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Info Service on Climate Change (Mar24/04) Coventry, 13 Mar (Celine Tan*) — Methodological changes to how the UK calculates international climate finance and retrospective incorporation of projects and programmes are inflating the country’s climate finance figures. These adjustments were undertaken to allow more aid expenditure to count as climate finance and does not result in additional resources to finance climate action in developing countries, calling into question the UK’s compliance with commitments under the United Nations Framework Convention on Climate Change (UNFCCC). A rapid review by the Independent Commission for Aid Impact (ICAI), a statutory body established to scrutinise the UK’s overseas development assistance (ODA), found that the government “moved the goalposts” for measuring climate finance to developing countries to enable it to meet its pledged climate target of 11.6 billion by 2025-26. Additionally, a “scrubbing exercise” was undertaken to retrospectively identify “climate-relevant components” within its current ODA portfolio to tag as climate finance but which did not entail any additional financing to developing countries. According to ICAI’s report, these accounting changes resulted in total reclassified climate finance amounting to GBP 1.724 billion or 15 percent of the total GBP 11.6 billion commitment but did not translate to increases in climate finance that were disbursed to developing countries. All UK international climate finance is derived from its ODA budget as a starting point, which already calls into question the UK’s compliance with its obligation under Article 4.3 of the UNFCCC that developed countries “shall provide new and additional financial resources to meet the agreed full costs” of climate action by developing countries. However, the recent changes – implemented since 2023 – have compounded the problem of lack of additionality in international climate finance while also reducing the amount of ODA available for non-climate finance expenditure, including health, education and humanitarian expenditure. The ICAI report outlines three main changes to the UK’s climate finance accounting that is inflating total climate finance figures. First, the UK now counts all “climate-relevant shares” of its core contributions to multilateral development banks (MDBs) as climate finance. Previously, only ring-fenced climate finance, such as through specific climate funds or programmes such as the Global Environment Facility (GEF), channelled through MDBs were counted as climate finance. This accounting change added 746 million towards the UK’s climate finance target. The second change entailed applying “a fixed proportion” of 30 percent as climate finance to humanitarian programmes in the ten percent of countries classified as climate vulnerable. This means that any humanitarian expenditure within those countries is automatically classed as climate finance and this accounting change is expected to add an additional GBP 497 million to climate finance figures between 2021-22 to 2025-26. The third change is to adjust how the UK government calculates ODA contributions it makes to climate-related projects of British International Investment (BII), the UK’s development finance institution (DFI). The BII, like all DFIs, lends to the private sector in developing countries drawing on ODA and other official financing as capital. This new accounting change involves calculating ODA-eligible core capital contributions to BII based on “actual BII investments” rather than assigning a fixed percentage of 30 percent as climate-related expenditure previously. This change could add GBP 266 million to the UK’s climate finance target. The government argues that calculating BII’s climate finance contributions in this way “more accurately reflects what core capital contributions are enabling BILL to deliver on climate finance”. These three changes have been complemented by the “scrubbing” of the existing ODA portfolio to identify climate finance programming which may have been missed to add to the overall climate finance figures. This exercise is said to have identified an additional $215 million of climate finance in existing aid programmes. According to ICAI, the government argues that these changes only bring it in alignment with approaches taken by other developed countries, including France, Germany, the Netherlands and Norway. The ICAI report outlines several concerns with the aforementioned changes to the effectiveness, credibility and sustainability of UK climate finance. There are serious concerns of “substantial trade-offs” between climate and non-climate ODA priorities within the context of “cumulative reductions and increased pressures” on the UK’s existing ODA budget. First, the UK government reduced its ODA target to 0.5 percent of gross national income (GNI) from its statutory 0.7 percent GNI target as a “temporary measure” in 2021 and is not expected to return to the 0.7 percent target spend until at least after 2027-28. Second, almost a third of UK ODA expenditure is now spent within the UK on accommodation and support for asylum seekers and refugees, expenditure that can be classified as ODA under the OECD Development Committee’s rules as “in-donor refugee support”. The ICAI report states that the UK government recognises that considering this climate finance as “new additional” funding “is difficult to defend in the face of reductions in the availability of ODA” and that the need to “significantly scale up [climate finance] with reduced headroom will mean that other areas such as education, health and humanitarian response will inevitably receive less funding”. The ICAI report also expresses concern that the type of climate finance instruments may not be appropriate for developing countries and many countries affected by the climate crisis, especially least developed countries (LDCs), fragile and conflict-affected states (FCAS) and small island developing states (SIDS), all priority areas identified in the UK’s recent International Development White Paper. In particular, the report highlights that the share of UK climate finance channelled through MDBs will be disbursed primarily through concessional loans rather than grants. It reports that MDBs tend to disburse mitigation and adaptation finance less through grants than bilateral donors or multilateral climate funds but concessional loans “are not the preferred modality of LDCs and SIDS”. The report also found that there is “insufficient transparency about the accounting changes, making it hard to replicate the government’s calculations and hold the UK to account for its climate finance commitments” and that climate finance programming did not sufficiently pay attention to gender in their design and implementation. Additionally, the report criticised the UK government’s domestic policy actions as damaging its “international climate leadership”. The ICAI found that changes to the UK’s own domestic next zero commitments, such as support for new oil and gas exploration, “contributed to the decline in the UK’s global leadership position” on climate action. It argues that the government’s International Climate Finance Strategy 2023 cross-references “domestic net-zero climate policies and achievements to bolster its international credibility on climate action and its commitment to [climate finance] to bolster its domestic net zero credentials” but “when domestic ambitions are reduced, this cross-referencing approach can contribute to lowering the UK’s international reputation”. The report makes four recommendations, including producing a more comprehensive and detailed internal plan for climate finance expenditure and improving transparency of climate finance reporting to enable better tracking of climate finance commitments as well as integrating consideration of gender in climate programmes and tracking delivery of international climate finance to SIDS, FCAS and LDCs. The UK government is expected to respond to the report in April 2024. [* Celine Tan is Professor of International Economic Law at Warwick Law School, University of Warwick, UK. She is Co-Director of the Centre for Law, Regulation and Governance of the Global Economy (GLOBE) and Project Lead for the New Frontiers in International Development Finance (NeF DeF) and Climate Finance for Equitable Transitions (CLiFT) networks, and founding member of The IEL Collective.] +
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