Study on the demand of climate finance for developing countries based on submitted INDC

Abstract

The 21st Conference of Party (COP21) held in Paris at the end of 2015 has opened a new era for the joint response dealing with climate change globally, and built up a new mode of global climate governance, that is, “all Parties submit INDC – global stocktake – enhance effort of actions – all Parties resubmit INDC – finally achieve the ultimate objective of the Convention.” With 160 INDC reports (covering 188 Parties) that the UNFCCC Secretariat has currently received as research objects, this study classifies the mitigation targets of all Parties, and focuses on the systematic analysis of the financial demand, mitigation cost and priority investment areas for developing countries. The results are as follows: among 160 INDC reports, 122 reports clearly include the finance content; 64 reports propose specific amount of financial demand for the implementation of INDC; 31 reports pre-estimate domestic amount and financial demand for greenhouse gas mitigation in 2030, based on which they have calculated that the average mitigation cost for developing countries in 2030 would have reached up to US$22.3 per ton CO₂ ; 28 Parties reclassify the financial demand for mitigation and adaptation areas, and reach the conclusion that the overall financial demand ratio for mitigation and adaptation is 1.4. Should the current mitigation commitments of the Parties from developed countries be used as benchmark, then in 2030 the total amount of financial demand for developing countries in response to climate change would have reached up to US$474 billion.

Keywords

INDC ; Climate change ; Finance ; Mitigation

1. Introduction

Finance has always been one of the focal issues in the negotiating process of United Nations Framework Convention on Climate Change (UNFCCC), and it is closely linked to mitigation, adaptation, technology transfer and capacity building. It is not only the core concern of developing countries, but also an important criteria to judge whether developed countries have effectively assumed the historical responsibility or not (Pan et al., 2013 ). Based on common but differentiated responsibilities and fair principles, UNFCCC requires Parties from developed countries to provide new and additional financial resources to Parties from developing countries, to support full or incremental cost occurred during UNFCCC implementation by Parties from developing countries. On the COP15 held in Copenhagen in 2009, developed countries proposed to quantify financing goals for the first time, promised to provide US$30 billion fast-start finance during 2010–2012, and to mobilize US$100 billion long-term finance per year from the beginning of 2020 for developing countries to cope with climate change. However, according to the reports of UNFCCC Secretariat and World Bank, global annual financial demand dealing with climate change would have reached up to US$170–600 billion during 2010–2030 (UNFCCC, 2007  and WB (World Bank), 2010 ), financing goals promised by developed countries cannot meet actual demand of developing countries, the global actions responding to climate change still face a huge financing gap.

On the COP21 held in Paris at the end of 2015, 196 Parties to the UNFCCC adopted the Paris Agreement (hereinafter referred to as Agreement), which made framework arrangement for the global actions on climate change after 2020. The Parties will advance the construction of global climate governance by submitting Intended Nationally Determined Contribution (in Adoption of the Paris Agreement, it is called as INDC; in Agreement, it is called as NDC). Although this bottom-up model will attract the Parties to participate in global actions on climate change in a balanced and equal way, the Parties have serious differences over the content of INDC. Parties from developing countries generally stress in INDC the financing obligation of developed countries, but developed countries confine contribution to mitigation, and evade their obligations under adaptation, finance and other issues, the guarantee role of international mitigation duty for obligation of financing has been minimal. Although Agreement finally retains textual expression of “developed country achieve the goal of jointly providing US$100 billion annually by 2020, and set a new collective quantified goal from a floor of US$100 billion per year prior to 2025”, it still fails to reach consensus on how developed countries share the financing responsibility in the future, nor did it plan a clear road-map to realize the annual financing goal of US$100 billion per year by 2020 (UNFCCC, 2015a ).

Given that INDC has become the main carrier for all countries to participate in international cooperation on climate change, this study is intended to take 160 INDC reports that the UNFCCC Secretariat has currently received as research objects, based on the classification of mitigation targets combining with geographic regions and political interest groups of all Parties, focus on the systematic analysis of the financial demand, mitigation cost and priority investment areas for developing countries, and then pre-estimate the total amount of financial demand for developing countries in 2030. As 2025 is upcoming, in response to the guidance of Agreement on finance, it is required to set a new financing goal in time for developed countries, externally to ensure the adequacy and predictability of climate finance, internally to avoid group differentiation of developing countries resulting from competition for limited financial resources. At the same time, developing countries can make full use of the organic links established by other countries among mitigation, adaptation activities and financial demand, constantly improve and coordinate the structure and content of INDC report in the future, in order to strengthen the transparency and comparability of financial demand, improve the fairness and scientificity of the argument in negotiation process, and provide a theoretical basis to consolidate the unified position of developing countries.

2. Classification of mitigation targets

INDC cited herein were derived from information published on the UNFCCC website (UNFCCC, 2015b ). As of January 31, 2016, the UNFCCC Secretariat has received a total of 160 INDC reports, covering 188 Parties of UNFCCC (including a regional economic integration organization – European Union), accounting for 95.9% of the total number of Parties, and accounting for 99.1% of global greenhouse gas (GHG) emissions (WB, 2012 ).

Although the structure and content of INDC submitted are different, all Parties take requirements in Article 14 of Decision 1/CP.20 as the guiding principle, assess and calculate domestic anthropogenic sources of GHG emissions, clarify the mitigation pathway in the future, and describe the fairness and the reasonableness of their contribution to the global mitigation target (UNFCCC, 2014 ). In accordance with their own national conditions, stages of development and economic structures, based on groups division, traditional orientation and position in the negotiating process, all Parties put forward their own mitigation targets from the perspective of maintaining their own rights, interests and economic development space. According to different forms of mitigation targets, 160 INDC reports can be divided into five forms: absolute emission reduction, relative emission reduction, carbon intensity reduction, policies and actions, and others. Number distribution of INDC by different mitigation target forms is shown in Fig. 1 .

Fig. 1. Number distribution of INDC by different mitigation target forms.

All Annex I Parties, except Turkey, and twenty-six other non-Annex I Parties propose the economy-wide absolute emission reduction target, expressed in the form of reducing target year GHG emissions to a certain percentage below base year level. Seen from reduction time interval, most countries choose 2030 as the target year, but their choices of base year are different; seen from efforts to emission reduction, the emission reduction by Annex I Parties ranges from 11.0% (New Zealand) to 50.0% (Switzerland, Monaco), while that of non-Annex I Parties ranges from 9.8% (Serbia) to 81.0% (Cook Islands); seen from objects of emission reduction, kinds of GHG emissions by Annex I Parties include six (excluding NF₃ ) or seven (including NF₃ ) specified in Kyoto Protocol, while different kinds of GHG emissions covered by non-Annex I Parties. Seventy-four Parties adopt the expression form of relative emission reduction, that is to reduce the emissions in the target year to a certain percentage below estimated emission level under the scenario of business as usual (BAU), the specific emission reduction ranges from 5.0% (Central African Republic) to 84.0% (Comoros). Seven Parties, including China and India, take carbon intensity (CO₂ emissions per unit of GDP) reduction as the main objective of INDC, and the reduction range is 33.0%–35.0% (India) to 60.0%–65.0% (China). Twenty-one Parties, including Saudi Arabia and Egypt, do not quantify emission reduction targets with specific figures in INDC submitted, but make a clear description of development strategies, policies, plans and actions for GHG emissions, which reflect their special national conditions. Eighteen Parties, including South Africa and Israel, take the peak year of GHG emissions, being carbon neutral, improving share of renewable energy and forest coverage rate and other targets as the main measuring indicators in INDC. In addition, North Korea, Libya, Nepal, Nicaragua, Panama, Syria, Timor-Leste and Uzbekistan, due to war, domestic political instability, insufficient capacity building and other reasons, have not yet submitted INDC. Diversity of mitigation targets submitted has actually broken the dichotomy rule under UNFCCC and the Kyoto Protocol, which regulate the obligation, corresponding responsibility and actions of developed and developing countries (Gao and Deng, 2015 ).

3. Description of finance content in INDC

3.1. General description of finance

Among 160 INDC reports submitted, 122 reports explicitly involve finance content, accounting for 76.3% of total submission. However, the Parties' understanding of INDC content varies. In order to support their overall strategies in climate negotiation, developed countries interpret contribution as mitigation, to evade their responsibilities and obligations under UNFCCC of providing financial and technical supports to developing countries, and try to break the comprehensiveness and balance of INDC elements. INDC submitted by fourty-two Annex I Parties have unified position, except Turkey, all do not mention any information about finance. As the only Annex I country including climate finance into INDC, Turkey even classifies itself into developing countries, emphasizes its need to receive financial and technical supports from the international community in order to promote the domestic mitigation actions. Developing countries stress that contribution should fully include mitigation, adaptation, finance, technology transfer, capacity building and transparency. Among 145 INDC reports submitted by non-Annex I Parties, 121 reports explicitly involve finance content. As shown in Fig. 2 , among five forms of INDC: absolute emission reduction, relative emission reduction, carbon intensity reduction, policies and actions, and others, the numbers of reports involving finance content are 19, 62, 6, 18 and 16 respectively, accounting for 47.5%, 83.8%, 85.7%, 85.7% and 88.9% of the total number of each form. On the statements of finance, non-Annex I Parties generally stress that the implementation of INDC require the international community to provide predictable and sustainable financial resources, capacity-building and technical support; to expand sources of finance from private sectors and innovative channels on the basis of maintaining main fund channel of Green Climate Fund in the future; to ensure transparent and fair distribution of climate finance among all recipients and investment areas, and to improve the efficiency of climate finance.

Fig. 2. Description of finance content by different mitigation target forms.

3.2. Description of financial demand

Among 122 INDC reports with explicitly description of finance content, more than half of the Parties (64 reports) made quantitative estimation of financial support required to implement their mitigation contribution, put forward the financial demand amount. As shown in Fig. 2 , among five forms of INDC mentioned above, numbers of INDC involving financial demand amount are 8, 39, 3, 9 and 5, respectively, accounting for 20.0%, 52.7%, 42.9%, 42.9% and 27.8% of the total number of each form. From division of geographic regions, the above 64 Parties include 36 African countries, 11 Asian countries, 10 Latin American and Caribbean countries, 4 Oceania island countries and 3 European countries. From division of political interest groups, the 64 Parties include 27 members of least developed countries (LDCs) and 17 members of alliances of small island states (AOSIS). From the amounts of financial demand, the total amount of financial demand for the 64 Parties by 2030 would have reached up to US$4592.9 billion. Among them, India (US$1040.0 billion), Iran (US$927.5 billion) and South Africa (US$898.5 billion) rank the top three in terms of amount of financial demand; Nauru (US$0.1 billion), Sao Tome and Principe (US$0.1 billion) and Grenada (US$0.2 billion) rank the last three in terms of amount of financial demand. Most Parties stress that the sources of finance to implement INDC should include increase of government budget, reform of tax system, improvement of green credit mechanism, promotion of market mechanisms and expansion of public-private partnerships. However, most developing countries confine the finance content to their own domestic need, except China, no other Parties stress or require to “clarify the 2020–2030 quantitative financing target and the corresponding road-map, the finance should have been increasingly expanded on the basis of US$100 billion each year by 2020” for developed countries. Developing countries concern with their own interests on finance, which is not only detrimental to the whole group to take INDC submission as an opportunity to put pressure on developed countries by virtue of finance, but also reserves space for developed countries to evade their financial obligation under the UNFCCC.

3.3. Description of financial demand for mitigation and adaptation

Human beings usually take measures and actions on two fronts in response to climate change: mitigation and adaptation. Mitigation mainly takes various measures aiming at reducing GHG emissions; adaptation mainly adopts various actions to advance the resistance and resilience of ecosystem and avoid climate risks (Pan and Zhang, 2014 ). Among INDC reports submitted, 28 Parties reclassify financial demand for domestic mitigation and adaptation areas, accounting for 17.5% of total submission. As shown in Fig. 2 , among five forms of INDC mentioned above, the numbers of reports involving reclassification of financial demand for mitigation and adaptation are 5, 16, 2, 2 and 3, respectively, accounting for 12.5%, 21.6%, 28.6%, 4.8% and 16.7% of the total number of each form. From division of geographic regions, the above 28 Parties include 16 African countries, 7 Asian countries, 3 Latin American and Caribbean countries, 1 European country and 1 Oceania island country. From division of political interest groups, 28 Parties include 15 members of LDCs and 6 members of AOSIS. In addition, 24 Parties pre-estimate the total amount of financial demand for domestic INDC implementation, 7 Parties only pre-estimate financial demand for mitigation, 5 Parties only pre-estimate financial demand for adaptation. As described by Parties, cost of mitigation is mainly invested in areas such as renewable energy, energy efficiency, sustainable transport, industrial process fugitive gases, agriculture/forestry/livestock management, waste disposal; cost of adaptation is mainly invested in areas such as water supply and management, infrastructure and coastal protection, agriculture and ecosystem protection, human health and disaster risk management, etc.

4. Analysis of finance content in INDC

4.1. Analysis of cost of mitigation

Cost of mitigation is a link to establish mitigation target and financial demand, also a scale to evaluate and measure the difficulty level of the Parties' mitigation actions. Multiple institutes carry out related research on carbon mitigation cost in different industries and different regions. McKinsey (2007) estimated the global mitigation cost, and concluded that with the total global mitigation amount by 2030 is 26.7 Gt, the cost of GHG mitigation would not exceed US$45 per ton CO₂ ; according to the research of United Nations Environment Programme (UNEP, 2011 ), the carbon mitigation cost achieved simply by improving energy efficiency and energy structure is US$25–54 per ton CO₂ , and the overall carbon mitigation cost achieved by power generation, industry, transportation, construction, forestry, agriculture and waste disposal industry is US$50–100 per ton CO₂ . Many academics calculated the cost of mitigation for China. Gao et al. (2004) used an emission prediction and policy analysis model (EPPA) for simulation, and found that when the mitigation rate ranges 10%–40%, the marginal mitigation cost is US$9–72 per ton CO₂ ; Chen (2005) used a MARKAL-MACRO model, with 2010 as base year, calculated the costs for achieving 0.1, 0.2 and 0.3 Gt carbon mitigation are US$18, 44 and 79 per ton CO₂ , respectively.

Among 160 INDC reports submitted, 31 Parties simultaneously pre-estimate domestic amount and financial demand for GHG mitigation in 2030. Since all Parties have different phases of economic and social development, composition of energy structures and natural resources, climatic conditions and vulnerability to impacts of climate change, so the cost of mitigation are significantly different. Of which, Yemen (US$1.3 per ton CO₂ ), Togo (US$6.5 per ton CO₂ ) and Moldova (US$9.8 per ton CO₂ ) have the lowest cost of mitigation; Iran (US$524.1 per ton CO₂ ), Solomon Islands (US$364.1 per ton CO₂ ) and Guinea (US$238.1 per ton CO₂ ) have the highest cost of mitigation. The above 31 Parties include 6 absolute emission reduction Parties, 23 relative emission reduction Parties and 2 carbon intensity reduction Parties, their average costs of mitigation (median, the same below) are US$70.6, 51.4 and 34.5 per ton CO₂ , respectively. From division of geographic regions, 31 Parties include 15 African countries, 6 Asian countries, 6 Latin American and Caribbean countries, 2 European countries and 2 Oceania island countries, their average costs of mitigation are US$39.2, 27.8, 90.4, 30.6 and 204.3 per ton CO₂ , respectively. From division of political interest groups, 31 Parties include 14 LDCs countries and 10 AOSIS countries, the average costs of mitigation of the two groups are US$17.8 and 90.4 per ton CO₂ . With GHG emission reduction of 31 sample countries in 2030 as the independent variable, financial demand for mitigation as the dependent variable of a fitting equation, as shown in Fig. 3 , the model has high credibility. The simulation result shows that the average cost of mitigation for the 31 Parties in 2030 is US$22.3 per ton CO₂ .

Fig. 3. Fitting curve of mitigation cost for developing countries in 2030.

4.2. Analysis of financial demand for mitigation and adaptation

Both mitigation and adaptation activities require a lot of finance, which is the incremental cost compared to traditional socio-economic development. Over the years, due to small economic profit, big project risks, long cycle of activity, high access thresholds, little practical experience and other reasons, people are not enthusiastic investing in adaptation activities. Climate Policy Initiative (CPI, 2011 ) has analyzed and summarized the global distribution of climate finance since 2010 for five consecutive years, and found that the proportion of climate finance annually invested in adaptation is only between 3.8% and 6.4%; the annual report released by International Development Finance Club (IDFC, 2015 ) shows that, during 2011–2014, the proportion of finance invested in adaptation is 6.7%–18.4% per year. Although data from these statistical agencies are different, the financing imbalance between mitigation and adaptation has become a universal consensus of the international community.

According to statistical results shown in Section 3.3 , domestic financial demand for mitigation and adaptation areas are explicitly stated in 28 INDC reports. Among them, financial demand for South Africa, Iran, India – three large emitters of GHGs tilt to mitigation, and their financial demand proportions for mitigation and adaptation are 19.7, 9.7 and 4.0, respectively, mitigation remains to be the main area for climate finance; the ratios of mitigation/adaptation financial demand for Eritrea, Madagascar, Uganda – three African LDCs are all only 0.2, adaptation accounts for 83% of total climate finance. The average financial demand ratio of mitigation/adaption for 28 Parties is 1.4. From division of geographic regions, the financial demand ratios of mitigation/adaption for 16 African countries, 7 Asian countries, 3 Latin American and Caribbean countries, 1 European country and 1 Oceania island country are 1.7, 1.0, 0.7, 8.3 and 1.3, respectively. From division of political interest groups, the financial demand ratios of mitigation/adaption for 15 LDCs countries and 6 AOSIS countries are both 0.9. Several Parties stress in INDC that, domestic financial demand for adaptation depends on the process of global mitigation activities. Therefore, should countries cannot further intensify efforts in mitigation areas; the financial gap in adaptation will be further expanded.

4.3. Calculation for financial demand

According to statistic of the UNFCCC Secretariat following the current development trajectory, global GHG emissions would have reached up to 60.8 Gt CO₂ -eq in 2030, but to achieve the goal of temperature rise below 2 °C at the end of the 21st century, it is required to control emissions below 42.7 Gt CO₂ -eq, therefore, it needs to reach the mitigation task of at least 18.1 Gt CO₂ -eq globally (UNFCCC, 2015c ); the calculation result released by UNEP (2015) shows that, based on IPCC (2014) AR5 scenarios, if no additional climate policies are put in place after 2010, global GHG emissions would have reached up to 60.0 Gt CO₂ -eq in 2030, to control the temperature rise below 2 °C, the upper limit of emission should be 42.0 Gt CO₂ -eq, and the lowest target for global emission reduction is 18.0 Gt CO₂ -eq.

Based on mitigation commitments of 42 Annex I countries in current INDC, their total emission reduction in 2030 would have reached up to 5.6 Gt CO₂ -eq, only accounting for 31.1% of total global mitigation task; the total emission reduction left to non-Annex I countries is around 12.4 Gt CO₂ -eq, accounting for 68.9% of total global mitigation task, and is 2.2 times of that for Annex I countries. In accordance with mitigation cost of US$22.3 per ton CO₂ for non-Annex I countries in 2030, financial demand for mitigation in developing countries would have reached up to US$276.5 billion. If estimate at current average mitigation/adaptation ratio 1.4, financial demand for adaptation in developing countries in 2030 would be US$197.5 billion, and the total amount of financial demand in response to climate change would have reached up to US$474.0 billion.

5. Conclusions and outlook

With 160 INDC reports that the UNFCCC Secretariat has currently received, this study classifies the mitigation target of all Parties, and focuses on the systematic analysis of the financial demand, mitigation cost and priority investment areas for developing countries. The position of developed countries is relatively unified, with mitigation as the basic content in INDC, they break comprehensiveness and balance of contribution in INDC, which is to evade their responsibilities and obligations under UNFCCC. Under tremendous development pressure and in the context of continuing imbalance between supply and demand of climate finance for many years, differences in interest concerns of developing countries are further highlighted. Even though most of developing countries have stressed the financing obligation of developed countries, their progresses in the evaluation of financial demand, accounting of mitigation cost and planning of priority investment areas are not synchronous. With INDC submission as an opportunity, their overall position need to be further consolidated by virtue of finance to impose pressure on developed countries. Based on the above research results, three suggestions are raised as follows: firstly, in terms of content, developing countries should be fully aware of the importance of finance in INDC, consciously safeguard the comprehensiveness and balance among various elements of INDC, strive to form a unified stance within the group of developing countries; secondly, in terms of form, developing countries may make full use of the organic links established by other countries between actions in response to climate change and financial demand, in order to improve and coordinate the structure and content of INDC reports in the future, to strengthen transparency and comparability of climate finance for all countries, and to improve the fairness and scientificity of the argument in negotiation process; thirdly, in the dawn of 2020, scientific summary and objective evaluation of financial demand are timely made for developing countries. On the basis of mobilizing US$100 billion per year, new climate financing target is set for developed countries, to ensure the adequacy and predictability of climate finance, and lay theoretical basis for developing countries to consolidate the unified group.

Acknowledgments

This work was financially supported by the National Development and Reform Commission of China (201515 ).

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