Definitions and accounting of climate finance: between divergence and constructive ambiguity

ABSTRACT

The Paris Agreement reaffirmed the commitment to provide USD 100 billion in international climate finance to developing countries by 2020, while COP26 agreed to set a new target by the end of 2024. However, in the absence of a clear, internationally accepted definition of climate finance, the estimates of the progress towards this objective wildly differ. This article provides an overview of different issues related to diverging definitions of climate finance, its main dimensions and proposes to distinguish between counting methods (e.g. Rio markers) and accounting frameworks of climate finance (e.g. by the OECD). We start by reviewing the existing definitions of climate finance both under the UNFCCC and beyond, followed by a discussion of the key dimensions of climate finance that affect definitions, as well as the main climate finance accounting approaches. In the context of the Paris Agreement, attaining a consensus among Parties on the definition of climate finance is crucial, but may result in watering down the level of ambition, for example, by including finance to activities that may not be in line with the latest climate science. Such convergence would require resolving all controversial dimensions of climate finance discussed in this article – notably, provider versus recipient side perspectives, eligible activities, inclusion of controversial sectors and technologies, public versus private finance, climate versus development finance, accounting for negative climate finance and so on. As most likely not all issues can be resolved through a consensual multilateral process, some level of ‘constructive ambiguity’ may be required in defining and accounting for international climate finance.

Key policy insights

• There is no commonly accepted definition of international climate finance today, making it difficult to track progress.

• Climate finance accounting approaches differ depending on the interpretation of different dimensions of climate finance.

• A commonly accepted definition of climate finance should take into account the latest science on 1.5°C and net-zero scenarios.

• Climate clubs or coalitions may take up the issue of ‘muddled’ counting methods and accounting frameworks of international climate finance in ‘side deals’ of official negotiations.

• The Standing Committee on Finance is best positioned to authoritatively perform regular accounting for finance flows eligible under international climate commitments.

KEYWORDS:

• Paris Agreement
• climate finance
• fossil fuel finance
• accounting

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Note that we use the distinction between ‘developed’ and ‘developing’ countries only since it continues to be the standard terminology under the UNFCCC negotiations, while fully acknowledging the misleading nature and biophysical constraints of following a linear (Western) development model.

2 Two-year averages, referring to the most recent data, that is, the period 2018–2019 for OECD (2021a) and 2019–2020 for Buchner et al. (2021). Including finance for activities that have both mitigation and adaptation benefits, OECD (2021a) report a 33% share of international climate finance associated with adaptation, Buchner et al. (2021) a share of about 10% of total climate finance flows.

3 Such bodies exist for a variety of special themes, including for adaptation, least developed countries’ matters, and capacity building, to name only a few. Generally, all UN regions can nominate a certain number of members of such bodies which operate according to the consensus principle. Bodies cannot take decisions but make recommendations to the COP.