, double-crediting) of emission reductions.
- If all the carbon credits are used to ‘excuse’ continued emissions, then there is no net mitigation gain. In other words, if the investment is made to offset emissions, rather than to prevent or to retire emissions, that transaction doesn’t lead to a net emission reduction. This is the basis of a lot of civil society concern about Article 6. Recent negotiations have introduced the concept of ‘overall mitigation of global emissions’ (OMGE), to indicate that all crediting schemes must lead to an actual decrease in emissions, instead of just re-assigning responsibility for emission reductions.
- Should there be some mechanism so that investor and host country can ‘share’ the credit? Should some of the credits be retired? Retiring (cancelling) the credits leads to net mitigation benefit.
- Should private sector businesses be allowed to use Article 6 mechanisms? Right now, there are very few constraints on private-sector involvement in carbon markets.
- The Kyoto Protocol established the Clean Development Mechanism, that generated carbon credits from different projects in developing countries. Should these CDM credits be allowed as part of the Paris Agreement? If so, how do we distinguish between the credits generated by these legacy projects under the CDM, from what countries are planning to do in the NDC? This is also necessary to avoid ‘double counting’.
You can read CLARA’s detailed recommendations about Article 6 market provisions here.
CLARA member Carbon Market Watch addresses the problem of ‘carbon offsets’:
The Paris Agreement also included a non-market option for climate finance that CLARA members argue should become the more important mechanism for international cooperation. This is Article 6.8 of the Paris Agreement. CLARA argues that Article 6.8 encourages real reductions (‘real zero’).
Existing pledges – that is, ‘ambition’ found in previously-submitted NDCs – are not sufficient to reduce global warming to the under-two-degrees target negotiated in the Paris Agreement. New NDCs need to be more ambitious.
Many developing countries are now submitting NDCs that contain two mitigation targets. The first is an ‘unconditional’ target. That target indicates what the country will do to reduce emissions ‘on its own’ – meaning, using its own capacity and financial resources.
The second target – a ‘conditional NDC’ – is the additional mitigation steps that a country would take if it can get international support. Remember that developed countries committed to providing “adequate” and “predictable” climate finance to help all countries reach higher levels of ambition in their NDCs.
Some developing country NDCs therefore outline what kinds of measures would be taken with international financial support. They state a ‘conditional’ NDC goal that is ‘subject to the availability of international finance’. Some countries go further; in addition to calling for financial support, they request transfer of technologies to help with implementation, and assistance with capacity building. Paris Agreement Article 10 encourages the transfer of technology to address climate change, while capacity building is part of the support that developing countries were promised to reduce emissions and adapt to climate change.
The ‘conditional NDC’ is much higher than the ‘unconditional’ NDC in some countries. For example, Bangladesh said with its own effort it could reduce emissions by 5%; but with international assistance it could reduce emissions by 15%. Nigeria’s unconditional NDC decreases national emissions by 20% but ‘adequate and predictable financial international finance’ would enable Nigeria to decrease emissions by 45%.
Ideally, financial support for achieving conditional NDCs, would be grant-based (not a loan), government-to-government, and include provisions for technology transfer and capacity building. However, the Paris Agreement does not exclude the consideration of climate finance loans, nor does it require that all funds are public funds, though it recognized that public funds are of particular significance (Article 10.3). Meanwhile, countries and multilateral institutions make loans at both market rates and at “concessional rates”, where conditions for the borrowing country are better than those they can get in the financial markets.
The mechanisms for international climate finance are therefore quite complicated. We address this complexity on the Financial Mechanisms page.
Loss and Damage
“Loss and Damage” is a legal concept covering losses associated with personal injury and/or damage to property, for which the victim should be compensated. After years of concerns raised by small island developing states, “Loss and Damage” entered the climate convention at the Conference of Parties in Warsaw (2013) and is now known as the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts. This mechanism is supposed to address loss and damage in developing countries associated with extreme weather events, or with slow-onset events like sea level rise. The Warsaw International Mechanism also has work programs related to comprehensive risk management approaches, and cooperation on migration and displacement (climate refugees). The UNFCCC published an on-line guide to Loss and Damage in 2020, found here.
Whether and how climate finance will be used to address Loss and Damage is still to be seen. Many developed countries – most prominently the United States – have refused to negotiate on the issue of compensation. But countries vulnerable to typhoons or sea level rise again argued that it is imperative to provide finance to address loss and damage impacts. A compromise could be reached to fund capacity building – for dealing with extreme storm events, and on longer timelines, with adaptation as well as the possible displacement of populations.
However, the Civil Society Equity Review raises the question in a recent report, “Can Climate Change Fueled Loss and Damage Ever Be Fair?”
Two recent resources for learning more about Loss and Damage and applying this to NDCs:
- ActionAid developed a Handbook for Community Assessment on Loss and Damage that gives communities tools to assess and record the economic and non-economic losses and damages they have experienced.
Climate Finance for Loss and Damage: EU church organizations published this analysis of how to mobilize support for developing countries to tackle loss and damage.
And a recent guide prepared by Worldwide Fund for Nature (WWF) and Practical Action, found here, that emphasizes four ways to integrate Loss and Damage into NDCs:
- Define Loss and damage in the national context: What’s happening your country with loss and damage? It should be defined and described in the NDC.
- The challenge: What specific losses and damages that are already happening now, and what sectors or areas are vulnerable in future?
- Highlight ongoing responses to address loss and damage at the national level, including adaptation measures.
- Develop specific targets for combating loss and damage, for example finance, technology, capacity building, and research.
What to Look For
Civil society groups should pay attention to these climate finance issues in your NDC:
- Proposed actions in your country’s ‘unconditional’ NDC. This is the basic measure of how much mitigation ambition your country is proposing to take on by itself. Does the NDC indicate how domestic resources will be mobilized? Does the NDC talk about financing for both mitigation and adaptation?
- Proposals for the ‘conditional’ NDC. Does the country specify the sectors, or kinds of activities, that are part of the Conditional NDC? Does it specify that international financial support should be in the form of grants? (Some countries may also seek “concessional finance” in the form of low-interest loans as an acceptable form of climate finance.)
- Does the NDC indicate a limit on the use of ‘conditional financing’ to reach mitigation or adaptation goals?
- Negotiating stance on Article 6. Countries disagree on how strict the Paris Agreement ‘flexibility mechanisms’ should be to prevent double-counting, and to ensure mitigation gains (not just offsetting one country’s emissions with another’s). Does your country call for any sectors to be excluded from Article 6 mechanisms? (CLARA members oppose the use of land-based credits to offset continued fossil fuel use.)
Fundamentals: The Heinrich Boell Foundation has published a series of reports to better understand climate finance flows, the regions and countries that finance reaches, and for what purposes.
Fair Shares: Many CLARA members contributed to the Civil Society Equity Review which estimates individual countries’ “Fair Share” of the global response to the climate crisis. The review suggests how much each country should cut their emissions to be in line with the Paris Agreement call for ‘equitable burden sharing’. Estimates are based on countries’ historical emissions (i.e. historical responsibility for contributing to climate change) and economic capacity (i.e. respective capabilities in addressing climate change). These reviews generally show that Western countries have Fair Shares that are substantially higher than what their current NDCs aim for, and in some cases far above what can technically be mitigated within their own countries.
OMGE: Means ‘Overall Mitigation in Global Emissions’. How to ensure that international cooperation in climate finance leads to an overall drop in emissions – and not just shifting responsibility for continued emissions?
Non-Market Approaches: Rich countries pledged $100 billion per year by 2020 to assist developing countries reduce emissions and adapt to climate change. That pledge hasn’t yet been fulfilled. At the same time, these countries continue to provide billions of dollars a year to subsidize fossil fuel exploration and production! ActionAid makes the case here that those subsidies should be redirected toward climate finance.
Agriculture: Institute for Agriculture and Trade Policy prepared a brief on Agricultural Finance for Climate Resilience, focused primarily on the United States.
- HBF: Climate Finance Fundamentals
- IATP: Agricultural Finance for Climate Resilience
- Civil Society Equity Review: After Paris: Inequality, Fair Shares, and the Climate Emergency
- CIDSE: Finance for Agroecology
- ActionAid: The Robin Hood Tax Campaign
- OXFAM: $100Billion Commitment
Paris Agreement Article 6
- CLARA Recommendations, Article 6
- Article 6.8 Recommendations
- Above and Beyond Offsets