COP29: Money matters

The upcoming UN Climate Change Conference in Baku, Azerbaijan, has been labeled by many as the "finance COP," and is expected to set new targets and clear timelines for climate finance. Article 6 finalization, preparations for new national climate targets, and the debut of new climate envoys from the US and China are also in the spotlight.

Baku was appointed to host COP29 in December 2023 after rounds of discussions during COP28 in Dubai. Unlike other host countries that usually have around two years to lay the groundwork for the annual conference, the government of Azerbaijan only had less than one year to make all preparations. Given the limited time, Azerbaijan has chosen to focus this year on climate finance. In 2009, it was agreed that developed countries need to provide developing countries with $100 billion of climate finance annually by 2020.

Recent studies showed that developed countries provided $115.9 billion for developing countries as of 2022, indicating that the goal was met despite a two-year delay. This time around, the developing world is asking for trillion-dollar-scale financial support, with NCQG – the New Collective Quantified Goal for climate finance – the trendiest acronym for COP29. The NCQG is meant to be adopted this year to replace the previous $100-billion goal.

"There's a clear need to pay for energy transition," Roman Kramarchuk, Head of Climate Markets and Policy Analytics at S&P Global Commodity Insights, said at the APPEC 2024 conference in Singapore in September. "The willingness and ability to pay isn't necessarily there, so one of the key issues that we expect to be at the forefront of COP in Baku is the idea of finance – of who pays."

In the trillion-dollar debate, Kramarchuk said the two sides – the developed and developing countries – are still far apart in their agreements. The developing countries are saying wealthier countries must contribute around $1.1 trillion-$1.3 trillion/year by 2030 for things like mitigation and adaptation, as well as loss and damage during disasters like typhoons.

At APPEC, Philippine Climate Change Commissioner Albert Dela Cruz said his country will host the board of Loss and Damage Fund this year and will devote maximum efforts to ensure developed countries put money on the table for developing countries impacted by climate disasters. The Loss and Damage Fund was a historic agreement initiated at COP28.

Nevertheless, more countries and more pledges are expected this year to address the increasing frequency of climate disasters and escalating financial losses. Implementation details need to be crafted regarding how this fund should be managed and distributed.

The developed world has not proposed a quantitative target they are willing to pay. They have also called for the private sector to step up and have asked developing countries to show genuine commitment to mitigation and adaptation.

Unlike with the previous goal, where developed countries agreed to pay and developing countries to be the recipient, Kramarchuk said there will likely be a debate around this issue in setting the new targets. The developed countries are likely to ask some economic powerhouses, like China, India, Saudi Arabia and the UAE, to also contribute to climate finance despite still being considered "developing countries" under the UN's current framework, Kramarchuk said.

China and India have both officially expressed concerns over such requirements from the Global North, saying this is an unreasonable request.

Lifting hurdles in landing Article 6

Apart from financing, Article 6 is going to be a crucial agenda and, as with previous COPs, a big headache. Climate negotiators told Commodity Insights that two key hurdles in landing Article 6 are likely to be resolved this year: uncertainties around revocation by project host countries that have discouraged investments in Article 6.2 projects and rules on carbon removals that have delayed the finalization of Article 6.4.

There currently is no clear definition of the circumstances under which a project host country can revoke its authorization for an Article 6.2 credit. If such revocation occurs, the country that has bought this credit can no longer use it to meet its climate targets.

The project's private-sector investors will also suffer financial losses as the project becomes a stranded asset. Benedict Chia, director-general for climate change at Singapore's National Climate Change Secretariat, said there are currently two options to settle the revocation issue.

One is for the UN to allow individual countries to decide their own terms and conditions for revocation, and to define the actions to be taken if revocation occurs.

The other is for the UN to clearly define the circumstances under which a revocation can be accepted. To reassure investors, Chia said revocation should only be allowed under extreme circumstances, such as human rights disputes.

Rules around carbon removals are likely to be finalized this year, another climate negotiator told Commodity Insights, adding that there will be different requirements for nature-based and tech-based removals. For nature-based removals, the guidance on environmental integrity must be strong enough to address the trust issue of nature-based projects seen in voluntary carbon markets. The Article 6.4 market must set a higher bar to prevent recurrence of the same issues, the negotiator said.

Meeting old targets, setting new ones

Some countries have previously set their climate targets, or nationally determined contributions, with 2025 as the finish line. This makes 2024 a critical year for countries to review and assess if they can reduce emissions, cut carbon intensities, or increase renewable capacities by the committed level in 2025.

Some countries are also due to refresh their NDCs by 2025. As such, COP29 will likely be a reflection point for countries to evaluate their progress and to make informed decisions for the next phase.

Notably, the UN has set up the Paris Agreement Implementation and Compliance Committee (PAICC) to guide countries to transparently report their NDC-fulfillment progress and support countries that are finding it challenging to realize their commitments on time.

"Based on current rules, countries will not be penalized if they cannot meet their NDCs, as long as they report this in a transparent manner," a PAICC committee member told Commodity Insights. "We are still at an early stage, and the priority is to help countries familiarize themselves with NDC-related reporting."

US, China climate envoys

COP28 witnessed the departure of the former US Climate Envoy John Kerry and his counterpart in China, Xie Zhenhua. Their decade-long friendship has enabled collaborations in many areas, such as carbon capture, green hydrogen and methane emission reduction, despite the geopolitical headwinds between the world's two largest economies.

COP29 will witness the debut of their successors, John Podesta and Liu Zhenmin. Despite the two meetings on several occasions prior to COP29, whether they can continue Kerry and Xie's work and propose new areas for collaboration remains uncertain.

Some policy analysts expressed concern about the successors, noting Liu's recent public speeches that fiercely criticized policies that hinder made-in-China solar PV products, wind turbines, batteries and electric vehicles from being exported to the US market. Analysts added that the US election, which will be concluded just before to COP29, will create additional uncertainties.

Additional contribution by Eric Yep.

This article was featured in the October 2024 edition of Commodity Insights Magazine.