This year’s United Nations Climate Change Conference (COP28) opens in Dubai with two fundamental questions confronting participants. First, do we have enough time to limit global warming to 1.5 degrees Celsius to prevent the potentially irreversible impacts of climate change? Second, how can we deliver a funding mechanism to ensure sufficient investment, around US$1 trillion a year, as estimated by the International Renewable Energy Agency, to meet this objective?
As nations look forward for new impetus at COP28, these questions lie at the heart of climate initiatives, greatly praised when they were launched in past conferences but have moved forward very little since, and will be the focus of discussions in the next two weeks.
From COP26: Just Energy Transition Partnership
The Just Energy Transition Partnership (JETP) is a groundbreaking deal that aims to help developing countries lift their ambitions in energy transition for a greener future. Under this arrangement, wealthy nations will support emerging economies with blended financing mechanisms including public and private grants, loans and concessions to be used for climate mitigation and adaptation. South Africa struck the first JETP deal with a promised amount of US$8.5 billion from G7 member countries during COP26, held in Glasgow in November 2021. In turn, South Africa is required to drastically reform its power sector by slashing coal-fired power plants and growing renewables. One year later, Indonesia and Vietnam also joined the JETP in which G7 pledged packages of US$20 billion and US$15.5 billion, respectively, for the phaseout their fossil fuel capacities.
However, the rollout of the JETP in these countries was not smooth. In the case of South Africa, only one coal-fired power plant out of the proposed six has closed since it entered JETP, and the country is already experiencing increased blackouts in 2022. In Indonesia, the recently released investment plan under JETP, called the Comprehensive Investment and Policy Plan (CIPP), excluded private, off-grid coal power plants from the JETP financing scope, making its target of reaching the peak of power sector emission by 2030 extremely difficult. Vietnam, on the other hand, is still negotiating with providers on the term details of the financial package. In short, most of the committed funds from the JETP are not in place.
The main reason for the delayed transition under JETP is the fact that financing costs are too expensive for receivers. A large portion of the JETP packages for the three countries are commercial loans while less than 5% are grants. Amid high interest rates, developing nations worry that these loans would bring them into a debt trap.
Another factor that drags the progress of early retirement of fossil fuels is infrastructure insufficiency. In Indonesia and Vietnam, the level of grid connectivity is still very low and electricity generation in many parts of the two countries has to rely on off-grid coal plants; shifting away from these generators before they are replaced with renewables is impractical. In the midst of the war in Europe, the prevailing sentiment is to prioritize energy security over energy transition, and this has contributed to the JETP impasse.
The innovative design of JETP is to use public funding to leverage private finance. However, the fact that private sector is not willing to accept terms below market rates in the energy transition investment plan has hindered the flow of funds. Amid expectations that interest rates will remain high, COP28 must think of other terms that can better incentivize private participation to push JETP ahead.
From COP27: Loss and Damage Fund
The Loss and Damage Fund was a milestone agreement reached last year at COP27 in Sharm El-Sheikh, Egypt. The fund is built on the proposition that developed nations should compensate developing nations for their suffering from climate adversities. However, no substantive moves have been taken to implement the fund over the past 11 months. Critical issues such as who will pay, who will receive it, and who should be in charge of distributing it are still up in the air.
Unlike JETP, which is about collaborative investments, the loss and damage fund is a compensation in nature, meaning it will rely solely on government funding. It also means the discussion will be prolonged since free money is never easy to get. In the most recent transnational committee meetings, the main contention is who should oversee the fund. Developed nations favor custody under the World Bank, whereas developing nations want a UN agency to look after its operation.
A hard truth is that the ability of many developing countries to cope with climate disasters is contingent on the adequate implementation of this fund. Speaking at the 6th ESG Summit organized by The Asset in Singapore, Jenn-Hui Tan, chief sustainability officer at Fidelity International, shares: “The extreme weather events and financing difficulties we currently see are only first-order implications of insufficient climate adaptation. The second and third-order implications such as climate migration are things we haven't begun to think about yet.” Indeed, Therefore, the world must first address the consequences in the first order before they catalyze into the second and third order.
Can COP28 deliver on these unfulfilled ambitions?
Both the JETP and the Loss and Damage Fund are historic initiatives aimed at tackling the climate crisis, and the hope is that COP28 will provide a new impetus to bring them to the next level. The United Arab Emirates, this year’s host, has its own financing ambitions for energy transition. The event's president-designate Sultan Al Jaber urges parties to triple the capacity of renewable energy to more than 1100 gigawatts by 2030, alongside the objective of doubling energy efficiency. This, again, requires enormous amounts of financing.
Time may be running out and the window of opportunity is closing, but hope springs eternal. Leading banks, asset owners and asset managers are sending a larger delegation to COP28 to help in finding solutions to the complexities of climate finance. Hopefully, their presence in the conference will provide a positive signal and money will be where the mouth is.