COP 27 Q&A: Climate Finance & How It Affects Our Planet’s Future

Question: As we see many times every year around the world, climate change is unleashing catastrophic and worsening storms, wildfires, flooding, and other disasters. Who currently pays for such damage?

David Levaï: This is an important question to understand, because many actors contribute funding depending on the type of damage. Humanitarian assistance is the first to arrive in emergency situations in the form of international public aid and philanthropic organizations that help and support the affected population. But humanitarian assistance is often limited and doesn’t take into account climate change-related disasters that are slow-onset events, such as rising sea levels, the retreat of coastlines, or impacts from deforestation. In these cases, funding must come from other entities.

Other compensation mechanisms, such as insurance, exist for climate change-related events. But to be effective, they must offer significant coverage, which is not often the case in vulnerable nations. How the insurance industry responds to a catastrophic event poses additional questions. For instance, when it comes to investing in reconstruction, will an insurance company take into account the constraints and realities of a changing climate and help drive new practices and behaviors? Or will it rebuild exactly the way things were, exposing citizens to repeating disasters?

The term “climate finance” refers to all the investments necessary to transition to a net-zero economy, meaning net-zero carbon emissions. But does it also cover other dimensions, such as adapting to our changing world?

Yes, climate finance covers the investments needed to switch to less polluting energy systems, industrial systems, and transportation systems. But it also includes adaptation finance — that is, how do we fund the transformation necessary to reduce the human and environmental costs of climate change and build resilience to new conditions? How do we anticipate and make changes so that buildings and transportation can better withstand bigger disasters? So that agricultural production is not at the mercy of rising heat or water scarcity? How do we support transformational change in regions and communities whose revenue sources will shrink as the climate changes? A process at COP 27 aims to double funding for adaptation and resilience to more than $40 billion by 2025, but it is still unclear where this enormous pool of money will come from. A major issue is how to encourage the private sector to fund adaptation actions that do not produce immediate return on investments, such as helping farmers transition from an at-risk activity to more resilient practices.

Then there is finance to cover losses and damages resulting from a changing climate, which involves reconstruction after disasters, as well as compensating countries and communities for shrinking revenue sources, for instance, coastal villages whose economies rely on fishing in regions where fish species are dying off or migrating due to changing ocean temperatures and acidification. A large number of delegates from developing economies are going to the COP wanting to talk about climate impacts and the losses and damages they induce. We must build new financial mechanisms to help communities on the receiving end of catastrophes, and most important, deliver on pledges to provide that critical funding.

How will traditional finance paradigms need to change in coming years?

Our international finance institutions were created in the wake of World War II, in a moment of crisis, to address critical development needs in a specific country, such as a bridge in Senegal or a power plant in India. Today, with climate change, we need new models that address collective and systemic problems that are occurring simultaneously and are compounding each other. Whatever funding decisions are made now in one country will have an impact on other countries. So our international financial institutions must adapt to operate in a more holistic and less project-specific way. Reforming the structure of the international financial system is not up for negotiation at COP 27, but it will be high on the political agenda at a moment when the countries that need the most investment in transitioning to a carbon-free economy are often the least responsible for climate change. These are also the countries that struggle with high levels of debt and experience difficulties in accessing finance from capital markets, hence the corrective mechanisms that the multilateral community developed together need to better take these issues into account.

What are the main issues in climate finance on the table at COP 27?

First, there are four components of the ongoing year-to-year negotiations:

1) In Copenhagen in 2009, developed economies pledged $100 billion annually to support developing economies to pay for mitigation and adaptation activities, but the most recent numbers reveal a shortfall of around $16 billion. Addressing this gap in the coming years will be a contentious part of the negotiations, with developing economies feeling they cannot trust developed economies to deliver on their promises.

2) As referenced earlier, there is a mandate coming out of COP 26 in Glasgow to double international funding for adaptation to more than $40 billion a year by 2025, but there is not yet a clear road map for getting there. This will undoubtedly be under discussion at COP 27.

3) Small Island Developing States—which represent 38 countries out of the 198 that have ratified the UN Framework Convention on Climate Change—as well as many African nations, will continue to push for the creation of a loss and damage fund, to help them deal with worsening impacts of climate change and their irreversible consequences.

4) In 2025, the pledge to provide $100 billion annually to developing economies will expire. A new financial mechanism must be put in place at this point, but it is unclear what that will look like. Bringing the world to zero carbon emissions by 2050 will require ramping up funding and implementing much more sophisticated finance mechanisms. What will countries need the most? Is it debt forgiveness, or loans, or grants that are easily accessible and can quickly create change on the ground? The challenge will be moving from a technical conversation to setting a political vision, one that answers the question, “What instruments do we need to fund the transformation to a zero-carbon world?”

In addition to the actual negotiations, the climate community will be focused on partnerships between G7 countries and large economies such as Indonesia, and Vietnam that are highly reliant on coal-generated energy. One example is the Just Energy Transition Partnership (JETP), which was initiated last year when several countries pledged $8.5 billion to support South Africa in accelerating its transition away from coal. Since then, there has been uncertainty about how this deal would be implemented, so we expect to see a detailed investment plan at COP 27 that lays out how this funding would be used and how it can help leverage additional private investments. We are also expecting the announcement of three similar coal-transition partnerships focused on Indonesia, Senegal, and Vietnam and are eager to hear the details.

How might discussions of climate finance be influenced by the location of this conference, on the African continent?

Africa is a fast-growing region that has enormous needs in terms of development. A vast number of people still do not have access to energy, which impedes health care and quality of life as well as economic development. But African countries are also conscious of the disproportionate impacts that a changing climate has on the continent in terms of agricultural production, access to water, and regional conflict, even though their historical contribution to climate change has been minimal. So on a continent that has always received the least amount of international investment and where demand is the highest, getting finance right is extremely important.

How many COPs have you attended?
Eight.

What is your most memorable moment?

The most amazing moment I had the chance to live was the adoption of the Paris Agreement after many months of effort and two weeks of sleepless nights. At the time, I was part of the French presidency at COP 21, working for the French government hosting the meeting. We had drafted the final iteration of the Paris Agreement, which now needed to be submitted to 196 countries for approval by consensus. On Dec. 12, 2015, at 7 p.m., I thought the world had tipped over into a new era where climate issues would finally be meaningfully addressed. When the gavel came down on the desk, the entire room — even the most difficult of opponents — jumped and cried and kissed each other.

COPs have been taking place for more than a quarter of a century. Is the glass half full or half empty?

It’s both — and it’s a dual reality that we have to understand. When you get to a COP, needs are high: people are dying; weather events are destroying communities and economies; expectations for change are enormous. At the same time, the multilateral and multinational institutions we have are imperfect. The COP is a consensus-based process in which all the countries in the world, including Syria, North Korea, and Russia, must decide in a consensual manner to move one step further. It’s like we are in a race, all on a 196-person bicycle, and if just one rider stops pedaling, you can’t move forward. But still, you’re in a race! If you watch that from the outside, it can be very frustrating.

When the Paris Agreement was adopted, it was hard to envision that so many companies and countries would have shifted as they have by now. The U.S. is, of course, making sure it’s a little out of step; but if you look at Africa, China, Europe, at investments: things have taken a huge turn. Change is drastic compared with the world we had before 2015. Still, we are far from what needs to happen to keep up with our 2025 goal of limiting temperature rise to 1.5°C over preindustrial times. Today, climate finance has multiplied, but it is still less than fossil fuel investments. Politicians are still tied to vested fossil fuel interests that have been controlling their countries, and their politics, for decades. Are COPs the moment to make it all happen? I’m not sure. All other national, regional, and international institutions also need to act accordingly. There is only so much COPs can do. COPs are for taking stock of how fast the world is — or is not — changing. We should set the bar as high as possible but be ready for some disappointment. Consensus is always mutually unsatisfactory.