COP26 and Beyond: CGD’s Work on Coherence and Effectiveness in Climate Finance and Policy

With COP26 about to get underway, many of the opportunities and tensions inherent in the international community’s approach to supporting climate change transformation are rising to the surface.

Within the rich body of work which is ongoing within this area, CGD’s focus is on shaping and improving climate and finance policy to ensure it does the most for the development, and the planet:

1. Ensuring value for money in climate finance

In advance of COP26, the Organisation for Economic Co-operation and Development (OECD) has published analysis which  suggests countries’ new climate finance commitments will increase by a further $20bn and reach $100bn per year by 2023.

With climate financing now accounting for a significant share of official development assistance (ODA) and flows of finance from development banks, it is essential that lessons learned in development are applied, to ensure value for money in spending on climate. But the work that CGD colleagues have done shows that there is little high-quality evidence and considerable variation in the results that do exist on the impact and effectiveness of climate change focused projects across agencies.

How can we ensure that there is more transparency, accountability, and a strengthened focus on cost effectiveness in addressing climate change challenges? And how can we incentivize the innovation and risk-taking that will be needed? CGD is playing an important part in answering these questions, as part of its advisory role on the FCDO’s Taskforce on Access to Climate Finance, as well as through various research projects.

2.  Supporting climate finance as part of a focus on global public goods

While many public development banks are increasing their focus on climate transformation, the pace of change remains uneven and too slow. CGD colleagues argue that climate-related activities should be a central feature of their work—especially in middle-income countries—and part of a broader focus on tackling global public goods.

In the case of the IMF, there are questions being raised as to how, and even if, the Fund should be involved in financing for climate transformation. Work by CGD colleagues finds that there is a well-defined role for the Fund in surveillance as well as lending for climate transformation, but this must be done in close consultation with development banks and be specific in scope. The Resilience and Sustainability Trust (RST) which the IMF is setting up could be a key instrument for advancing this agenda, provided this can reach a level of ambition that matches the scale of the climate challenge.

3. Coherence of climate, economic, and development policy

As governments promote international climate action, they will need to recognise the very low levels of emissions in the poorest countries compared to their own, and ensure that their domestic policies—for example on carbon pricing—match their international ambitions and create the right incentives.

CGD work has shown that even rapid growth in the 50 lowest income economies over the next decade, now much less likely given COVID, would leave per-head emissions at a fraction of those elsewhere (and under 1.5 tonnes per head). Meanwhile, CGD’s tracking of carbon pricing, which is a crucial step in curbing climate change, shows most major economies’ pricing is well below the social cost of carbon in most countries.

African leaders such as Nigerian vice-president Yemi Osinbajo have highlighted that de-funding gas will create a dire situation—which illustrates the inconsistency of widespread fossil-fuel subsidies in high-income settings.

The G20, arguably the key forum for coordinating economic policy (see the recent progress on a minimum corporate tax rate), will be chaired by Indonesia and India in 2022 and 2023. Balancing COVID recovery with sustainability will need to be on high on their agenda, particularly as the EU develops its plans to tax carbon at the border with potentially higher costs for developing countries.

Beyond COP

We hope that national leaders will use the occasion of COP26 to make credible, ambitious emissions-reduction plans for the future, and to commit to better quality of climate finance to address challenges in the most vulnerable countries. As finance is shifted towards climate challenges, if providers do not focus on the effectiveness of that investment as part of a coherent system of policies then neither climate nor development goals will be achieved. CGD colleagues will continue to step up our work in support of this crucial agenda.