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One step forward, two steps back on climate finance

by Brandon Wu | ActionAid
Monday, 17 December 2018 15:56 GMT

* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Under the Paris Rulebook, wealthy countries will still be able to count all sorts of dubious things as financial support for poor nations

The “Paris Rulebook” was completed at the U.N. climate negotiations this month in Katowice, Poland – a framework for how the Paris Agreement on climate change will be implemented. While the rulebook is a step forward for the global climate regime, it is not nearly enough to match the scale and urgency of the climate crisis.

There is one aspect of the Paris Rulebook that is not just inadequate, but a step backwards: climate finance. The Paris Agreement simply will not work without climate finance, so this outcome from Katowice is particularly disheartening.

Climate finance – the transfer of resources from rich to poor countries to support climate action – is a practical necessity, as well as a moral and legal obligation for rich countries.

Achieving the Paris Agreement’s goal of keeping global temperature rise under 1.5 degrees Celsius is a guaranteed impossibility without massive levels of support for economic transformation in developing countries.

The Katowice talks did result in some minor progress on collective targets for climate finance. There is language that “urges” rich countries to meet their existing commitment of mobilizing $100 billion in climate finance per year by 2020. And, in response to a consistent demand from developing countries, rich countries agreed to begin a process in 2020 to determine a new collective goal to take effect after 2025.

But collective goals are arguably the most useless of the tools to get climate finance flowing. Absent any formal methodology for deciding which countries bear responsibility for what share of the overall goal, they fail to put meaningful pressure on individual governments to provide finance.

And they are vulnerable to dodgy accounting practices, as countries count all sorts of dubious things as climate finance, taking advantage of vague definitions and a general lack of accounting rules. This latter problem is exacerbated by the Paris Rulebook, whose reporting rules are so loose they are practically meaningless.

Given that climate finance should be a net transfer of wealth from rich to poor, it has long been argued that only grants, or the “grant-equivalent” of non-grant instruments, should be counted as climate finance - similar to accounting guidelines for foreign aid.

But under the Paris Rulebook, countries are explicitly allowed to count all sorts of non-grant instruments as climate finance, including commercial loans, equity, guarantees and insurance. They are only asked to report the grant-equivalence of these instruments on a voluntary basis. These two things combined could make the concept of climate finance virtually meaningless.

A simple example suffices to illustrate the problem. Under these rules, the United States could give a $50 million commercial loan to Malawi for a climate mitigation project. This loan would have to be repaid at market interest rates – a net profit for the U.S. – so its grant-equivalence is $0. But under the Paris Rulebook, the U.S. could report the loan’s face value ($50 million) as climate finance!

If rich countries give loans to developing countries, yet do not have to report the grant-equivalent value of these loans, we could have a regime in which climate finance is actually a net transfer of wealth from poor to rich, rather than the other way around.

The $100 billion, rather than being $100 billion transferred to poor countries, could be made up largely of loans that increase the indebtedness of those countries.

As well as being an obviously grave injustice, this would be a death knell for the Paris Agreement. For the pact to succeed in keeping global temperature rise under 1.5 degrees, rich countries must be held accountable for providing real money for real climate action. Failure to do so will mean it is simply impossible for developing countries to transform their economies to more sustainable pathways.

The Paris Rulebook is a step backwards for climate finance, and these rules must be strengthened as soon as possible lest they doom the entire global climate regime to failure.