Azerbaijan’s New Climate Fund

Azerbaijan, the host of this year’s climate change conference, COP29, has proposed to launch a new climate fund for developing countries

Background of Climate Finance Negotiations

• About Climate Finance: The United Nations has defined climate finance as the local, national or transnational financing drawn from public, private and alternative sources of financing that seeks to support mitigation and adaptation actions that will address climate change.  
• Paris Agreement Mandate: The current obligation for developed countries is to mobilise at least $100 billion annually, which needs to be increased post-2025, as per the Paris Agreement.

• COP 29: The New Collective Quantified Goal (NCQG) is meant to be adopted at COP29 in Azerbaijan.
• At the same time, Azerbaijan announces a climate finance action fund (CFAF) at COP29 to support green projects and help member nations reach the 1.5C target.

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Azerbaijan’s New Initiative: Climate Finance Action Fund (CFAF)

• Climate Finance Action Fund (CFAF) will be capitalised with the voluntary contributions from fossil fuel producing countries and companies across oil, gas and coal, and Azerbaijan will be a founding contributor. 
  • Members will commit to transfer annual contributions as a fixed-sum or based on volume of production.
  • Initial fundraising aiming for $1 billion, as COP29 President-Designate calls for contributors to come forward with climate finance. 

Issues with Azerbaijan’s Climate Fund

• Voluntary Contributions: The proposed fund by Azerbaijan would rely on voluntary contributions from oil and gas-producing countries and companies, raising doubts about its effectiveness.
• Loss and Damage Fund Comparison: Similar funds, like the Loss and Damage Fund created at COP27, have struggled with low pledges, making it uncertain how much Azerbaijan’s fund will attract.
• Legacy-Building: Azerbaijan’s proposal is seen as an effort to leave a legacy for COP29, similar to initiatives by previous COP presidencies.
• Quantum of CFAF: The proposal for the CFAF indicates an initial round of $1 billion per year by 10 countries or shareholders.
  • This amount is too little contribution by fossil fuel producing countries. To put it in perspective, the revenue of oil and gas companies is at the order of a few trillion per year. Saudi Arabia alone has an oil revenue of over $300 billion per year. 

About The New Collective Quantified Goal (NCQG): post-2025 climate finance goal

• New Financial Target: It is a key element of the Paris Agreement, designed to set a new financial target to support developing countries in their climate actions post-2025.
  • It succeeded the previous goal set in 2009 at the Copenhagen Climate Summit, where developed countries committed to mobilising $100 billion per year by 2020 to address the needs of developing countries. 
  • The NCQG is currently under negotiation and is expected to be finalised by 2025. 
• Quantum of Finance Required: Several developing nations, including India, have proposed that the NCQG amount should be between $1 trillion and $1.5 trillion annually, reflecting the amount needed for effective climate action.

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Reasons for the importance of NCQG

• Addressing Climate Finance Gaps: The NCQG (New Collective Quantified Goal) aims to bridge the persistent gaps in climate finance. 
  • The NCQG focuses on providing concessional finance to developing countries, which need substantial resources for climate mitigation, adaptation, and transitioning to sustainable energy systems.
• Supporting Vulnerable Developing Countries: Emerging markets, especially small island states and least developed countries, are disproportionately affected by climate change. By setting higher targets for climate finance, the NCQG can provide the necessary resources to help these countries build resilience against severe climate impacts like extreme weather and rising sea levels.
• Enhancing Global Climate Action: The NCQG fosters global cooperation by encouraging developed countries to demonstrate responsibility and solidarity. 
• Leveraging Private Sector Investment: Public financing alone cannot meet the massive requirements for climate action. The NCQG signals stability and commitment, which can attract private investors to climate-friendly projects.
• Promoting Accountability and Transparency: The NCQG promotes accountability and transparency in climate finance by setting clear goals, parameters, and reporting mechanisms, ensuring funds are tracked and reach intended recipients.

Challenges of NCQG

• Challenges in Meeting Targets: Developed countries have failed to meet even the existing $100 billion targets, making it unlikely that they will agree to the much larger sums proposed.
• Expansion of the Donor Base: Developed countries argue that High-Income Nations like China, South Korea, and oil-rich Gulf states should also contribute to climate finance.

Way Forward

• Address Three pillars of Climate Change: To ensure that all the Three Pillars of Climate Action: Adaptation, Mitigation and Loss and Damage are addressed adequately.
• Designing the NCQG to Support High-quality Climate Finance: Beyond the dollar amount of the NCQG, the quality of the finance delivered is also important. 
  • “High-quality” climate finance mechanisms ensure that the funding can be used most effectively and efficiently.
• Donor Base of the New Fund: It is essential to determining which countries should contribute to the New Finance Goal.
  • Developed countries have suggested various indicators to assess who can and should pay into the NCQG. For example, countries’ potential to contribute could be analysed based on their ability to pay (income) and historical responsibility for climate change (emissions). 

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