Financial support to developing countries under the ETF of the Paris Agreement

While the outcomes from COP26 were not met with as much acclaim as those from Paris, one of the key unresolved parts of the Paris rulebook, rules on transparency of climate action and support, was finally agreed upon in Glasgow, providing for agreed tables and formats to account and report for targets and emissions. This is a significant step central to the operationalization and so implementation of the Paris Agreement. Ensuring financial, technology transfer and development and capacity building support is adequate, targeted and provided in a way that meets the needs of the country to best achieve their mitigation and adaptation goals and commitments, it will enable countries to learn from each other, to collaborate and to collectively to achieve the goals of the Paris Agreement and address the climate challenge.

A technical background paper has been prepared by Climatekos for the UNFCCC secretariat on the so-called enhanced transparency framework (ETF) of the Paris Agreement and related reporting on financial support provided to developing countries by developed or OECD countries. Defining what developed country parties are expected to report, likely challenges and what would need to be presented in these biannual transparency reports (BTRs), the technical and conceptual aspects and issues are considerable, and include:

• National circumstances and institutional arrangements for reporting on the provision and mobilization of support

• Definition of public and private finance

• Determination of finance to be concessional and/or ODA

• Assessment of private finance mobilized

• Avoidance of double counting

• Reporting on multilateral finance

• Support provided and mobilized in line with the long-term goals of the Paris Agreement

• Progression from previous levels in the provision and mobilization of finance under the Paris Agreement

National circumstances and institutional arrangements for reporting on the provision and mobilization of support

Without a comprehensive climate change institutional framework (i.e., monitoring, reporting and verification system), the reporting abilities of countries are severely hampered. In addition to the application of (the same) definitions and categories across ministries and related agencies, it is also important which definitions and categories are used, which is related to comparability, transparency, and the application of international standards. In addition and next to a central coordination unit at the respective ministry that leads and coordinates reporting and related data collection, dedicated units or focal points in key ministries are important, as the likelihood of incomplete, incorrect, or missing data is rather high if they do not exist. Such incompleteness and lack of data not only affect sector reporting, but also the accuracy of a reporting country's overall investment portfolio.

Definition of public and private finance

Although coordination and consolidation measures continuously evolve there are definitional differences inherent in the main public climate finance tracking approaches currently in place. Enhancing the transparency of reporting, requires information on the underlying definitions methodologies and assumptions used. Depending on the channel through which the funds are provided, the two most widely used accounting methods are based on the Organisation for Economic Co-operation and Development (OECD) and its Development Assistance Committee (DAC) system, incl. the Rio Markers approach, and the Multilateral Development Banks’ (MDB) joint methodology. The issue here is that the two underlying methods are very different in the approach to tracking and the definitions of climate finance. Whereas these two methods cover most public finance flows, the reporting of private finance is a completely different topic. The main issue here is the lack of proper definitions and comprehensive tracking methodologies, which goes back to the very different nature of actors in this field and the fact that no reporting requirements exist, so far.

Determination of finance to be concessional and/or ODA

A very basic challenge arises from the fact that some countries do consider non-concessional instruments as climate finance, whereas others do not. Again, one issue here is the lack of an internationally agreed definition of climate finance, which is one of the causes of mismatching reports of finance provided and received. Regarding ODA, a widely accepted definition is the one of the OECD. Therefore, a reference to the OECD’s definitions can be expected in BTRs as a minimum, whilst any explanations, methodological guidance and related categorizations regarding what is considered concessional, and ODA can be seen as best practice.

Assessment of private finance mobilized

The OECD-DAC stresses the importance of reaching an agreement on the definition of the terms “mobilized” and “leverage” to provide accurate, comparable data on mobilisation at the international level. As long as such a definition does not exist, a clear and transparent description of the methodology used is a basic requirement. Moreover, the accounting boundaries and the nature of effects (direct vs. indirect) should be clearly stated. A few, albeit limited approaches exist to capture the amount of private finance mobilized. These attempts usually evolve around tracking and measuring private finance that can be directly attributed to a publicly financed intervention. However, when it comes to capturing more indirect private sector contributions, i.e., private sources mobilized by public investments, we are at the beginning.

Avoidance of double counting

Double counting can especially occur when several funding sources are involved, or funds have more than one objective towards which they are counted. Therefore, accounting boundaries and definitions applied should be clearly described in the BTRs. There are several aspects that may open the door for double-counting and reporting parties should make efforts and provide related information on avoiding double-counting. For example, supporting NDC implementation and reporting this as “support provided” is not to be intermingled with credit transfers to Annex-I countries in the context of Art. 6 projects. Another example: reporting parties should ensure that claiming shares of climate finance provided for developed country parties do only reflect their original shares. Allocation formulas for the mobilization of private finance mobilized need to be found and provided to avoid that multiple parties claim all the private finance mobilized at the same time in the case several parties are involved in a funding channel or mechanism, for instance.

Reporting on multilateral finance

Whether inflows or outflows are reported, and which approach or definition of climate finance has been used to distinguish climate finance from general ODA is critical, as MDBs and donor countries take different approaches to reporting. Only MDBs do track their outflows, so far. In most cases, a reference to the OECD DAC and the Rio-Markers can be expected at least. In addition, several major MDBs have agreed on common accounting principles for climate finance (i.e., the joint MDB methodology). Unlike the Rio Marker approach, which classifies entire projects as climate-relevant, the Joint MDB Methodology captures climate-relevant financial flows at the project level. This allows for a more accurate delineation of actual climate finance, which is less prone to overestimation.

Support provided and mobilized in line with the long-term goals of the Paris Agreement

The decarbonisation of investment portfolios is challenging. Many unanswered questions remain on how to translate climate commitments into tangible action. Criteria such as Do No Harm, Support Paris-Consistent Climate Co-benefits, and Foster Transformative Outcomes as well as the following three dimensions may provide guidance to countries - steering a country’s investments and align them with the goals of the Paris Agreement: 1. Striving for positive impact on climate transformation; 2. Increasing the volume and number of Paris-aligned activities in the portfolio; and 3. Minimizing exposure of the portfolio to Paris-incompatible activities. A continued application and further evolvement of the relevant approaches and methodologies currently applied by reporting parties can be expected (i.e., OECD and the Rio Markers approach, and/or the joint MDB methodology). This means that sector and/or project related criteria and related methodologies will be further elaborated and developed that will ensure alignment with the long-term goals of the Paris Agreement. Application and reference to these methodologies is to be expected in the BTRs aside from a statement confirming alignment with the long-term goals of the Paris Agreement.

Progression from previous levels in the provision and mobilization of finance under the Paris Agreement

Compliance with this reporting requirement under the MPGs means that individual reporting parties demonstrate progress from previous levels in the provision and mobilization of finance. Parties should report on finance provided and mobilized over multiple years. Underlying methodologies and approaches with respect to what is reported and how together with a statement on their progress from previous levels (incl. any relevant figures). In addition, parties can provide a link to the UNFCCC online portal or tool where the relevant data is provided over multiple years, contributing to increased transparency.

As the UK and EU former lead negotiator Peter Betts told a press briefing in Glasgow. “The whole climate regime rests on transparency … Having a functioning transparency regime is absolutely key to the whole system working.” After a presentation of the technical background paper to staff members of the UNFCCC secretariat just after COP26 in November, Robert Tippmann, Managing Director Managing Director at Climatekos, said: “Implementing and achieving the goals of the Paris Agreement does require speeding and scaling up climate action and related finance in this decisive decade, whilst demonstrating that next to transparency the needed support is provided in a measurable, accountable and comparable manner.”

Climatekos gGmbH is an independent social enterprise in the field of environment and development focusing on international climate protection.