North-South Divide on Climate Finance VS Investments at IPCC

Green Climate Fund. Wikipedia

Kathmandu, 11 Mar (Prerna Bomzan): At the recent 62nd session of the Intergovernmental Panel on Climate Change (IPCC 62) which approved the chapter outlines of the three working group (WG) reports of the upcoming seventh assessment report cycle (AR 7), the critical issue of “climate finance” dominated the negotiations with a sharp divide between developed and developing countries over inclusion of the term “investments” in the chapters on “finance”.

On 1 March in Hangzhou, China, after a day of scheduled closing and a marathon session of 40 hours, Panel members concluded the approval of the chapter outlines of WG 1 ‘The Physical Science Basis’; WG 2 ‘Impacts, Adaptation and Vulnerability’; and WG 3 ‘Mitigation of Climate Change’ reports.

The strong consistent push by developed countries to elevate “investments” and include it in the ‘title’ of the WG 2 and WG 3 respective finance chapters which read as solely “finance”, was successfully warded off by developing countries retaining the ‘title’ as is, and considered it a big win in defense of their interests on climate finance as a critical means of implementation for climate action.

The approved chapter outlines of WG 2 contain ‘Chapter 6: Finance’ and of  WG 3 contain ‘Chapter 7: Finance’. (This article will focus on WG 3 discussions, while another article will follow on WG 2).

The key contention centred around the scope of climate finance, pervading the indicative ‘bullets’ of the two respective finance chapters of WG 2 and WG 3 reports: developed countries argued for a “broad” scope, highlighting and conflating investments, financial flows and all sources of finance and financial actors underlining the role of private finance, explicitly anchoring Article 2.1(c) of the Paris Agreement (PA). However, developing countries countered for use of the term “climate finance” as the normative, in the form of grants and concessional loans, from public sources, in line with developed countries’ obligations and commitments under the UNFCCC and its PA.

(Article 2.1(c) reads, “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. There is no consensus yet on the  scope of Article 2.1(c) and its complementarity with Article 9 [on finance] of the PA, with ongoing work under the Sharm el-Sheikh dialogue launched in 2023 at COP 27, and Parties to decide on a way forward with regard to deliberations on the matter, when they meet at COP 30 in Belem in Nov 2025.)

Negotiations fraught with divergences over the fundamental understanding of climate finance and its clear scope, brought back to the table the perennial problem of absence of a multilaterally agreed “common definition”, which has plagued the overall transparency and accountability of climate finance from developed to developing countries.

Overall, there were two important wins for developing countries going forward: (i) the ‘title’ is maintained as solely “finance” without inclusion of investments and (ii) the absence of language on Article 2.1(c) of the PA, in both the WGs 1 and 2 finance chapter outlines.

Other broad sticky issues were: whether or not to align the two respective finance chapters for “consistency”; reflection of “differentiation” between developing and developed countries vis-à-vis climate finance obligations and specific references to the two categories of countries and differentiation between market and non-market based approaches. (See details below).

PROCESS & MODE OF WORK

At the plenary sessions on 24-26 Feb, views and inputs on the two respective finance chapters were received as part of general comments on the proposed chapter outlines presented by the Co-Chairs of  WG 2 and WG 3 respectively, which resulted out of the scoping meeting held in Dec. 2024 in Kuala Lumpur, Malaysia.

On 27 Feb night, a ‘contact group’ was set up by the WG 3 Co-Chair Joy Pereira (Malaysia) and Vice-Chair Jan Fuglestvedt (Norway), with the mandate to “seek agreement on (i) the title of Chapter 7 and (ii) bullets of Chapter 7” of the WG 3 finance chapter outline. The dedicated setting aimed at finding agreement on the text, for consideration at the plenary for approval. Following over 14 hours of negotiations in the contact group setting, the WG 3 finance chapter outline was finally agreed and approved at a plenary setting late night on 28 Feb.

The WG 2 finance chapter outline was then opened in the early morning of 1 March, at a plenary setting and negotiated hurriedly towards its approval, sharply contrasting with a dedicated 2-day contact group mode of work which was followed for WG 3 finance chapter.

Saudi Arabia expressed “disappointment” over the “imbalance of treatment” between the two WGs finance chapters and cautioned against setting a precedent, calling for a process with equal allocation of time.

Negotiations on the two respective finance chapters and the evolution of the final texts are summarised below. In essence, the difficulty and sensitivity of the finance discussions revolved around ensuring the IPCC’s principle of being “policy-relevant” and “policy-neutral” against being “policy-prescriptive”, and aiming for that “balance” in the final texts.

WG 3, CHAPTER 7: FINANCE

Negotiations were based on the proposed chapter outlines agreed at the scoping meeting, which was presented by the WG 3 Co-Chair Pereira and Vice-Chair Fuglestvedt, on behalf of the WG 3 Bureau.  The ‘title’ and 12 indicative ‘bullets’ of the chapter outline read as follows:

“Chapter 7: Finance

• Scaling finance to meet current and future finance needs;

• Innovation for financing, including schemes, instruments (e.g., green bonds, green credits, green taxonomies), and case studies of successful innovations;

• Types of finance and financing mechanisms: public, private, bilateral, multilateral, blended finance, market-based instruments (including carbon markets);

• Financial adequacy, access (equity and justice), inclusion, and effectiveness, considering finance at different scales (including national, regional, and global);

• Financial flows (including to developing countries), tracking by sources, sectors and levels of governance, channels, regions, countries, and instruments;

• Finance for innovation and for national and sectoral transitions;

• Cost of capital, debt, and debt instruments;

• Enabling environments for finance ;

• Governance of finance, including regulation and coordination of finance actors;

• Transition risks in the financial sector;

• Ex-post analysis of mitigation finance;

• Gender, Indigenous Peoples and local communities climate finance”.

During general comments at the WG 3 plenary sessions, members highlighted finance as a “cross-cutting” issue with cross WG linkages and therefore, the need for “consistency” and close “alignment” between the WG 3 and WG 2 finance chapters. Developed countries primarily framed it in the context and relevance of Article 2.1(c) of the PA, underscoring investments, financial flows and all sources of finance and financial actors with the role of private finance, and further calling for inclusion of “investments” in the title of the chapter to read as “Finance and Investments”, as well as in the indicative bullets which was starkly missing.

In addition, linkage with “cost of inaction” was pushed by Germany, France, Denmark, Switzerland, Italy, Australia, UK, Luxembourg, Sweden, Norway, Belgium, New Zealand, the Netherlands, Austria, Canada, Ukraine and the European Union, in the context of “stranded assets” and related transition risks.

However, any cross WG framing and “alignment” was sharply objected to by Saudi Arabia, India, and China, who argued for preserving the autonomy of the two respective finance chapters that deserved its own merit. They also maintained that Article 2.1(c) of the PA is out of scope and mandate at the IPCC, given that it is a highly contested political matter under the UNFCCC, and also opposed to the inclusion of “cost of inaction”.

Further, on the critical issue of “differentiation” between developing and developed countries vis-à-vis climate finance obligations, inclusion of references to these two categories of countries was called by India, Saudi Arabia, China, Egypt, Algeria, and South Africa.

India also expressed concern on clubbing “market-based” instruments, which it did not consider as a type of financing mechanism, and for the need to separate it from the rest. It further highlighted “non-market” approaches, which was also called by Indonesia for its inclusion along side market-based approaches.

China called for the deletion of “debt” from the indicative bullet (7th), stating that this important issue is dealt with at a political level through specific bilateral and multilateral channels. It highlighted the term “non-debt inducing” financial instruments.

On 27 Feb night, the ‘contact group’ in a dedicated setting, was led by Cheryl Jeffers (Saint Kitts and Nevis) and Sebastian Konig (Switzerland), with the mandate to “seek agreement on (i) Title of Chapter 7 and (ii) Bullets of Chapter 7”.

The following section below outlines the evolution of the final 9 indicative ‘bullets’ of the chapter outline, as agreed in the contact group and approved at the plenary by Panel members.

Title: Finance

The sharp divide between developing and developed countries to retain the ‘title’ solely as “finance” against inclusion of also “ investments” persisted with no headway made even at the contact group. India underlined that climate finance is not a matter of investments and profits and it was suppported by China, Saudi Arabia, and Kenya. With no agreement in sight, the ‘title’ was brought back to the final plenary where it was finally agreed solely as “finance”.

The approved ‘title’ of the chapter outline reads, “Chapter 7: Finance”.

Bullet 1: Scaling finance to meet current and future finance needs

Saudi Arabia, India, and China specifically called to add “for developing countries” at the end of the sentence to reflect the critical issue of “differentiation”. Australia and Denmark argued that finance is essential for both developed and developing countries. Germany stressed only on future needs and stated to replace “scaling” by “mobilising”, while Denmark suggested to replace by “accelerating financial flows and investments”. Palau stressed on understanding of finance needs. Switzerland highlighted investments and “consistency of financial flows” relating to the  goals of the PA, suggesting to add “low emissions development” at the end of the sentence which was supported by the Netherlands and Canada.

Saudi Arabia countered that this is related to Article 2.1(c) of the PA with no common interpretation yet so not to prejudge matters of the UNFCCC in a scientific report. The UK said that this first introduction bullet can be common across the three working groups. India reiterated that there is no need for alignment and further responded that “low emissions” pathways is controversial.

This bullet 1 was later taken as a package agreement with bullet 6, “Finance for innovation and for national and sectoral transitions”, where the call for reflecting investments was potentially identified. An alternative language proposal from a Bureau member for consideration, read as “Investment and finance for innovation, and for sectoral and national transitions”. Switzerland highlighted to add “consistent with mitigation pathways” which was supported by Denmark, but was opposed by Kenya, and India who said that mitigation pathways has specific meaning in the context of WG 3 and concerns issues of “equity and justice”. Co-Chair Jeffers (Saint Kitts and Nevis) reminded members not to be “too prescriptive”

India made another alternative language proposal for bullet 6 as, “Investment and finance for innovation and transitions in the context of sustainable development”, which was supported by China. Denmark expressed reservations to removing “sectoral” and “national” from the original language. The UK agreed with India’s alternative proposal along with bullet 1 as a package, which was supported by France and Switzerland. The alternative bullet 6 was moved up and placed as new bullet 2, with the language evolving into including “mitigation” and read as, “Investment and finance for innovation and for mitigation and transitions in the context of sustainable development”

The approved bullet 1 retained its original language and reads, “Scaling finance to meet current and future finance needs”.

The approved new bullet 2 ( bullet 6 renumbered) reads, “Investment and finance for innovation and for mitigation and transitions in the context of sustainable development”.

Bullet 2: Innovation for financing, including schemes, instruments (e.g., green bonds, green credits, green taxonomies), and case studies of successful innovations

Saudi Arabia and China asked for deletion of case studies and to add “national” before schemes; however, Austria and Australia preferred to retain case studies. Japan did not approve of green bonds etc and suggested to include “transition finance”. Palau suggested merging the sentence with the 6th bullet which also speaks to innovation. France asked to add “innovative sources”. Saudi Arabia made alternative language proposal to read as “innovation for financing including instruments”, which was acceptable to Australia, however, the formulation eventually evolved into “innovation for financing”.

The approved new bullet 3 reads, “Innovation for financing”.

Bullet 3: Types of finance and financing mechanisms: public, private, bilateral, multilateral, blended finance, market-based instruments (including carbon markets)

Saudi Arabia, India, China, and Kenya highlighted inclusion of “grants”. India also said to separate market-based instruments and carbon markets, to which Switzerland agreed, however, stressing on the importance to retain carbon markets. Saudi Arabia opposed to carbon markets as not being under finance and Kenya commented that it falls under international cooperation. Palau asked to unpack finance and financing mechansims. Denmark mentioned the missing elements of “incentives, disincentives and subsidies” which was supported by France and Switzerland, but it was argued by India that disincentives are not finance, further supported by Saudi Arabia that incentives and disincentives are very prescriptive in nature. Denmark responded that its about “financial incentives and disincentives to fossil fuels which goes against mitigation”.

Following various proposals, Saudi Arabia suggested alternative language proposal as, “Financial instruments, channels and mechanisms in use” to which India said to add “sources” before instruments, stressing that “grants” should be reflected in the background note. Kenya agreed with India, while Switzerland agreeing to add sources, also asked to include investments, supported by Denmark. However, it was not accepted by China. On “sources”, Saudi Arabia suggested to replace it by “climate finance types”.  Sweden and Denmark expressed absence of market-based instruments in the alternative language proposal. India made alternative language proposal as, “Finance sources, instruments, channels and mechanisms”.

The approved new bullet 4 reads, “Finance instruments, sources, channels and mechanisms”.

Bullet 4: Financial adequacy, access (equity and justice), inclusion, and effectiveness, considering finance at different scales (including national, regional, and global)

Germany called for replacing adequacy with “appropriateness” to which France preferred “impacts” but was willing to support Germany’s proposal. India asked for the removal of the paranthesis between equity and justice and argued that “access” is largely determined by them, but there was resistance by Australia, Germany, the Netherlands, and Switzerland. Switzerland also asked to add “consistency with mitigation action” into the sentence which was supported by France, Denmark, but was opposed by Saudi Arabia, India, Kenya, China.

This bullet was taken as a package with bullet 11, “Ex-post analysis of mitigation finance” which was very contentious given “assessment” of  “outcomes” of “mitigation finance” which developed countries strongly pushed for, but “outcomes” oriented framing was strongly resisted by Saudi Arabia, India, China, Kenya. China said that if it is in relation to assessment of mitigation finance, then to add “provided from developed to developing countries” which was supported by Saudi Arabia who further suggested to drop bullet 11 altogether due to huge divergence and being very prescriptive in nature. Palau was willing to go with “finance outcomes” which was supported by Norway, Australia. The final compromise evolved into deleting bullet 11 altogether and capturing “outcomes” in the new bullet 5.

The approved new bullet 5 reads, “Financial adequacy, access (equity and justice), inclusion, effectiveness, and outcomes considering finance at different scales (including national, regional, and global)”.

Bullet 5: Financial flows (including to developing countries), tracking by sources, sectors and levels of governance, channels, regions, countries, and instrument  

Saudi Arabia, India, China called for “from developed to developing countries” to anchor differentiation and climate finance obligations by developed countries under the climate regime. Denmark said to add “investments” after financial flows, and also to add “in” before developing countries which was supported by France. Australia supported by Denmark wanted to capture domestic resources and pushed to add “within” developing countries however it wasn’t accepted. It was eventually agreed to bring the language “including those to, from, and between developed and developing countries” from the background information document.

Discussions also led to adding a qualifier after “financial flows” with two options – either “to support mitigation” or “in the context of mitigation” – which could not be agreed in the contact group and was taken to the plenary. Saudi Arabia, India, and Kenya pushed for the first option saying that it was already a bridging proposal.

The approved new bullet 6 reads, “Financial flows to support mitigation (including those to, from and between developed and developing countries), and tracking by sources, sectors and levels of governance, channels, regions, countries, and instruments”.

Bullet 6: Finance for innovation and for national and sectoral transitions

This bullet 6 was renumbered to new bullet 2 during the evolution of the text. It was agreed as a package with bullet 1 (See details above in bullet 1)

Bullet 7: Cost of capital, debt, and debt instruments

China said that debt is a highly political process and due to its complexity, resolving it requires bilateral and multilateral processes to reach consensus, hence to delete references to “debt”. It stressed on non-debt creating instruments to access grants and concessional loans and preventing additional burden on developing countries. Germany was fine with deleting “debt” but asked to keep “cost of capital”. Kenya and Palau asked to keep the bullet language as is.

This bullet was eventually discussed in relation to the following bullet 8, “Enabling environments for finance” where access to finance and its disenablers or barriers were also discussed and therefore, a potential package was explored to delete bullet 7 and address its elements instead in bullet 8.

India asked for deleting bullet 8 altogether due to concerns arising from domestic policies like “structural adjustments” as enabling environments. Denmark, France highlighted “disenabling” environments to which Saudi Arabia responded to include “unilateral measures” as well, which was objected by Germany, the UK, and Australia who said it was an ongoing political issue in other forums like the WTO (World Trade Organisation). France, Australia, the UK, Denmark, Palau, and Kenya preferred “enablers and disenablers for finance”.

However, Saudi Arabia suggested alternative language proposal to bullet 8 as, “Enablers and barriers to access finance” and with the deletion of bullet 7 as a package, which was supported by China. Switzerland, the UK, Austria and Australia objected to “access”, with the latter proposing “to attract investment and finance” as a compromise. They were also willing for deletion of bullet 7 with the language proposal to bullet 8 as, “Enablers and barriers for finance”. India eventually proposed alternative language proposal to bullet 8 as, “Enablers and barriers for finance, including barriers to access” with the deletion of bullet 7 as a package, which was agreed.

The approved new bullet 7 reads, “Enablers and barriers for finance, including barriers to access”.  

Bullet 8: Enabling environments for finance

This bullet 8 was renumbered to new bullet 7 during the evolution of the text, as mentioned above.

Bullet 9: Governance of finance, including regulation and coordination of finance actors

Germany asked to delete “including regulation and coordination of finance actors. France highlighted “wide variety of actors including development banks and multilateral funds”. Kenya preferred the bullet language as is. Co-facilitator Konig (Switzerland) suggested an alternative language proposal for consideration which read only as, “Governance of finance” which was supported by Palau, Denmark, Vanuatu, and Australia. However, Saudi Arabia and India asked for the deletion of the bullet altogether.

Bullet 9 was also discussed at tandem with following bullet 10, “Transition risks in the financial sector” and negotiations evolved into a package agreement of the two bullets. In this particular bullet 10, developed countries highlighted the missing element of “cost of inaction” and therefore called for its inclusion, referring to the specific issue of “stranded assets”. Saudi Arabia, India, and China called to drop bullet 10 as it was too prescriptive. Palau stressed that “equitable” is an important word for how small economies are managing risks and thus proposed alternative language to read as, “equitable management of climate-related financial risks”.

Denmark next proposed a package – an alternative language proposal to bullet 9 to read as, “climate-related governance of finance” and delete bullet 10 including all its alternative language proposals. A Bureau member present also agreed that bullet 10 would be covered by “governance”. Saudi Arabia, India, and China then made another alternative language proposal to bullet 9 as, “climate-related management of finance”. Sweden and Switzerland next proposed as, “climate-related planning and management of finance, including transitions and assessment”.

The approved bullet 8 reads, “Climate-related planning and management of finance”.

Bullet 10: Transition risks in the financial sector

This bullet 10 was deleted as a package agreement with bullet 9, as mentioned above.

Bullet 11: Ex-post analysis of mitigation finance

This bullet 11 was agreed as a package with bullet 4, as mentioned above.

Bullet 12: Gender, Indigenous Peoples and local communities climate finance

This bullet 12 was agreed as is at the contact group and reads as new bullet 9. The approved outline with its final 9 indicative bullets reads as follows:

“Chapter 7: Finance

• Scaling finance to meet current and future finance needs

• Investment and finance for innovation and for mitigation and transitions in the context of sustainable development

• Innovation for financing

• Finance instruments, sources, channels and mechanisms

• Financial adequacy, access (equity and justice), inclusion, effectiveness, and outcomes considering finance at different scales (including national, regional, and global)

• Financial flows to support mitigation (including those to, from and between developed and developing countries), and tracking by sources, sectors and levels of governance, channels, regions, countries, and instruments

• Enablers and barriers for finance, including barriers to access

• Climate-related planning and management of finance

• Gender, Indigenous Peoples and local communities climate finance”

- Third World Network