Climate Finance Takes Center Stage at COP27

COP27 took place November 6-18 in Sharm El Sheikh, Egypt. The conference convened politicians from nearly 200 nations alongside business leaders, scientists and activists to discuss climate-related issues, solutions and goals.

The COP of Implementation

COP27 was dubbed “the COP of Implementation” as it sought to operationalize climate commitments made at previous global summits. At the COP26 summit last year in Glasgow, countries set new greenhouse gas (GHG) emissions reduction targets, known as Nationally Determined Contributions (NDCs). These NDCs aim to collectively limit the global temperature rise to 1.5 degrees Celsius by the end of the century. COP27 aimed to implement these emissions reduction pledges in order to close the gap between commitment and action, but it did not see countries setting new emissions targets.

In seeking to operationalize the emissions reduction targets, the COP focused largely on the financing needed to implement these changes. The summit established a climate fund in which wealthier nations will pledge money to be paid to developing countries to compensate them for the destructive impacts of climate change. While the COP was momentous in some respects, it did not deliver on stricter climate commitments in the wake of rising inflation, geopolitical conflicts resulting in food and energy shortages, and an energy trilemma of energy reliability, affordability and sustainability.

Historic Establishment of a Loss and Damage Fund

The most notable achievement of COP27 was the establishment of a climate fund to compensate vulnerable nations from loss and damage from climate change. The term “loss and damage” refers to the impacts of climate change that cannot be avoided by climate change mitigation (reducing emissions) or climate change adaptation (adjusting to the impacts of climate change).¹ It includes impacts such as rising sea levels, prolonged heatwaves, desertification, the acidification of the sea and extreme events like wildfires, flooding and crop failures.²

The climate fund will provide financial assistance to the most vulnerable developing nations impacted by the effects of climate change.³ Its establishment is a historic win for developing nations that have been pushing for over 30 years to receive funding from wealthier economies, which are responsible for the majority of historic GHG emissions.⁴ At previous COPs, developed nations pledged to provide $100B per year for climate action in developing countries from 2020 to 2025, a goal which has not been met.⁵ The climate fund seeks to hold countries accountable for these pledges.

While the establishment of the fund is momentous, how and when it will be implemented has yet to be determined. A committee of countries will determine which countries contribute to the fund and which are recipients of the financing. The fund will be set up in time for next year’s summit, COP28.⁶

No Hard Commitments to Phase Out Fossil Fuels

The summit did not result in a commitment to phase out, or even phase down, fossil fuel use. Last year’s summit, COP26, resulted in a historic commitment to “phase down” coal use. It was expected that COP27 would build on this to decrease the use of all fossil fuels (coal, oil, natural gas). However, concerns regarding the cost and security of energy resulted in governments’ hesitation to express clear intentions of completely phasing out fossil fuels.

The summit also did not see strict commitments to reduce fossil fuel use from private actors. COP26 resulted in the formation of a number of industry groups committed to meeting net zero GHG emissions, including the Glasgow Financial Alliance for Net Zero (GFANZ). GFANZ members represent over 550 financial sector members that have pledged to reach net zero emissions by 2050 and represent over $130T in assets under management (AUM).⁷ Weeks before the summit, GFANZ announced that it would not require its members to stop financing fossil fuel projects.⁸

Spearheading Carbon Market Schemes

The summit unveiled a global voluntary carbon trading market scheme. The Energy Transition Accelerator (ETA) will be a carbon offset credit trading system where countries can buy and sell carbon offset credits. A carbon offset is a reduction in GHG emissions, or an increase in GHG storage through a variety of activities, including the planting of trees and the development of renewable energy facilities. A carbon offset credit is a tradable certificate that represents the offset, which entities can purchase and “retire” to claim a reduction towards their own net GHG emissions (which can be used to achieve their emissions reduction goals). The ETA specifically focuses on developing countries, which may incentivize them to protect land or roll out clean energy to sell offset credits into the global scheme, which will help deliver the trillions of dollars of investment needed to help developing countries transition to renewables and adapt to the impacts of climate change. While ambitions for the global carbon trading scheme are high, countries still need to agree on the specifics and it may prove controversial over doubts regarding the integrity and effectiveness of existing voluntary offset initiatives.

The summit also saw the formation of several other initiatives to expand the adoption of climate markets. Three Cairns Group and Bloomberg Philanthropies announced the formation of the Global Carbon Trust (GCT), which aims to develop the necessary market infrastructure to scale global voluntary carbon markets.⁹ The Africa Carbon Markets Initiative was also launched to dramatically expand Africa’s participation in the voluntary carbon market. The initiative aims to produce 300 million carbon credits annually by 2030 from participating African nations.¹⁰

Good COP or Bad COP?

While the COP27 climate summit did not deliver on stricter climate action and notably did not result in any explicit commitments to phase out fossil fuels, it made significant progress in other areas. The summit established a climate fund that will compensate developing countries for the destructive impacts of climate change and laid the groundwork for the implementation of global carbon markets.

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