Discussions on financial reporting requirements under the Paris Agreement expose the deep divide among the Parties
At the best of times, the question of finance has been highly contentious at climate negotiations. These are not the best of times. The Green Climate Fund—the largest financial institution dedicated to climate priorities—is in disarray. The last meeting of its Board ended with fundamental rifts regarding the future of the fund, as well as the resignation of the Fund’s Director. This will weigh heavily on negotiators this week in Bangkok, as they discuss the framing of guidelines under the financial reporting obligations in the Paris Agreement.
Article 9, paragraph 1 lays out the basic obligation on developed countries: they “shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation”. In order to encourage regular progress on this obligation, the Agreement sets up two types of reporting requirements.
Under Article 9, paragraph 5, developed countries are supposed to report, every two years, on the finance that they will provide in the future to meet their obligations. This is generally known as the “ex-ante” reporting requirement. There is also an “ex-post” reporting requirement in Article 9, paragraph 7 (also required every two years), which obliges developed countries to report information regarding the finance that they have already provided. However, the Agreement is largely silent on what kind of information is to be provided. This will be specified in the rules or guidelines developed under the Paris Agreement (known as the “Paris rulebook”). Negotiators are hoping to finalise this rulebook by December this year.
Work on these two reporting requirements is moving at very different paces. Discussions around the ex-post reporting requirement have resulted in a relatively streamlined “draft negotiating text”, with clear options to simplify further negotiations. Discussions around the ex-ante reporting requirement, however, have not yielded a document with a clear structure. Negotiators’ concerns are still noted prominently in the text, which is not a good sign.
In a sense, this is inevitable. It is easier to report on things in the past than it is to project forward. However, the ex-ante reporting requirement is a very important tool for developing countries to anticipate the amount of finance that will be available, and plan accordingly. Without this knowledge, developing countries’ planned climate action will always be less ambitious than ideal. The whole purpose of the Paris Agreement is to set up regular cycles of planning in order to generate increasingly ambitious climate targets. Hence, failure to make progress on the issue of ex-ante financial reporting is a failure to encourage ambition on climate priorities, and a failure to adhere to the foundational purpose of the Agreement.
Apart from the mess around ex-ante reporting, the path ahead on ex-post reporting is not exactly smooth. The draft text on ex-post reporting is much cleaner than that on ex-ante reporting, but the text is still heavily bracketed. The brackets mean that countries continue to fundamentally disagree on key concepts but are kicking the can down the road to December.
The concept of ‘climate-specificity’, for example, is still in brackets. Without it, there would be no way to distinguish genuinely new and additional climate finance from development aid which is simply being re-branded as climate finance. Also controversial is the concept of “non-concessional loans”. Ideally, climate finance should be provided through grants. Loans provided at lower-than-market rates of interest could conceivably be included. But what about loans which impose onerous repayment obligations on developing countries? Allowing such loans to be reported under Article 9 would irretrievably muddle the picture on climate finance.
The concept of “grant-equivalent value” is also in brackets. This concept would require the contributor of finance to partially discount the value of a loan so as to make it more comparable to a grant. Not applying such a concept would encourage the use of loans at the expense of grants, resulting in the conversion of the climate finance obligation into a revenue source for developed countries.
Finally, there is no clarity as to who is bound by these reporting rules. The Paris Agreement makes it clear that the finance obligation is on developed countries. It also encourages other countries to consider providing support. This has been interpreted by some developed countries as permission to impose reporting rules on all countries—an idea that has crept into the draft text as references to “Reporting parties”. This phrase does not exist in the Paris Agreement, and its inclusion in the draft text is bound to cause controversy down the line.
These disagreements on the process of reporting are going to severely undermine more concrete promises made in Paris. After all, apart from the Paris Agreement, a Decision of the Conference of the Parties in Paris promised $100 billion each year for climate action in developing countries. Acting on that promise and putting institutions like the Green Climate Fund back on track are the truly daunting challenges of the moment. Settling the rules on reporting is only the first step. If countries cannot agree on something this basic, we are truly lost.
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