Article:
Climate finance is an instrumental part of the global effort to combat climate change. The Organisation for Economic Cooperation and Development (OECD) has raised critical views about this important subject in the lead up to the Conference of Parties 28 (COP28) in Dubai. A significant issue underscored by the OECD report is the shortfall of developed countries in their promise to mobilize USD 100 billion a year, towards Climate Mitigation.
About OECD and its Role in Tracking Climate Finance
The OECD is an intergovernmental economic organization established in 1961 with its vision centered on stimulating economic progress and world trade. Mainly composed of high-income economies with high Human Development Index (HDI), the organization’s membership spans 38 countries, with Colombia and Costa Rica being the most recent members. Despite not being a member, India maintains a key economic partnership with the OECD.
The mission to track progress towards the USD 100 billion per year pledge for climate action in developing countries was entrusted to the OECD by donor countries. The commitment, which was formalized at COP16 in Cancun and reiterated at COP21 in Paris, aims at promoting transparency and meaningful mitigation actions.
Critical Findings from the OECD Report
The annual climate finance provided and mobilized by developed countries for developing nations in 2021 amounted to USD 89.6 billion, indicating a 7.6% increment compared to the previous year. Despite falling short of the USD 100 billion goal, Public Climate Finance nearly doubled between 2013 and 2021, surging from USD 38 billion to USD 73.1 billion. However, adaptation finance, which is essential in addressing mitigation and adaptation needs, decreased by USD 4 billion (-14%) in 2021.
While USD 49.6 billion came as loans, it is worth noting that heavy reliance on loans can trigger debt stress in poorer countries. This challenge, in turn, may deter these nations from effectively addressing climate change. Consequently, a call to scale up adaptation finance and to build capacity through project development, financial literacy, and operational efficiency is posed.
Challenges with the OECD Report
The report didn’t escape criticisms. One primary issue is the lack of universally agreed-upon definition of ‘climate finance’. This allows developed countries to classify various kinds of funding, including Overseas Development Assistance (ODA) and high-cost loans, as climate finance. This ambiguity leads to potential double-counting and evasion from scrutiny. The UNFCCC principle of “new and additional finance” has been questioned; some countries have admitted to double-counting aid, undermining this criterion. Furthermore, the computation of total climate finance figures considers loans at face value, not the grant equivalent. This results in unjustified credit for developed nations providing climate finance while poorer countries grapple with repayment and interest.
Future Directions in Addressing Climate Finance Concerns
To counter the aforementioned challenges and increase effectiveness of climate finance, several recommendations are proposed:
Establishing transparent and standardized reporting mechanisms for climate finance contributions will ensure accuracy, prevent double-counting or misclassification of funds, and inspire accountability. Developing universally agreed-upon definitions and criteria for what constitutes climate finance is paramount, as it prevents ambiguity and guarantees that funds are genuinely additional and geared towards climate mitigation and adaptation. Encouraging grants or concessional loans over commercial loans can alleviate the debt burden on developing countries, thus ensuring that funding mechanisms support climate actions without adding to debt stress.
