Why COP29 is Crucial for Restoring Trust in Global Climate Action

The 29th COP of the United Nations Framework Convention on Climate Change (UNFCCC) in Baku signifies a critical juncture in climate finance negotiations. Dubbed as the ‘finance COP,” it will set the agenda for a New Collective Quantified Goal (NCQG) in annual climate finance from developed to developing nations starting in 2026.

Alongside the NCQG, negotiators will address key issues, including those pertaining to the funds for responding to loss and damage to support vulnerable economies and guidelines for activating international carbon markets under the Article 6. The conferees at Baku will have a historic opportunity to restore global trust in climate action, shaken by lengthy, contentious negotiations at previous COPs.

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The NCQG is meant to succeed the previous funding target of $100 billion per year by 2020, which was subsequently also made applicable through to 2025, and was reportedly met in 2022. However, many parties remain sceptical about the veracity of these figures. The doubts stem from several concerns, including: (i) whether these figures represent actual flows or commitments; (ii) whether they include reclassified development aid; (iii) whether climate relevance estimates by multilateral development banks and bilateral agencies inflate the flows and, finally, (iv) if public capital on commercial terms should count towards the goal.

The Baku Conference can avoid these controversies by ensuring that the NCQG comprises actual disbursements – not commitments—that are both new and additional. The flows that count towards the NCQG should be either public finance in the form of grant capital or the grant-equivalent of other forms of concessional public capital, along with any private finance these mobilise. Public capital should primarily be deployed through blended finance instruments to mobilise substantial private capital and minimise the burden on developed countries. By reducing investment risks or other mechanisms, such instruments facilitate the participation of private capital in climate projects in developing countries.

Public climate finance requirements should be sized to help attract sufficient incremental private capital in turn, so that these may collectively meet the external climate finance requirements of developing countries. According to the estimates of the Independent High Level Expert Group on Climate Finance, developing nations (excluding China) require $1 trillion per year by 2030 from external sources. This should form a credible basis from which to determine the quantum of the NCGQ.

Operationalising the loss-and-damage-fund

Although COP28 flagged off the loss-and-damage-fund, several crucial details remain hazy, such as which countries will contribute (whether this should be developed countries only, or include others as well), which developing countries will benefit and what will be the scale of funding. One viable financing option is to set up the fund as insurance with premiums covering climate risks. This can be approached in the following two ways:

General Insurance Model: Here payouts depend on assessed damages after the occurrence of covered events involving complex determination for climate-related losses.

Parametric Insurance Model: In this alternative, pre-determined payouts are made based on specific trigger events, with the size of the payout linked to that of the insurance premium. This approach balances the interests of funders by capping payouts.

Carbon markets conundrum

On international carbon markets, COP26 established the broad principles for Article 6.2 (bilateral/multilateral trading between countries) and Article 6.4 (centralised market mechanism). Since then, negotiators have evolved detailed guidance to operationalise these mechanisms though consensus on all matters has not yet been achieved. While countries like Switzerland, Japan and Sweden have signed Article 6.2 agreements, they must remain mindful of how future rules may impact these arrangements.

Transparency and reporting are vital under Article 6.2 and, along with the process for authorisation of credits (ITMOs), will be key discussion points at COP29. Standardised electronic reporting formats for ITMOs, generated through Article 6.2 deals, are yet to be finalised. Contentious provisions also remain around options for confidentiality of reporting. Limiting confidentiality to exceptional circumstances could prevent green washing and reinforce trust.

For Article 6.4, the Supervisory Body has adopted standards on methodologies and carbon removals with effect from October 2024. Should the COP, the highest decision-making body under UNFCCC, endorse these standards, Article 6.4 markets could be operationalised.

The Finance COP presents negotiators with an opportunity to resolve long-standing controversies. Will a finance mobilisation goal foster trust in climate negotiations? The climate emergency is pressing, and time is not on our side.

Dutt is Senior Programme Lead, and Purkayastha is Director Growth and Institutional Advancement at Council on Energy, Environment and Water (CEEW).