Editing IPCC:AR6/WGIII/Chapter-14 (section)

==== 14.3.2.8 Finance Flows ====

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Finance is the first of three means of support specified under the Paris Agreement to accomplish its objectives relating to mitigation (and adaptation) ( [[#UNFCCC--2015a|UNFCCC 2015a]] , Art. 14.1). This sub-section discusses the provision made in the Paris Agreement for international cooperation on finance. [[#14.4.1|Section 14.4.1]] below considers broader cooperative efforts on public and private finance flows for climate mitigation, including by multilateral development banks and through instruments such as green bonds.

As highlighted above, the objective of the Paris Agreement includes the goal of ‘[m]aking finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ ( [[#UNFCCC--2015a|UNFCCC 2015a]] , Art. 2.1(c)). Alignment of financial flows, and in some cases provision of finance, will be critical to the achievement of many Parties’ NDCs, particularly those that are framed in conditional terms ( [[#Zhang--2016|Zhang and Pan 2016]] ; [[#Kissinger--2019|Kissinger et al. 2019]] ) (Chapter 15).

International cooperation on climate finance represents ‘a complex and fragmented landscape’ with a range of different mechanisms and forums involved ( [[#Pickering--2017|Pickering et al. 2017]] ; [[#Roberts--2017|Roberts and Weikmans 2017]] ). These include entities set up under the international climate change regime, such as the UNFCCC financial mechanism, with the Global Environment Facility (GEF) and Green Climate Fund (GCF) as operating entities; special funds, such as the Special Climate Change Fund, the Least Developed Countries Fund (both managed by the GEF), and the Adaptation Fund established under the Kyoto Protocol; the Standing Committee on Finance, a constituted body which assists the COP in exercising its functions with respect to the UNFCCC financial mechanism; and other bodies outside of the international climate change regime, such as the Climate Investment Funds administered through multilateral development banks (the role of these banks in climate finance is discussed further in [[#14.4.1|Section 14.4.1]] below).

Pursuant to decisions adopted at the Paris and Katowice conferences, Parties agreed that the operating entities of the financial mechanism – GEF and GCF – as well as the Special Climate Change Fund, the Least Developed Countries Fund, the Adaptation Fund and the Standing Committee on Finance, all serve the Paris Agreement ( [[#UNFCCC--2016a|UNFCCC 2016a]] , paras. 58 and 63, 2019e,g). The GCF, which became operational in 2015, is the largest dedicated international climate change fund and plays a key role in channelling financial resources to developing countries ( [[#Antimiani--2017|Antimiani et al. 2017]] ; [[#Brechin--2017|Brechin and Espinoza 2017]] ).

Much of the current literature on climate finance and the Paris Agreement focuses on the obligations of developed countries to provide climate finance to assist the implementation of mitigation and adaptation actions by developing countries. The principal provision on finance in the Paris Agreement is the binding obligation on developed country Parties to provide financial resources to assist developing country Parties ( [[#UNFCCC--2015a|UNFCCC 2015a]] , Art. 9.1). This provision applies to both mitigation and adaptation and is in continuation of existing developed country Parties’ obligations under the UNFCCC. This signals that the Paris Agreement finance requirements must be interpreted in light of the UNFCCC ( [[#Yamineva--2016|Yamineva 2016]] ). The novelty introduced by the Paris Agreement is a further expansion in the potential pool of donor countries as Article 9.2 encourages ‘other Parties’ to provide or continue to provide such support on a voluntary basis. However, ‘as part of the global effort, developed countries should continue to take the lead in mobilising climate finance’, with a ‘significant role’ for public funds, and an expectation that such mobilisation of finance ‘should represent a progression beyond previous efforts’. Beyond this, there are no new recognised promises ( [[#Ciplet--2018|Ciplet et al. 2018]] ). In the Paris Agreement, Parties formalised the continuation of the existing collective mobilisation goal to raise USD100 billion yr –1 through to 2025 in the context of meaningful mitigation actions and transparency on implementation. The Paris Agreement decision also provided for the CMA by 2025 to set a new collective quantified goal from a floor of USD100 billion yr –1 , taking into account the needs and priorities of developing countries ( [[#UNFCCC--2016a|UNFCCC 2016a]] , para. 53). This new collective goal on finance is not explicitly limited to developed countries and could therefore encompass finance flows from developing countries’ donors ( [[#Bodansky--2017b|Bodansky et al. 2017b]] ). Deliberations on setting a new collective quantified goal on finance is expected to be initiated at COP26 in 2021 ( [[#UNFCCC--2019g|UNFCCC 2019g]] ,e; [[#Zhang--2019|Zhang 2019]] ).

It is widely recognised that the USD100 billion yr –1 figure is a fraction of the broader finance and investment needs of mitigation and adaptation embodied in the Paris Agreement ( [[#Peake--2017|Peake and Ekins 2017]] ). One estimate, based on a review of 160 Intended Nationally Determined Contributions ((I)NDCs), suggests the financial demand for both mitigation and adaptation needs of developing countries could reach USD474 billion yr –1 by 2030 ( [[#Zhang--2016|Zhang and Pan 2016]] ). The Organisation for Economic Co-operation and Development (OECD) reports that climate finance provided and mobilised by developed countries was USD79.6 billion in 2019. This finance included four components: bilateral public, multilateral public (attributed to developed countries), officially supported export credits and mobilised private finance ( [[#OECD--2021|OECD 2021]] ) ( [[IPCC:Wg3:Chapter:Chapter-15#15.3.2|Section 15.3.2]] and Box 15.4).

More broadly, there is recognition of the need for better accounting, transparency and reporting rules to allow evaluation of the fulfilment of finance pledges and the effectiveness of how funding is used ( [[#Xu--2016|Xu et al. 2016]] ; [[#Roberts--2017|Roberts et al. 2017]] ; [[#Jachnik--2019|Jachnik et al. 2019]] ; [[#Gupta--2019|Gupta and van Asselt 2019]] ; [[#Roberts--2021|Roberts et al. 2021]] ). There is also a concern about climate finance being new and additional though the Paris Agreement does not make an explicit reference to it, nor is there a clear understanding of what constitutes new and additional ( [[#UNFCCC--2018|UNFCCC 2018]] ; [[#Carty--2020|Carty et al. 2020]] ; [[#Mitchell--2021|Mitchell et al. 2021]] ). Some authors see the ‘enhanced transparency framework’ of the Paris Agreement ( [[#14.3.2.4|Section 14.3.2.4]] ), and the specific requirements for developed countries to provide, biennially, indicative quantitative and qualitative information as well as report on financial support and mobilisation efforts (Articles 9.5 and 9.7), as promising marked improvements ( [[#Weikmans--2019|Weikmans and Roberts 2019]] ), including for the fairness of effort-sharing on climate finance provision ( [[#Pickering--2015|Pickering et al. 2015]] ). Others offer a more circumspect view of the transformative capability of these transparency systems ( [[#Ciplet--2018|Ciplet et al. 2018]] ).

The more limited literature focusing on the specific finance needs of developing countries, particularly those expressed in NDCs conditional on international climate finance, suggests that once all countries have fully costed their NDCs, the demand for (public and private) finance to support NDC implementation is likely to be orders of magnitude larger than funds available from bilateral and multilateral sources. For some sectors, such as forestry and land use, this could leave ‘NDC ambitions... in a precarious position, unless more diversified options are pursued to reach climate goals’ ( [[#Kissinger--2019|Kissinger et al. 2019]] ). In addition, there is a need for fiscal policy reform in developing countries to ensure international climate finance flows are not undercut by public and private finance supporting unsustainable activities ( [[#Kissinger--2019|Kissinger et al. 2019]] ). During the 2018 Katowice conference, UNFCCC Parties requested the Standing Committee on Finance to prepare, every four years, a report on the determination of the needs of developing country Parties related to implementing the Convention and the Paris Agreement, for consideration by Parties at COP26 ( [[#UNFCCC--2019c|UNFCCC 2019c]] ).

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