Money talks: why climate finance at Cop27 is key to beating global heating

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Money is likely to be a flashpoint at the UN Cop27 climate summit starting on Sunday in Egypt, where world leaders will attempt to tackle the climate crisis.

The initial sums involved are just a month’s worth of the fossil fuel industry’s profits. Yet, say experts, the failure so far to deliver promised funding has corroded international trust so much that it could undermine the whole UN process – the only global forum for fighting global heating.

The most fiery issue will be “loss and damage”, the new funding from rich, polluting countries needed to rescue and rebuild poorer communities after climate disasters they have done little to cause. It has been a taboo subject for decades, but with climate impacts rapidly worsening from Pakistan to Puerto Rico, countries representing the vast majority of the global population insist it must finally be addressed.

There are plenty of ideas for raising the money, from taxing fossil fuel companies to the “nuclear option” of catastrophe-hit countries cancelling their foreign debt. A push for reform of the multilateral development banks, including the World Bank, with or without its beleaguered boss, David Malpass, who recently said he “does not know” if he accepts climate science, is also gathering momentum. The minimum that Cop27 must deliver, say campaigners, is a new finance facility into which loss and damage cash can be put.

Climate finance has three purposes: cutting emissions, adapting to the climate crisis, and paying for loss and damage. In 2015, rich countries promised $100bn a year by 2020 for the first two purposes. It has yet to deliver, which is a “shameful” failure, according to African countries, but may do so by 2023. The global economic gloom is also casting a shadow over fundraising efforts.

However, to put $100bn into perspective, it is 37 days’ worth of the oil and gas sector’s average profits over the past 50 years. In the context of this year, it is about half the revenue that Russia has received for fossil fuel exports since it invaded Ukraine. “There is no question – the money is there. It’s being used for the wrong things,” said Prof Saleemul Huq, a Cop veteran and the director of the International Centre for Climate Change and Development in Bangladesh.

For loss and damage, the funding offered to vulnerable countries was zero until very recently. But the dam was broken by Nicola Sturgeon, the first minister of Scotland, at Cop26 in Glasgow in 2021, with ?2m now promised.

Calls for loss and damage finance have been repeatedly rejected by the US and other large economies, which fear liability for trillions of dollars in climate compensation.

But the issue cannot be avoided any longer, according to the UN secretary general, Ant?nio Guterres. “This is a moral imperative that cannot be ignored and Cop27 must be the place for action on loss and damage,” he said in October. “This is the No 1 litmus test of how seriously governments take the growing climate toll on the most vulnerable countries.”

Madeleine Diouf Sarr, who will chair the Least Developed Countries group of 46 nations at Cop27, said: “We can no longer afford to have a Cop that is ‘all talk’.”

The fundamental case for loss and damage funds is that rich polluting countries caused the climate crisis but poorer, developing countries , with tiny carbon emissions, are worst hit by the impacts.

“Loss and damage is the greatest injustice for our generation,” said the Rwandan youth campaigner Grace Ineza, a co-founder of the International Loss and Damage Youth Coalition. “Our generation did not cause climate change, but we are the ones who are going to be left with the huge impact of it.”

Beyond the direct benefits of funding, money is also the currency of trust, said Huq, which is why the missed $100bn target matters so much. “It is a simple matter of credibility of the developed countries to fulfil what they say they will do and they failed,” he said. “So why should developing countries even bother talking to them anymore?”

Such loss of trust has serious real-world ramifications, according to the climate finance expert Kate Levick, at the E3G thinktank. The big greenhouse gas emissions of the future will come from the major emerging economies, such as India, Indonesia, Brazil and China, unless they take bold action that is supported by their populations, she said. “To do that, they have to feel they have the real support of the richer countries and that there will be funds to help them.”

Finance is critical to Cop27 and almost all the key issues, for Levick, come down to finance. She believes solving them is going to be key to the continuation of the UN forum as a driver of climate action.

Laurence Tubiana, a key architect of the breakthrough Paris climate deal in 2015, said that without some movement on loss and damage, “the legitimacy of [the UN process] will be challenged”.

Sameh Shoukry, Egypt’s foreign minister and president of Cop27, acknowledged the danger of problems with finance: “Without appropriate and fair finance serving as a catalyst, we will all continue to struggle in delivering impactful climate action.”

At Cop26, a group of 130 countries, representing 85% of the world’s population, demanded a loss and damage funding facility be set up, but the US and EU blocked it.

In the run-up to Cop27, the US and EU were still rejecting the idea of loss and damage payments. John Kerry, the US special envoy for climate change, was asked about such funding in September. “You tell me the government in the world that has trillions of dollars, because that’s what it costs,” he replied bluntly, adding that he would not be “feeling guilty” about it.

The EU climate chief, Frans Timmermans, also recently challenged the power of the moral argument for loss and damage: “Let’s be frank: many of our citizens in Europe will not buy this argument today because their worries are linked to their own existence in this energy crisis, in this food crisis, in this inflation crisis.”

As Cop27 drew nearer, the US and EU softened their language, saying they would at least not obstruct talks on loss and damage.

Huq said: “I would recommend [Kerry and Timmermans] talk to Nicola Sturgeon, who broke the taboo [on loss and damage funding]. Denmark has also broken ranks, the first national government.” Denmark has pledged $13m, with the development minister, Flemming M?ller Mortensen, saying in September: “We are putting action behind words.”

The contributions of Scotland and Denmark have high symbolic importance, but the sums needed for loss and damage are vast. Developing countries are on track to suffer $290bn-$580bn in loss and damages every year, according to one widely cited study, rising to more than $1tn by 2050. Add in the funding needed to switch to a low-carbon economy and pay for adaptation projects, and all assessments come up with a total of trillions of dollars.

There are a plethora of proposals in play for finding such funds, beyond government grants. “The window is wide open right now in terms of ideas,” said Levick. “There hasn’t been really big thinking coming through the G7 and G20 forums, partly because of political constraints.”

Huq added: “We should try all of them. I say let a hundred flowers bloom.”

Guterres told world leaders in September: “Polluters must pay. I am calling on all developed economies to tax the windfall profits of fossil fuel companies.” The youth activist Ineza backed this: “The first channel will be making the polluters pay, because polluters are the main drivers of [the climate crisis].”

The world’s most vulnerable countries are preparing to back calls for an ongoing tax on fossil fuel extraction, or global taxes on carbon emissions, airline travel, shipping fuels or financial transactions. A combination of these might raise $200bn a year, according to experts, though Levick warned: “International agreements about tax regimes are always very difficult. That said, there are a number of countries going ahead with [fossil fuel] windfall taxes.”

The biggest momentum is swinging behind dramatic reform of the international financial institutions and multilateral development banks, such as the World Bank and International Monetary Fund, which collectively hold $1.5tn in assets. This is backed by Guterres, the UN’s new climate chief, Simon Stiell, Cop26 president Alok Sharma and, crucially, the head of the IMF, Kristalina Georgieva, who said: “If we don’t shift our trajectory [to higher investment in climate action] this decade, we are cooked.”

Critics say the institutions, set up in the aftermath of the second world war, were appropriate for the 20th century, but not for the climate and other cross-border crises of the 21st century. Reforms could include cheaper loans for green projects and allowing the institutions to de-risk clean energy projects for the private sector by co-investing.

However, the lead institution, the World Bank, is seen as a drag. “We haven’t had the leadership expected from the World Bank,” Levick said.

Malpass, the bank’s boss, was appointed by then US president Donald Trump in 2019. In September Malpass was asked if he accepted the scientific consensus that fossil fuel burning was causing dangerous climate change. “I don’t even know, I am not a scientist and that is not a question,” he replied. The former US vice-president Al Gore previously said it was “ridiculous to have a climate denier as head of the World Bank”. Malpass later said he was not a denier, but campaigners are calling for him to be replaced.

After the row, 10 major economies, including the US, UK and Germany, handed a joint proposal for “fundamental reform” to the World Bank, expecting a response by the end of 2022. The IMF launched its Resilience and Sustainability Trust with $20bn from donors including China in October, to “support countries building resilience to structural challenges such as climate change and pandemics”.

Another set of financial reforms, the Bridgetown Agenda, is being championed by Mia Mottley, the prime minister of Barbados, whose outspoken appearances at Cop26 won her many plaudits. It calls for the mobilisation immediately of $100bn “to those who need it”, the suspension of interest penalties for heavily indebted countries, debt payment suspension for the poorest countries, a “global mechanism” for loss and damage funding, and a longer-term $650bn fund to help accelerate private clean energy investment.

“We cannot be good at rescuing banks but bad at saving countries,” the Agenda document says. Avinash Persaud, the special envoy to Mottley, said: “We believe the multilateral development banks can extend their lending by $1tn. There is a critical moment here because we have the grotesque coincidence of the oil producers making approaching $200bn of profits in the last quarter at the same time that a third of Pakistan is underwater: the cost in Pakistan, they say, is $40bn.”

A foreign debt crisis in poor countries, intensified by the Covid pandemic, also looms, with more than 60% of low-income countries in, or at high risk of, debt distress, according to the IMF. If climate finance comes in the form of further loans, that simply adds to high debt mountains. For example, small island states at extreme risk from climate impacts pay at least 18 times more in loan repayments than they receive in climate finance.

Such concerns have raised the idea of countries, such as flood-stricken Pakistan, stopping debt repayments to rich countries. Twenty countries highly vulnerable to the climate crisis may halt the repayment of the $685bn they owe, said Mohamed Nasheed, the former president of the Maldives, recently: “We are living not just on borrowed money, but on borrowed time.”

Levick said: “That’s a bit of a nuclear option. But it is one that feels like it’s getting closer to being on the table, simply because of the dire situations that many of these countries are in.”

Prof Carlos Lopes, at the University of Cape Town, South Africa, said such a move could be justified by the low emissions of developing nations: “African countries have a carbon credit, and we need to transform that carbon credit into debt forgiveness. If we don’t, we are really not taking into account loss and damage.” Some experts suggest debt reduction could be given in return for climate action.

Direct funding from rich countries for phasing out coal use is under way, although only on a country-by-country basis. South Africa may be the first to receive such funds – though the $8.5bn deal is yet to be sealed – followed by Vietnam, Indonesia and Mexico.

Providing insurance against climate disasters for poorer countries has also been trialled, but there are concerns over the affordability of premiums for events that are growing ever more likely. “Climate change is an uninsurable event,” Persaud said. “We need actual money.”

Demands for loss and damage funds could be boosted by a legal opinion being sought from the world’s highest court, the UN’s international court of justice (ICJ), on the obligations countries have to other climate-vulnerable countries and to future generations.

The advisory opinion is being requested by Vanuatu and its allies, and Bakoa Kaltongga, Vanuatu’s special envoy on climate change for the Pacific, said: “We are moving far too slowly, at a pace that does not reflect the devastation experienced every day in our communities. This is an existential crisis. ICJ advisory opinions hold great legal and moral authority, enough in the past to substantially change state behaviour on critical global issues.”

At Cop27, the minimum required is the establishment of a loss and damage finance facility into which funds could be put, said Ineza. Levick added: “We need to build enough trust, and that is going to involve donor countries offering enough on some of these contentious issues – loss and damage is going to be a key flashpoint.”

Huq is one of a handful of people in the world who have attended the UN’s climate Cop every year since they began in 1995. He said: “I’m always optimistic because the UN climate summit, for all its faults, is the only place where we the vulnerable, poor, developing countries have a seat at the table and the opportunity to argue and convince the big countries.

“We don’t usually win, but occasionally we do get something if we get our act together, and we can make good arguments and get allies on our side. But I’m also usually disappointed at the end.”