As we outline below, there are two key takeaways from COP27 – the Loss and Damage fund and a lack of action on emissions. Several talking points are also discussed, such as the appeal of blended finance and the new role of natural gas.
Loss and Damage
Over the past 20 years, climate-related disasters have cost 55 developing countries $525bn, according to a report. Going forward, the Loss and Damage fund seeks to cover the cost of damage that countries cannot avoid or adapt to. It not only represents a shift in how climate change is framed but is also a symbol of global unity. The moral argument is clear: developed countries have built their economies through the burning of fossil fuels that have released emissions contributing towards the climate-related disasters unfolding today, largely in the global south. Although this is an unprecedented step towards a more fair and just climate change programme, there are still several questions over who will pay, how much, what constitutes loss and damage, and how the money will reach its destination.
At the beginning of COP27, key African nations announced that fossil fuel infrastructure will continue to expand as a means to provide energy security to the continent and lift millions out of poverty. Following the well-trodden fossil fuel pathway is cheaper and lower risk compared to greener sources of energy. Many countries will have indigenous sources of fossil fuels and won’t be regulated by carbon pricing. Emerging economies, which are responsible for 95% of the increase in emissions over the past decade, are understandably following this path. Rather than blame them, a common but differentiated responsibilities approach will be followed, a framework established in 1992. Incentives, guidance, and expertise will be provided to prevent fossil fuel lock-in and enable an energy transition. To achieve this, limited public funds must be enhanced with private finance.
Blended finance is a mix of different types of finance sources including money from governments and public bodies, charitable and philanthropic organisations, and private sources. A major barrier to private organisations investing in early-stage unproven adaptation and mitigation initiatives is poor risk-reward ratios. Policy surrounding the renewable sector, for example, is still formulating and technology is still developing in areas such as battery storage. Investments, therefore, are risky.
To increase the likelihood of private investors getting involved there needs to be a suite of safeguards. Firstly, an attractive investment climate should be established. For example, carbon pricing can be utilised to force high emitters to pay more, thus channelling investors towards low emissions projects. A recent example of this (among other policies) can be seen in the US, where president Biden has unveiled the Inflation Reduction Act. Secondly, development banks, international financial institutions and philanthropists can work closely with governments to help initiate projects and underwrite some of the early-stage risk. This can work to encourage private investors into those projects by improving the risk-reward ratio. Developed economies could fund projects in developing nations. Following these steps ensures an appealing climate with suitable gains to be made for private investors.
Blended finance is gaining traction and popularity. The recently formed Global Blended Finance Alliance aims to be the “regional hub and global accelerator”, helping facilitate the collaboration of public and private finance. The Adaptation Fund, which finances projects and programmes that help vulnerable communities in developing countries adapt to climate change, received more than $230mn in new pledges at COP, $100mn of which coming from the US. Blended finance could prove crucial in maximising this fund's potential. Finally, the agreement made last week between Indonesia and the Just Energy Transition Partnership draws on $20bn of public and private finance. Indonesia seeks to have its emissions peak by 2030 and hence needs to decarbonise its energy sector - a significant challenge for the world’s third-largest coal producer.
Lack of action on emissions
Whilst the Loss and Damage fund was heralded as a positive development, the World Economic Forum’s president summarised the mood - “the cost of inaction far exceeds the cost of action”. 2022 is set to be a record year of emissions and, on this trajectory, the remaining carbon budget to limit warming to 1.5C by 2050 will be passed in nine years. The lack of action was a result of pressure from fossil-fuel states and a record number of fossil-fuel lobbyists. India, with the support of 80 countries, proposed to expand COP26’s agreement on coal phase-down to all fossil fuels, but the notion was quashed.
The COP text remains largely the same as last year, except for the inclusion of “low emission” energy alongside renewables. The alteration is significant in a text where the placement of a comma can be hotly negotiated. It is widely believed that it leaves the door open to natural gas, which is already seeing expansion around the globe in response to the current energy crisis. Indeed, both the EU and the COP27 president Sameh Shoukry have hailed natural gas as a “transitional source of energy”. Contrastingly, the International Energy Agency argue the expansion of fossil fuel infrastructure needed to stop a year ago. The bottom line is that emissions need to be reduced. Gas will be an important resource in the energy transition, but there are concerns over the pace of the transition. To ensure a liveable future, global emissions need to halve by 2030, determined the IPCC. This year’s COP has not made any progress towards that despite reaffirming the 1.5C limit.