Moving backwards, looking forwards

Disclaimer: The Donor Tracker seeks to avoid the use of the terms 'developed' and 'developing' countries when possible. However, because this was the language used in the NCQG agreement, we have kept the original terminology in quotation marks. See the Donor Tracker piece on our language philosophy here.

Introduction

The NCQG on climate finance was recently adopted at COP29, with parties agreeing to provide US$300 billion annually to 'developing' countries to support their obligations under the Paris Agreement and respond to their needs in the face of rising temperatures. The NCQG replaces the US$100 billion goal, dating back to COP15 in 2009, when 'developed' countries agreed to provide this amount annually to 'developing' countries by 2020. The Paris Agreement reiterated the goal and paved the way for a new goal to be established before 2025, resulting in the NCQG.

While the NCQG marks a key step in global climate ambition, it fell far short of the US$1.3 trillion annual figure sought by many emerging economies. The final negotiations were marred by the uncertainty posed by the re-election of Donald Trump, and the potential consequences of the US exiting the Paris Agreement, casting doubts on overall flows of climate finance.

Climate finance needs of 'developing' countries are estimated to be between US$5.1 and US$6.8 trillion by 2030. The NCQG would have to create enabling conditions for them to leverage sufficient financing, while supporting capacity building and climate action with very limited fiscal space and high capital costs. This Donor Tracker publication offers an insight into the NCQG, what was and was not achieved at COP29, and what the possible financing scenarios are for climate finance and ODA, going into in 2025 and beyond.

Decoding the NCQG decision

The ad-hoc work programme for the NCQG ran from 2022-2024, with 11 Technical Expert Dialogues and three High-Level Ministerial Dialogues to bring in the perspectives of governments, academia, civil society, and the private sector. The goal of these dialogues was to facilitate discussion on key elements of the NCQG, including transparency, potential sub-goals for mitigation, adaptation, and loss and damage, improved quality and access to climate finance, the structure of the goal, and the amount that would be provided by 'developed' countries.

Some key aspects of the NCQG, as captured in the decision at COP29, include:

• Aim: Financing will specifically support obligations under the Paris Agreement, including NDCs and their adaptation components, NAPs, as well as efforts to increase ambition and needs in the light of national vulnerabilities.
• Sources of financing: This includes a mixture of public and private, as well as bilateral and multilateral channels, including climate-related finance mobilized by MDBs, with no specific targets set for the amount of finance to be provided by 'developed' countries themselves.
• Counting of MDB flows: The NCQG recognizes the voluntary intention of Parties to count all climate-related outflows from and climate-related finance mobilized by MDBs towards achievement of the goal. This has implications on the volume of finance that 'developed' countries would provide bilaterally to 'developing' countries, given that donor funding constitutes only a portion of the overall climate finance channelled by MDBs.
• Country contributions and voluntary cooperation: 'Developed' countries would be “taking the lead” in providing the US$300 billion of annual financing, with voluntary contributions from emerging economies, and notably from China. 'Developing' countries are invited to provide this finance if they have economic capacity, without it being accounted for in the NCQG. This comes after mounting pressure on 'developing' countries such as China to be included in the list of contributing parties to the NCQG.
• Channels: The NCQG calls for a significant increase of public resources through the Adaptation Fund, the Least Developed Countries Fund, and the Special Climate Change Fund, with the aim of tripling annual outflows from 2022 levels by 2030, in addition to the use of MDBs.
• Transparency: 'Developed' country parties are obligated to provide information on climate finance provided and mobilized under the transparency framework laid out in the Paris Agreement, using standardized tabular formats decided upon by parties through previous COP decisions. For 2025 and 2026, the reporting deadline would be June 2028, and parties would have to submit biennial information thereafter.

The NCQG has come under immense criticism from 'developing' countries that goes beyond the amount of the goal. It has significant consequences for the way climate finance is delivered to 'developing' countries in terms of channels, access, transparency, and quantities.

Looking to the future of climate finance

Understanding key scenarios

With this understanding of some of the key aspects of the NCQG, this insight piece explores the outlook for climate finance flows and possible implications for ODA. To that end, we first create three scenarios for the future of the NCQG, and second, two projections to explore the future trajectories of climate finance and projections till 2035 and the interaction of climate finance and ODA. We answer some relevant questions, including what the required growth rate of climate finance would be to meet the NCQG, what the implications are if this rate is not achieved, and what the possible outlook would be for total ODA volumes.

Climate finance outlook post the NCQG: when will the goal be met?

We project how much climate finance flows are likely to grow from 2023-2025, in three scenarios. These projections build on the OECD figures reporting aggregate trends in annual climate finance provided and mobilised by 'developed' countries for climate action in 'developing' countries over the period 2013-2022, using 2022 as the base year. The climate finance figures reported by the OECD include bilateral public finance, multilateral public finance attributed to 'developed' countries (through MDBs, climate funds, and inflows to multilateral institutions), climate-related officially supported export credits, and private finance mobilized by bilateral and multilateral public finance.

The three scenarios are outlined below:

• First, the target scenario, where climate finance grows at the CAGR needed to meet the goal of providing $300bn per year in climate finance by 2035;
• Second, the business-as-usual scenario, where climate finance continues to grow at the average CAGR from 2018-2022; and
• Third, the worst-case scenario, which assumes that climate finance would grow at a CAGR which is the average of the three lowest year-on-year growth rates in climate finance, from 2019-2021.

Key results:

• Under the new target of US$300 billion annually by 2035, 'developed' countries would be required to grow their climate finance at a CAGR of 7.59%. However, in the business-as-usual scenario, the CAGR would be 7.72% and the goal would be exceeded in 2035, at US$304 billion.
• In the worst-case scenario, where climate finance grows at a CAGR of 3.39%, which is the average of the three lowest year-on-year growth rates, from 2018-2021, the goal of developed countries providing US$300 billion annually in climate finance would only be realized in 2047. At this rate, only US$191 billion would be provided annually in 2035, falling significantly short of the new goal.

Analysis

The target v. business-as-usual scenario: As seen above, the growth rate in the target scenario is lower than the rate in the business-as-usual scenario, which assumes no significant changes in current trends, with historical patterns of growth in climate finance continuing till 2035. Instead of requiring 'developed' countries to increase their efforts or significantly scale up their contributions, the target allows for climate finance to grow at a slower rate.

Avoiding the worst-case scenario: Events like Covid-19 led to decrease in climate budgets and delays in climate projects. Therefore, the worst-case scenario assumes that events of similar magnitude could exert pressures on climate finance, when countries have to respond to high socio-economic costs of other unforeseen events. Given the worsening effects of climate change, events such as future pandemics may become more likely.

In order to avoid the worst-case scenario, developed countries would have to ensure that their financial commitments are less fragile and more resilient, so that the capacity for climate action in developing countries does not suffer similar setbacks.

Role of MDBs: The NCQG text marks a significant departure from practice on accounting for financing from MDBs. Previously, OECD tracking of climate finance only accounted for multilateral public climate finance attributable to 'developed' countries and channelled through MDBs, climate funds and multilateral institutions. However, the NCQG text recognizes the voluntary intention of parties to count all climate-related outflows and climate-related finance mobilized by MDBs towards achievement of the goal.

In this context, it is relevant to mention that at COP29, MDBs outlined their financial support for climate action in LMICs, estimating that their collective annual climate finance would reach US$120 billion by 2030.

This is significant for several reasons:

If all MDB finance provided and mobilized is accounted for in the NCQG, it significantly reduces the burden on developed countries to meet the targets laid out in the NCQG. Even if a significant portion of climate finance is attributable to developed countries, the NCQG will now include finance “mobilized by” MDBs and also concessional loans provided by MDBs, thus accounting for more climate finance in the NCQG.

Even if developed countries fail to meet their obligations under the NCQG, it is possible that the NCQG would still be met, and potentially ahead of the 2035 target, if all MDB climate finance flows are accounted for in the NCQG. This significantly reduces the efforts required by 'developed' countries to provide bilateral finance to 'developing' countries, as any reduction in their contributions is hedged by the finance provided by MDBs.

Thus, 'developed' countries’ burden to provide climate finance is significantly reduced, and while they would still meet obligations under the NCQG, it would allow them to circumvent the obligation to increase ambition and effort to provide and mobilize climate finance.

Understanding the interaction between ODA and climate finance

We project two scenarios which capture the interaction between ODA (which also includes climate-related ODA), and climate finance, over 2023-2035.

The projections rely on ODA figures provided by the OECD from 2013-2023 (gross disbursements, in current prices) to build on the 2023 figures, while the climate finance figures rely on the OECD figures reporting aggregate trends in annual climate finance provided and mobilised by 'developed' countries for climate action in 'developing' countries over the period 2013-2022, using 2022 as the base year. This number captures only bilateral public finance and multilateral climate finance attributed to developed countries, channelled through MDBs, multilateral climate funds, and multilateral institutions). This is because export credits and mobilized climate finance (reported as part of climate finance by 'developed' countries and counted towards the US$100 billion goal) are not counted as ODA. While this number does not represent all climate-related ODA, it forms a significant part of climate-related ODA and is being used as a proxy for comparison.

The two scenarios are outlined below:

• First, the best-case scenario, which assumes that ODA grows at the average CAGR from 2018-2023 at 7.83%, while climate ODA grows at the rate required to meet the US$300 billion target in 2025, at 7.6%.
• Second, the worst-case scenario, which assumes that ODA grows at the lowest positive year-on-year growth rate from 2018-2023, at 2.11%, whereas climate ODA grows at the CAGR of the worst-case scenario envisioned above, at 3.93%.

Analysis:

In order to have an impact on building capacity for climate action in developing countries, it is imperative that climate finance is “new and additional” to ODA, implying that it does not substitute ODA and reduce the assistance provided for other key development priorities such as health and education. Given constrained ODA budgets of many developed countries, accompanied by the rise of right-wing populism in many donor countries, it would be important that climate finance does not cannibalize ODA for other priorities.

The analysis indicates that in the best-case scenario, the ODA growth only marginally outpaces the growth rate of climate finance, and therefore, while climate finance will continue to grow and occupy a part of ODA, ODA growth will allow allocation of finance to other development priorities without climate finance cannibalizing it.

However, in the worst-case scenario, we see that the growth rate of climate finance exceeds that of ODA significantly, as it is nearly double the growth rate of ODA. In this scenario, while both climate finance and ODA would grow, over time, more and more of ODA would be allocated to climate finance, leaving lesser finance for allocation to other development priorities such as health and education.

For donors to maintain credibility among recipient countries, it is imperative that climate finance is new and additional to ODA and does not diminish resources for other development priorities in LICs and LMICs. If financing is limited and countries are asked to make trade-offs between development and climate priorities, it would significantly undermine their appetite for climate action, and consequently, global climate ambition and goals.

Next steps for advocates

• Working with limited resources: The analysis above paints a grim picture of climate finance going forward; resources are likely to be scarce, and far below the needs of LMICs and MICs. Therefore, it will be key to advocate for effective use of scarce resources to leverage other sources of finance, given that billions are only a fraction of the trillions needed in climate finance.
• Changing landscapes in donor markets: Given constrained ODA environments, the rise of right-wing populism, and the diminishing ambition to provide finance to LMICs and MICs, advocates will have to navigate changing headwinds in donor markets and counteract these narratives by continuing to advocate for funding towards priorities in climate action and development.
• In a constrained ODA environment: It is imperative that climate finance does not cannibalize other development finance and undermine the achievement of other development priorities in LICs and LMICs. Therefore, advocates should engage with donor governments to ensure that climate finance is new and additional to ODA.
• Engagement with the NCQG and outcomes from COP29: It is important for advocates to continue to engage with the NCQG and to create multi-stakeholder campaigns informed by the goals of the NCQG. The NCQG decision has launched the “Baku to Belém Roadmap to 1.3T”, aiming at scaling up climate finance to 'developing' countries. Advocates can continue to engage with the creation of this roadmap to deliver on the NCQG.
• Going beyond US$300 billion: Advocates need to engage with 'developed' countries and multilateral organizations such as MDBs and the climate funds to go beyond the goals and objectives stated in the NCQG and provide and mobilize climate finance to meet the target well before 2035. A repeat scenario of the US$100 billion goal, with significant delays in meeting targets, would undermine trust in 'developed countries' and multilateral processes, and must be avoided at all costs.
• Transparency and accountability: Advocates need to engage with donor governments to ensure transparency in reporting on provision and mobilization of climate finance. Simultaneously, there is a need for enhanced and more accurate reporting of climate finance needs by adaptation, mitigation, and loss and damage in NDCs and NAPs which will form the basis of provision of climate finance. Thus, advocates should continue to engage with governments and demand enhanced transparency and reporting from all stakeholders.

To complement transparency, there is further need for accountability from all stakeholders, and advocates are key in demanding that. They should work towards the creation of harmonized definitions, KPIs for third party accountability, and holding stakeholders accountable to deliver beyond the NCQG.