CBDR Explained: Climate Finance and COP29 | Common But Differentiated Responsibilities

The loss and damage fund was established after rich countries acknowledged responsibility for most historical climate change and agreed to create financial mechanisms for poor and vulnerable nations. Despite months of negotiations resulting in a compromise blueprint, the actual funding mechanism remains incomplete. The goal is to operationalize this fund by 2024, with COP 28 expected to lay down the necessary framework for implementation.

The Loss and Damage Fund, established at COP27 in Egypt in 2022, provides financial support to developing countries, especially low-income nations and small island states, for climate disaster impacts. Key operationalization challenges include: (1) Scale - current funding of $700 million is insufficient, requiring hundreds of billions; (2) Allocation - ensuring vulnerable countries with limited capacity receive priority; (3) Equity - developing an allocation framework that puts equity, justice, and adequacy at its core. The fund differs from NCQG: it addresses irreversible climate impacts as compensation, while NCQG supports broader mitigation, adaptation, and resilience efforts. Developed countries face criticism for relying on carbon markets rather than direct action, despite being primary contributors to the climate crisis.

A major breakthrough at COP28 was the operationalization of the Loss and Damage Fund, which had been controversial for many years. During the opening ceremony, the World Bank was named as interim trustee, and countries responded enthusiastically with pledges totaling over $700 million by the end of the first week (up from approximately $500 million initially). While this represents positive momentum, it remains a small fraction of overall climate finance needs. The fund addresses climate impacts affecting vulnerable countries, representing a significant step toward accountability and support for those most affected by climate change despite contributing least to it.

The loss and damage fund operates within a broader landscape including the Warsaw International Mechanism and Santiago Network, requiring complementarity rather than fragmentation. The World Bank serves as interim host and trustee, raising questions about financial architecture reform and potential injustices. The fund board has achieved rapid progress including meeting World Bank conditions and selecting an executive director. Key operational questions include stakeholder inclusion (communities, indigenous peoples, vulnerable groups), direct access mechanisms, grant versus loan instruments, and ensuring the fund addresses both past and future impacts. The fund represents the third pillar of climate action alongside mitigation and adaptation, requiring balanced financial flows across all three pillars.

The Loss and Damage facility requires operationalization including claim processes, eligibility criteria, and disbursement procedures. The process is being compared to insurance company operations, where claimants must demonstrate damage, meet criteria, and receive compensation. The transitional committee established at COP 27 will develop these operational details over the next two years, as the facility currently has no funding. This represents a significant step forward in addressing climate justice for vulnerable nations.

Developed countries have argued that the climate finance contributor base should be expanded to include newly wealthy nations like Singapore, Saudi Arabia, and China, as these countries have become wealthy in the past two decades. This expansion was attempted during the Paris Agreement negotiations but was blocked by developing countries, particularly China. As a result, developed countries only committed to $300 billion annually in climate finance starting from 2035, which is considered insufficient for achieving climate goals. This demonstrates how the expansion of contributor base has weakened climate finance commitments.

Discussions about expanding the climate finance donor base to include high-income countries like Saudi Arabia, Qatar, UAE, China, Singapore, and South Korea are characterized as geopolitical distractions rather than genuine solutions. These conversations serve two main purposes: (1) allowing wealthy countries like Europe, Australia, US, Canada to deflect responsibility by shifting blame to other nations, and (2) serving domestic political interests rather than addressing the actual need for increased funding. China, despite being a high per-capita income country, already provides substantial voluntary climate finance to the global South, making expansion arguments unconvincing.

A central debate at COP 29 was whether China should be included in the list of countries contributing to climate finance. Developed countries (Annex 1) sought to expand the contributor base, while China maintained its position as a developing country under the Convention's definition. This divide reflects broader tensions about responsibility and historical emissions. Developing countries sought clear modalities for climate finance, including grants for adaptation and loss and damage, alongside loans and financing with better conditions for mitigation projects. While there was near-consensus on allocating $85 billion annually for adaptation, the final agreement left modalities largely open. The Azerbaijan presidency's handling of negotiations was criticized, including the unauthorized editing of documents by Saudi Arabia, which complicated the process.

The contributor base issue—who is responsible for delivering the NCQG—is highly contentious. Developed countries want to expand the contributor base beyond Annex 1 countries, arguing that the world has changed since 1992 and countries like China and Gulf States should contribute. However, developing countries argue this is not their problem and that the Paris Agreement language is clear on developed countries taking the lead. This issue is proving difficult to resolve and is getting negotiations stuck.

A major point of contention is who should contribute to the new climate finance goal. Developed countries propose expanding the contributor base to include emerging economies like China and certain Arab countries, arguing these nations have sufficient economic capacity and high emission levels. Developing countries, represented by G77+China, oppose this expansion, arguing it violates the clear obligations established in the Convention and Paris Agreement that only developed countries should provide climate finance.

Article 6 of the Paris Agreement sets up an accounting framework for international carbon markets. Unlike the Kyoto Protocol where developed countries had targets and could trade among themselves, the Paris Agreement is a bottom-up scheme where every country sets its own targets. Article 6 has three sections: Article 6.2 (Cooperative Approaches) allows countries to cooperate through bilateral agreements for trading carbon credits; Article 6.4 (Paris Agreement Crediting Mechanism) replaces the Clean Development Mechanism (CDM) as a UNFCCC-governed mechanism; and Article 6.8 (Non-Market Approaches) provides an alternative for countries that prefer non-market solutions. Participation in Article 6 requires more institutional capacity and regulation from the host country compared to CDM. Demand for carbon credits comes from multiple sources including bilateral agreements (86 agreements, 140 projects listed) and CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). The voluntary carbon market is not regulated by governments; companies and organizations set voluntary targets like climate neutrality or Net Zero. The market has experienced strong growth from 2017 to 2021 due to greater interest in Net Zero targets. The average price on this market is about $6 per ton.

This section covers the relationship between Paris Agreement Article 6 and carbon markets. Paris Agreement Article 6 relates to carbon markets in two ways: (1) Supply side - credits generated under Article 6.4 can be used in voluntary carbon markets, and (2) Demand side - countries can purchase credits to meet their NDCs. Major voluntary carbon market standards including Gold Standard, Verra (VCS), and others are responding to Article 6 by developing guidance on how their credits relate to the new mechanism. Environmental groups have expressed concerns about carbon markets, particularly regarding potential double counting and the quality of credits. These concerns have led to increased focus on credit quality standards and the need for adjustment mechanisms. The Article 6 framework addresses these concerns by establishing rules for preventing double counting and requiring host country approval for credits contributing to NDCs.

Article 6 of the Paris Agreement establishes mechanisms for international cooperation on carbon markets. Countries with domestic carbon markets can cooperate to trade emission reductions. This creates opportunities for countries like Brazil to generate carbon credits from projects such as reforestation and renewable energy, which can be purchased by other countries to meet their emission reduction targets.

The Paris Agreement (2015, COP21) introduced Nationally Determined Contributions (NDCs) to limit global temperature rise to 1.5-2°C. Article 6 sets out principles for carbon markets, enabling international cooperation to tackle climate change. It promotes both market-based and non-market-based strategies. Components include: 6.2 provides accounting guidance for international transfer mechanisms toward NDCs; 6.4 establishes a mechanism for trading high-quality carbon credits; 6.6 provides opportunities for non-market-based cooperation for financing climate actions.

Article 6 of the Paris Agreement establishes a comprehensive framework for international carbon accounting that extends beyond individual projects to encompass national inventories and Nationally Determined Contributions (NDCs). The agreement distinguishes between Article 6.2 (international transfers between countries achieving NDC targets) and Article 6.4 (project-level mechanisms similar to the voluntary market). A critical mechanism is the corresponding adjustment, which prevents double counting by requiring host countries to discount credits when they are counted toward purchasing countries' NDCs. There is emerging consensus that the voluntary market should not necessarily conform to Article 6 corresponding adjustment rules, as they represent parallel accounting systems.