2022 will be a critical year for climate finance. Taking steps to resolve underlying issues of accountability will help restore trust and enable the ambition needed to limit warming to 2°C.
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The Paris Agreement is built on trust. In order for it to work, countries must trust that their efforts to reduce emissions will be matched by the efforts of others. For developing countries, financial support is key to this trust. They must believe developed countries will support them financially in choosing low-carbon pathways and adapting to climate impacts.
However, trust in climate finance is at an all-time low. In a report released just before COP26, developed countries admitted they were failing to deliver on their promise of $100 billion annually from 2020 onwards. They fell particularly short in support for adaptation. This admission raised major questions about developed countries accountability to their commitments.
At COP26, these countries took steps to close the funding gap, outlining a plan to deliver the $100 billion by 2023. They also announced plans to double adaptation finance by 2025 from 2019 levels.
Closing the gap is an important step to restoring trust in climate finance. However, it is only the first step. Significant underlying issues of accountability remain unresolved. Funders need to do more to show they are providing high quality, predictable, and accessible support. Recipients can also do more to show they are using international resources effectively and fairly. Improving accountability on both sides will be key to the long-term success of the Paris Agreement.
Transparency and easy access can improve accountability
Aside from not having delivered on the amount of funding promised, wealthy countries have obfuscated the type and quality of funding they provide. They have often double-counted development assistance. Certain estimates show that over-reporting of “climate relevance” could mean that bilateral climate finance is a third lower than reported.
A significant proportion of funding continues to come in the form of loans, which add to the debt burdens of already heavily indebted countries. Up to 40% of all climate finance is non-concessional.
Wealthy countries have also consistently fallen short in supporting adaptation, a priority for recipients, despite pledging to put it on equal footing with mitigation. The UN estimates that only a quarter of overall funding goes to support adaptation.
Transparency can help improve accountability over the type of funding that countries count as climate finance. New reporting requirements under the Agreement, known as “common tabular formats”, require countries to distinguish between mitigation and adaptation funding, and between grants, loans, and private finance.
New reporting requirements can also improve the predictability of financial support. This is a major concern for recipient countries who need information in advance in order to plan climate programs and integrate them into domestic budget and policy processes. Wealthy countries’ tendency to announce financial commitments ad hoc has irked recipients, who sense such announcements are as much about public relations as genuine support. Other small steps, like providing grants in local currency, can help make support more predictable by removing the uncertainty of currency exchange over longer project periods.
Funders should also take steps to make climate finance more accessible. Many countries struggle to meet the public financial management standards required for accreditation to directly manage international funds. Multilateral funds have complex application requirements and appraisal criteria, requiring capacity that many small governments do not have or cannot spare.
Small island states are particularly affected by these barriers: they benefit less than others from these funds despite their high vulnerability. Funders can help developing countries by supporting streamlined accreditation processes, like those of the Adaptation Fund. They can also create “dialogue spaces” to help countries through accreditation and application processes.
Accountability must go both ways
Recipient countries should also take steps to improve their accountability by demonstrating they are using climate finance effectively and fairly.
Recipients have long fought to establish the principle of restitution in UN climate negotiations. They argue that climate finance is compensation for harm, not aid given out of altruism. By principle, they do not believe they should be obligated to justify their use of funding.
However, in practice, funders fear that climate finance will enable corruption and prop up authoritarian regimes. Though rarely publicly acknowledged, this mistrust is at the root of many current barriers to access. Recent studies have shown that climate finance can be misused and is unlikely to reach marginalized communities.
Though recipients may rightfully resent the paternalism of funders, it would be to their benefit to demonstrate their accountability. Both official and unofficial reporting tools offer opportunities to do so. Illustrating that mitigation projects are efficiently reducing emissions and that adaptation funding is benefiting the most vulnerable communities would build confidence among funders as they seek to reduce barriers to access. Funders can help to reduce the added burden of reporting through further financial and technical support.
Financial accountability enables the success of the Paris Agreement
COP26 started a multi-year process to determine a new long-term finance goal to take effect in 2025. Developing countries have clearly linked their future ambition to a significant increase in financial support, setting the expectation of a trillion dollars annually.
Without trust that transparent and accessible funding is forthcoming, developing countries are likely to be more reluctant to commit to making the cuts in emissions needed to limit warming to 2°C.
In a worst-case scenario, a lack of trust in finance could cause the agreement to collapse. More likely, however, is that a lack of trust would slowly undermine ambition, causing the Agreement to fail through ineffectiveness.
Taking steps now to improve accountability of both funders and recipients will ensure that finance enables rather than hinders the long-term success of the Paris Agreement.