22 September 2022.
Anna Stünzi, how is the financing of climate protection projects regulated under the Paris Agreement?
The Paris Agreement plays a central role in the financing of climate protection. But even before the Paris Agreement, industrialized countries agreed to jointly provide 100 billion USD per year starting in 2020, which developing countries can use to reduce emissions and adapt to climate change. This money can be provided through bilateral or multilateral channels, as well as through private sector mobilization.
What is problematic about the official report on climate finance projects?
In summary, there are two major problems: First, there is no clear definition of what counts as climate finance. Second, there is criticism that currently only donor countries decide whether a project is climate relevant. There are some donor countries that apply clear rules and look closely at each project. Nevertheless, our analysis shows that many projects are still marked as climate financing that actually have very little to do with climate. Conversely, some relevant projects are also not marked. This leads to the fact that the comparison and the survey of the aggregated financial flows are very difficult. In the past, there has also been criticism that some donor countries deliberately over-report the numbers.
How did you plan to address this issue with your research?
The idea was to create a tool that, on the one hand, would allow us to analyze the totality of projects in terms of their relation to climate change, using a single, consistent methodology, and, on the other, that could be used precisely by different actors. With our model, we were able to look at over 2.7 million projects over the period 2000-2019. It still needs expert knowledge to decide on the actual climate relevance in unclear cases or projects that have several overarching goals. However, our idea with ClimateFinanceBERT was to create a tool to make a first, large-scale analysis and classification. This can also be used by recipient countries or independent institutions and thus provide a 'second opinion' to the reported figures of donor countries.
How did you go about determining the true extent of climate finance?
We built a two-step model. First, we machine-read the entire corpus of project descriptions of international development cooperation projects and classified whether the project is remotely related to climate change. Then, we divide the projects into detailed categories, such as adaptation or solar energy. Out of more than 2.7 million projects, we were able to identify the 82,000 that have a primary focus on reducing emissions and adapting to climate change. It is important to note that we only looked at bilateral projects, not, for example, money spent through multilateral development banks or climate funds, although these figures also contribute to the $100 billion target. However, bilateral projects account for the largest share of all reported climate projects in terms of financial volume over the period.
What were the most important results for you?
Basically, the numbers we find are significantly lower than the reported numbers. For example, since the Paris Agreement, we find relevant bilateral projects amounting to $30.3 billion, significantly less than communicated by developed countries. There are some countries, such as Canada or Portugal, that report relatively similarly to what our model suggests. Switzerland also performs relatively well. However, there are others that report significantly too much or too little, sometimes even at the same time. In other words, the same country reports projects that are not really climate projects and others that are.
Also interesting is where the money is going. We see that many adaptation projects are financed and that these funds often flow to countries that are very strongly affected by climate change, for example to small island states. At the same time, the financial volume is low, so there is not enough money for adaptation to climate change.
A lot of money flows into energy projects in middle-income countries, while the volumes for the least developed countries are lower. But it is precisely these that would often need access to financing.
What are the societal implications of your study?
We hope that our research can contribute to more transparency in reporting, which could benefit the international process to reach the $100 billion goal but also negotiations on future financing targets.
Other authors of the study are:
Malte Toetzke, Group of Sustainability and Technology, ETH Zurich, Switzerland
Florian Egli, Energy and Technology Policy Group, ETH Zurich, Switzerland / Institute for Innovation and Public Purpose, UCL, UK
Image: Adobe Stock / Parradee