Perspective

What’s the point of COP27?


Many point to COP27 as being a ‘quiet’ year for COPs. A key component to 2022’s COP, is that it was being hosted by an Africa country, placing Africa’s climate needs high on the agenda. Africa in particular, but also other emerging and frontier markets, were in the spotlight both as receiver of funding to decarbonize, but also as providers of investment opportunities that can leapfrog the current climate stalemate.

Article 9 of the Paris Agreement stipulates that developed countries shall provide financial resources to assist developing countries with both mitigation and adaptation needs. The US$100 billion annual commitment by developed nations, which was set in 2015, has yet to be reached. Clearly, the discussions need to move forward and developing nations need to be the protagonists in climate action as the current market circumstances are certainly not accelerating developing nation’s access to climate finance.

Mitigation

2022 has brought energy security to the forefront of many governments’ minds; attempting to reconcile climate commitments with the immediate demand for energy. But the increased concern for energy independence and self-sufficiency has the potential to damage the global and integrated efforts towards climate change, largely in developing countries. Previous COPs have examined the continuation of fossil fuels subsidies.

However, developed market policies around subsidising the cost of renewables to encourage further expansion – President Biden’s US$396 billion program is a point in case - and push in some cases for local production at all costs, can outprice developing countries by reducing their purchasing power for renewables even further.

The subsidies example demonstrates two aspects. Firstly, how important collaboration between governments is on the global issue of climate change, and just how valuable COP discussions could be as developed and emerging markets look at the impact subsidies can have globally. Secondly, it demonstrates the important role of private finance within developing markets to aid the transition to clean energy sources and other climate solutions.

Adaptation

Africa is a clear example of the two-fold effects of climate change; firstly, the direct exposure to physical risks is greater than the global average (examples include the frequency of heat and water-related stresses) and secondly, through lack of financing to build resilience and a capacity to cope with climatic change (adaptation). Insurance is a key area within climate adaptation, not only by providing an element of climate resilience for the agriculture sector but also by mitigating risks and enhancing bankability for a large range of entrepreneurs and their businesses.

Current estimates indicate annual climate adaptation costs in emerging economies could reach US$330 billion in 2030 (UNCTAD Trade and Development Report); whilst the Glasgow Climate Pact’s definition of adaptation is, ‘helping those already impacted by climate change’. These two statements demonstrate the dual-action between financing future climatic change vs the immediate climate finance needed by many already facing the perils of climate change. Knowing that in the most fragile economies and vulnerable sectors, such as agriculture, the impact of climate change can threaten the livelihood of entire communities.

Natural Capital

Natural capital is a key component of climate finance, aiding in both adaptation and mitigation actions. Nature-based interventions can help to deliver carbon reductions, generally at a much lower cost compared to engineered solutions, providing a more holistic strategy to reaching net zero.

With a developing market focus, many areas have high exposure to natural habitats and contribute significantly to GDP. Forestry for example, contributes to up to 30-40% of national exports for some African countries, with tourism, another key industry, dependent on natural assets.

Climate financing flows between developed and developing nations are expected to remain limited given the scarcity of public finance. To meet Africa’s climate finance needs, the private sector will need to play a more prominent role. Mobilising climate solutions investments in Africa, and other developing nations, will require innovative financing structures to overcome current financial barriers.

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