The global climate crisis demands urgent action, and the upcoming COP29 conference will be a crucial battleground for securing the necessary financial resources. The Energy Transitions Commission's (ETC) latest publication, "NDCs, NCQG, and Financing the Transition," provides a comprehensive roadmap for navigating the complex landscape of climate finance. This insightful report sheds light on the different types of finance required, the role of updated National Determined Contributions (NDCs), and the principles that should guide the New Collective Quantified Goal (NCQG) debate.

Unlocking the Potential of Climate Finance

The ETC's report underscores the vital importance of clearly defining the various categories of "climate finance" and recognizing the appropriate funding sources for each. It identifies four distinct types of finance required to address the climate challenge:

Mitigation Investments

The report estimates that an average of $3 trillion in annual investments is needed to establish zero-carbon energy systems globally and mitigate climate change. The majority of these investments will be financed by private institutions, provided that appropriate real-economy policies are in place. However, the crucial role of multilateral development banks (MDBs) and other public financial institutions in supporting financial flows to middle and low-income countries cannot be overstated.

The private sector's ability to deliver attractive returns on these mitigation investments is a testament to the remarkable progress made in renewable energy technologies, such as solar PV, wind power, and batteries. This technological advancement has enabled countries to rapidly reduce emissions while still meeting growing demands for affordable energy access and use.

Concessional or Grant Payments

In certain areas, such as early coal plant retirement, ending deforestation, and financing carbon removals, the investments may not generate a return on investment. In these cases, concessional or grant payments from sources like carbon offset markets, philanthropic funds, or intergovernmental contributions will be required. The ETC estimates that $300 billion in annual payments of this nature may be needed, though actual flows are unlikely to reach this magnitude, necessitating other measures, such as strong policy, to achieve emission reductions.

The importance of these concessional or grant payments cannot be overstated, as they play a crucial role in addressing the challenges that may not be financially viable for private investors. By bridging this gap, they help ensure that the necessary emissions reductions are achieved, even in areas where the market alone cannot provide the required incentives.

Adaptation Investments

Investments in adaptation measures, such as flood management and coastal protection, are essential to deal with the inevitable consequences of global warming. The Songwe-Stern 2022 report suggests that these investments could reach $250 billion per annum in middle and low-income countries. While a significant portion will be financed from domestic resources, particularly in middle-income countries, there is a vital role for MDB loans and concessional payments or grants from high-income countries.

Adapting to the changing climate is a critical component of the global response, and the ETC's report highlights the need for a comprehensive approach that leverages both domestic and international resources to build resilience in vulnerable communities.

Loss and Damage Payments

The Songwe-Stern report estimates that the costs of addressing loss and damage already produced by climate change in middle and low-income countries could reach $200-$400 billion per annum by 2030. At COP27 in 2022, the principle was agreed that higher-income countries should contribute towards meeting these costs, recognizing their historical responsibility and the disproportionate impact on developing nations.

Addressing the loss and damage caused by climate change is a critical component of climate justice, and the ETC's report underscores the need for a robust and equitable mechanism to channel financial resources from high-income to low-income countries.

Navigating the NCQG Debate

The report acknowledges the divergent views on the scope of the NCQG, with some countries advocating for the inclusion of loss and damage payments, while others argue that the focus should be on mitigation and adaptation finance. The ETC believes that the NCQG will have the greatest impact on global mitigation efforts if it includes:

1. Clarity on the different types of investment and payment needed, the sources that can meet these needs (e.g., private finance, MDB loans, or concessional/grant finance), and what is covered by the NCQG headline figure.

2. A strong focus on the large-scale financial flows required to support mitigation in middle and low-income countries (estimated at around $900 billion per year) and the significant role that MDBs must play, including in catalyzing private financial flows.

3. An expansion of the definition of contributing countries to include at least China and high-income oil and gas producers, such as Saudi Arabia, UAE, and Qatar, due to their high per capita emissions and low cost of capital.

4. Support for new sources of funds, such as carbon pricing, international shipping and aviation levies, and innovative financial instruments.

The Crucial Role of Updated NDCs

The report emphasizes that while private finance will play the primary role in funding capital investment for mitigation, governments have a responsibility to incentivize that investment through well-designed policies. The ETC recommends that the next round of NDCs should:

1. Set more ambitious emission reduction targets to reflect technological progress and cost reductions already made, and align NDC objectives with existing policy commitments.

2. Define strong links between targets and supporting policy, acting as comprehensive roadmaps for implementation.

3. Contain absolute or equivalent emissions targets for specific sectors and cover all greenhouse gases.

4. Identify the investments required to deliver emissions reductions and the broad balance of financing sources envisaged.

By aligning NDCs with the latest technological and policy developments, countries can unleash the private finance necessary to drive the clean energy transition and meet their climate commitments.