New climate finance – a steep climb up the COP29 hill?

COP29 is arguably the most important UN climate change conference since COP21, in 2015, after which the Paris Agreement was signed. This is because the next stage of climate financing is due to be agreed: intended to move beyond the COP15 target, established in 2009, of providing US$100 billion per year by 2020 to support climate action in developing countries.

The new agreement will set a trajectory for financial flows and accelerate mitigation and adaptation with more specific objectives and breakdown in financing instruments: "new collective quantified goals" (NCQG) are to replace the previous annual goal.

The NCQG is expected to reflect the scale of the current climate crisis and ensure that developing countries receive the necessary support to transition to low-carbon economies. It is not just a financial target but is also likely to be seen as a litmus test for global cooperation under the Paris Agreement. However, there are a number of key issues and challenges still to be resolved.

Terms and conditions of financing

Developed countries, including the USA and the EU, favour a multi-layered approach that includes international public finance at its core, supplemented by private and domestic finance. This approach could potentially increase the annual total to around US$ 600 billion.

Developing countries, including the Arab group, prefer a simpler structure with climate finance primarily coming from developed countries' public budgets. Some have called for developed countries to mobilise US$ 1.1 trillion annually, with a minimum of US$ 441 billion per year provided to developing countries from 2025 to 2029.

Existing donor countries suggest expanding the list of contributor countries to include large and rich developing economies like China, India, and the Gulf states. This suggestion has been strongly opposed by developing countries, citing principles of equity and historical responsibility for climate change.

The G77 (represented by Uganda) and China have called for the NCQG to be based primarily on grants and highly concessional loans, as opposed to the current trend of providing finance in the form of loans at slightly concessional rates. This shift has been presented as crucial to avoid increasing the indebtedness of developing countries.

Developed countries have shown reluctance to include Loss and Damage finance alongside mitigation and adaptation as sub-goals with financial targets. However, this remains a key priority for groups such as Small Island Developing States (SIDS) and Least Developed Countries (LDCs) who face the most severe physical risks from climate change in short- to medium-time horizons.

Trickle-down effects on the energy transition and regulatory environment?

The NCQG is likely to include substantial funding for renewable energy projects. This should accelerate the deployment of renewable energy technologies in developing countries, reducing their reliance on fossil fuels.

As countries plan to enact nationally determined contributions (NDCs) in 2025, the agreements within the NCQG will feed directly into impact analyses conducted by member states on the extent to which emission reduction can be realised. The UK has confirmed a new NDC of 81% reduction by 2035.

Countries will be able to invest in large-scale renewable energy infrastructure, such as solar and wind farms, supported by concessional finance and grants. Financial support for energy efficiency measures should enable countries to implement policies and programmes that reduce energy consumption and emissions. This will include investments in energy-efficient buildings, industrial processes and transportation systems, contributing to overall emission reductions.

The NCQG is intended to support just transition initiatives, ensuring that the shift to a low-carbon economy is inclusive and equitable. Funding will be available for retraining programmes, social protection measures and community development projects, helping workers and communities transition away from fossil fuel-dependent industries.

Progress and prospects 

Despite the disagreements, some progress has been made at COP towards a common understanding of transparency arrangements for the NCQG and the need to simplify access and increase efficiency. However, uncertainties remain on the specific methods to ensure robust tracking and reporting mechanisms for monitoring progress.

Pranjal Mathur, ESG data analyst, contributed to this Insight.