Climate finance ... Why can't countries agree on the meaning of Article 2.1(c) of the Paris Agreement? Image: Pexels/Min An
Natalia AlayzaManager, Sustainable Finance Center, World Resources Institute
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- Aligning financial flows with climate goals is crucial to avoid the worst effects of climate change.
- Article 2.1(c) of the Paris Agreement aims to make finance flows "consistent with a pathway towards low greenhouse gas emissions and climate-resilient development". But countries are still at odds over what this means.
- Countries’ inability to agree on steering finance towards a low-carbon, climate-resilient world is slowing progress towards global climate goals.
Recent studies indicate that the world will need $10 trillion annually between 2030 and 2050 to avoid the worst impacts of climate change. That’s a lot — but the world has the money.
As the Intergovernmental Panel on Climate Change (IPCC) explains, ”there is sufficient global capital to close the global investment gaps… but there are barriers to redirecting capital to climate action.” The challenge, then, is not necessarily raising additional finance for climate change mitigation and adaptation, but how to align all the world’s capital towards climate action.
Article 2.1(c) of the international Paris Agreement on climate change aims to do just that by “making finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development.” However, the language of Article 2.1(c) is vague on what exactly it entails. Eight years after virtually all countries signed the Paris Agreement, they’re still at odds over the scope of Article 2.1(c) and how it should be implemented.
This year’s UN climate summit (COP28) will provide an opportunity for countries to better define Article 2.1(c), as well as how to operationalize and monitor it. Here, we explain what Article 2.1(c) is, how it interacts with other finance mandates, and what’s needed to put it into action.
What’s the World Economic Forum doing about climate change?
What does Article 2.1(c) do?
The heart of the Paris Agreement on climate change is Article 2, which sets the objectives of the agreement. Article 2.1(a) urges a global response to hold the increase in global average temperature to 1.5 degrees C (2.7 degrees F) to reduce the risks and impacts of climate change. Article 2.1(b) outlines the need to adapt to adverse impacts of climate change, build resilience and pursue low-greenhouse gas development. Article 2.1(c) points out that we need to make finance flows consistent with these objectives if we’re ever going to attain them. Finally, Article 2.2 outlines the context these articles should be pursued under, including the principles of equity, common-but-differentiated responsibility, and respective capabilities and national circumstances.
2.1(c) is a holistic goal. That means it covers both mitigation and adaptation, potentially encompassing domestic and international finance flows. It requires not just scaling up the good finance — for example, climate resilience bonds and financing for new renewable energy projects — but also scaling down funding to carbon-intensive activities, like new coal plants or diesel truck fleets. And it doesn’t stop with government spending. Depending on how it’s interpreted, it could also encompass the private sector, including financial institutions, businesses, corporations and investors.
In short, financial systems broadly must align with the pursuit of sustainable development and international climate goals. This means that all types of investments and financing activities — all investors and actors in the real economy, stock as well as flows — should be “consistent” with achieving the world’s climate goals.
2.1(c) will require economic and financial reform. The tools (e.g., policies and economic and financial instruments) for getting there will be many and varied. Innovative policies and financial instruments will surely play a role, such as green procurement (where companies and governments would be required to decarbonize supply chains) and climate-related bonds to integrate climate priorities into economic development plans.
And in order to ensure equity, alignment of financial flows will have to be customized to each country’s economic, financial and social contexts. This especially includes developing countries’ pursuit of sustainable development, poverty eradication and a just transition.
What progress has been made toward achieving Article 2.1(c)?
Though a common understanding of 2.1(c) has yet to be agreed upon by Paris Agreement signatories, efforts inside and outside the UN’s Framework Convention on Climate Change (UNFCCC) are providing glimpses of what alignment could look like.
Efforts within UNFCCC
The UN’s Global Stocktake, which will conclude at COP28, will assess progress towards the goals of the Paris Agreement for the first time, including Article 2.1(c). In its key findings released in a Synthesis Report in September 2023, it recognized that financial flows include “international and domestic, public and private.”
Negotiators established the Sharm el-Sheikh dialogue on Article 2.1(c) at COP27 in 2022, where countries, organizations and other stakeholders can exchange views and enhance understanding of the scope of 2.1(c) and its complementarity with Article 9 of the Paris Agreement, which focuses on developed countries’ financial responsibilities). As a result of the dialogue, the secretariat prepared a report about their deliberations.
The Standing Committee on Finance (SCF), established during COP16, has two tasks related to Article 2.1(c): mapping information that contributes to the implementation of Article 2.1(c) and preparing a synthesis report (published in November 2023) analyzing how to operationalize it. The SCF provided a first report at COP27 and will present an updated report at COP28 for countries’ consideration.
Efforts outside UNFCCC
Stakeholders like investors and corporations have developed frameworks to identify progress in aligning financing per Article 2.1(c). For example, WRI developed a framework and identified tools governments already have at their disposal to shift and mobilize finance. Tools are available in four categories: financial policies and regulations, fiscal policy levers, public finance and information instruments.
Investors, corporations and financial institutions have also shown some progress on Article 2.1(c) alignment.
Some are mainstreaming climate risk in their operations by applying risk management approaches, including disclosure frameworks to assess physical (e.g., fires and floods) and transitional (e.g., regulatory and technologies) risks. The theory of change is that disclosing information on climate-related risks may lead to investors deciding to shift their investments, contributing to alignment. To this end, corporations are applying the Task Force on Climate-Related Financial Disclosures (TCFD) frameworks to their own risk disclosures. Some central banks have incorporated climate-related risks into their operations.
Additionally, investors with the Glasgow Financial Alliance for Net Zero (GFANZ) have developed guidelines for financial institutions to align their business and operations with the goal of achieving net-zero emissions. Financial institutions including asset owners and managers, commercial banks and insurers have made commitments to back sustainable finance and phase out coal. Multilateral development banks have rolled out principles and a joint methodology to align their operations — including both direct investment and policy-based lending — to the goals of the Paris Agreement.
What challenges remain to operationalize Article 2.1(c)?
Despite incremental progress, understanding the place of 2.1(c) in the overall climate negotiations, defining key terms like “financial flows” and “consistent,” and addressing concerns about countries’ sovereignty all pose challenges for the international finance community to move forward.
Defining ‘consistency of financial flows’
One of the key challenges to operationalizing Article 2.1(c) is that countries are using different terms and concepts to interpret the word “consistency.” These include directing, orienting, aligning, shifting, steering, scaling up, scaling down and more. Some countries argue that “consistency of financial flows” is about directing finance to green, sustainable and/or climate-related activities, regardless of the financial instruments through which such flows are channeled. The IPCC has defined it more broadly as looking at all investments, whether or not they contribute to climate objectives, including those investments that play a transition role.
However, “consistency” will require some conversation about what not to do, as well. At the very least, countries need to come to a common understanding on how to scale down misaligned investments (like financing fossil fuels) and the impact this may have on countries’ domestic policies and national development.
Concerns about unintended consequences
Countries have different development pathways, needs and priorities. Policies and instruments to align their financial flows will need to account for this diversity. However, because 2.1(c) is a global effort, questions will arise about standards for action and whether similar policies and regulations need to be applied in all countries. For example, if one developing country does not reform a specific set of policies, will it no longer be eligible to access climate finance? Will there be trade restrictions imposed on specific products?
The relationship of Article 2.1 (c) to other global finance goals
Article 2.1(c) is just one goal within the Paris Agreement for addressing climate change. To effectively operationalize it, it must be considered within the context of the whole agreement — especially its other finance goals.
For example, negotiators and other stakeholders like research organizations and academia are examining the complementarity of Article 2.1(c) and the new collective quantified goal (NCQG) that must be established by COP29 in 2024. NCQG will set a new finance objective that goes beyond developed nations’ current goal of providing a collective $100 billion in climate finance annually. However, while Article 2.1(c) refers to allfinancial flows for countries that signed the Paris Agreement, the NCQG is specific to finance support to developing countries
Importantly, the mandate to adopt NCQG states that the new goal must take into account developing countries’ needs and priorities. Developing countries have reiterated their concern that Article 2.1(c) discussions could draw the NCQG conversations away from this focus and instead towards domestic policy and finance flow shifts, or include conditionalities or barriers to access financial support.
It's important that negotiators take these concerns seriously as they consider how to move forward, particularly in the context of who contributes to the NCQG and efforts to maintain access to climate finance.
What to watch for at COP28
Article 2.1(c) will likely be addressed on several fronts at COP28 in Dubai, including as part of the Global Stocktake, in reports prepared by the SCF, and in outcomes of the Sharm el-Sheikh dialogue.
In addition, developed countries have suggested an agenda item focused on Article 2.1 (c), as well as a dedicated work programme within the UNFCCC. Developing countries, however, have expressed skepticism about this approach, on the basis that a focus on 2.1(c) could “lead to developed countries shying away from their commitments and obligations” to provide financial support to vulnerable nations. This concern was also expressed last year at COP27.
The provisional agenda of the CMA (the group of countries that have signed and ratified the Paris Agreement) currently includes an item on the scope of Article 2.1(c) and its relationship to Article 9. However, it’s unclear if it will proceed since agenda items must first be accepted by all Parties to the Paris Agreement.
There will be no way to meet global climate goals if countries can’t agree on how to steer finance toward a low-carbon, climate-resilient world. Investment is both the fuel and the steering wheel for arriving where we need to go. Article 2.1(c) will be complicated to operationalize, but in its very ambition, it provides a vision for the road forward.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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