“Bigger, Better, Faster”: The OPEC Fund and Climate Action

In an increasingly fractious world riven by deep divisions, the need for climate action is one of the few things almost everyone can agree on. The OPEC Fund is part of this effort. At the UN Climate Change Conference COP28 last December in Dubai almost 200 nations reaffirmed their commitment to the Paris Agreement’s goal of limiting “the increase in the global average temperature to well below 2°C above pre-industrial levels” and pursuing efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.” 

The urgency is beyond doubt. But hitting these targets is impossible without more funds and faster action. Anything less risks a steep human cost, specifically in terms of lost livelihoods. 

A new working paper by the economists Adrien Bilal and Diego R. Känzig estimates that climate change could cause a one-third or more loss in long-term human welfare. Employing long-term data on global economic growth and average annual temperature, they find that an additional 1°C of warming will lead to a 12 percent fall in GDP. They warn that a climate-change scenario with more than 3°C warming would be “an equivalent blow to fighting a permanent war.” 

Yet the chances of achieving the Paris goal are decreasing by the day. The World Meteorological Organization (WMO) said in its most recent report in June 2024 that there is an 80 percent likelihood that the annual global average temperature will temporarily exceed 1.5°C above pre-industrial levels for at least one of the next five years. 

To put this into perspective: When the Paris Agreement was drafted in 2015, such a chance was “close to zero”, the WMO says. The organization also warns that there is an 86 percent chance that a new “hottest year on record” will be set this year. In other words 2023, the dubious current record holder, will seem cool by comparison.  
Lower temperatures, higher sticker price 

COP28’s Global Stocktake report showed that the world is “severely off track” on climate. “Governments are taking baby steps,” while they “must make bold strides” instead, said the Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), Simon Stiell. To achieve the Paris Agreement’s targets, global greenhouse gas (GHG) emissions must be cut by around 43 percent by 2030 and 60 percent by 2035 from 2019 levels, aiming for net-zero CO2 emissions by 2050. 

The costs are immense. The Independent High-Level Expert Group on Climate Finance (IHLEG) said that emerging markets and developing countries (EMDCs), excluding China, need to invest and spend close to US$2.4 trillion a year by 2030 to meet climate and nature goals. That is four times what is currently being invested. 

A silver lining, especially for EMDCs, is the opportunity to “leapfrog the dirty and destructive phase of fossil-fuel growth of developed countries and build cleaner, safer, more energy-secure, more resilient and more bio-diverse ways of living and working,” as the experts put it. Renewables investments and savings from the replacement of fossil fuel use would go a long way. 

But not long enough. While global efforts to tackle climate change are increasing, EMDCs are facing various setbacks. These include the shift to clean energy in supply and use, enhancing adaptation and resilience, addressing loss and damage, protection and restoration and ensuring a just transition. 

This backsliding is also borne out in numbers: Global clean energy investments reached an all-time high in 2023, but more than 90 percent of the increase took place in advanced economies and China. Low- and lower-middle income countries accounted for only 7 percent of clean energy spending in the previous year. 

Adaptation needs are estimated at around 10-18 times as much as current flows of international public adaptation finance, the IHLEG report says. Although EMDCs account for an estimated 90 percent of the investment opportunity in protecting and restoring nature from 2020-2030, 80 percent of the financing remains in developed economies. International public finance commitments for adaptation in EMDCs fell by 15 percent in 2021. 

The IHLEG report concludes: “There are important shortcomings from the perspective of EMDCs: climate finance is concentrated in developed economies and China, and in mitigation rather than adaptation. Private finance is insufficient. Climate finance is primarily delivered in the form of debt. And most financing remains in its country of origin.” 

Doing nothing costs a lot 

Despite a global increase in climate financing – mostly benefitting rich nations – the amounts are still far from what is needed and also what is spent on other purposes. According to the International Institute for Sustainable Development, an independent think tank, governments provided a record high of over US$1.7 trillion in public money in 2022 to support fossil fuels, despite 91 percent of global CO2 emissions originating from fossils fuels. This amount dwarfed the US$1.27 trillion of global climate finance committed in 2021/22. 

In addition to raising more funds, it is also imperative to act faster. When the groundbreaking Stern Review on “The Economics of Climate Change” was published in 2006 it provided a first substantial estimate, suggesting that stabilizing greenhouse gases, if action were taken promptly, would cost 1 percent of global GDP. For lack of action that estimate today has more than doubled. In other words, the world has learned the hard way that the cost of inaction far outweighs the expense of mitigation. 

A new study by the International Institute for Applied Systems Analysis in Laxenburg, Austria, finds that if global warming continues to 3°C, global GDP will decrease by up to 10 percent – with the worst impacts in less developed countries. “When it comes to climate variability and extremes, it is crucial that we can understand and quantify their financial impacts and how those will change over time,” says co-author Jarmo Kikstra. “Our results suggest that climate change comes at a substantial cost to populations around the world.” 

The IHLEG report also warns against the “cost of inaction” and calls instead for a “comprehensive strategy to deliver bigger, better and faster climate finance.” One of the pillars of this approach are multilateral development banks. A G20- mandated Independent Expert Group calls for a tripling in sustainable annual lending levels by MDBs to US$390 billion by 2030. 

The OPEC Fund and climate action 

The OPEC Fund is taking on a growing role in the delivery of climate action. It adopted its first Climate Action Plan in 2022, setting ambitious targets of increasing climate finance to 25 percent by 2025 and 40 percent by 2030 of all new financing. The OPEC Fund also committed to seeking alignment with the goals of the Paris Agreement. 

The OPEC Fund’s approach focuses on three key areas: 1. Climate finance and energy mitigation, 2. Food security and climate adaptation, and 3. Nature-based solutions – in other words, the protection of ecosystems and biodiversity. 

In order to assess its delivery, the OPEC Fund introduced an annual accounting of its climate financing in 2021. It follows the methodology adopted by other multilateral development banks (MDB). This harmonization represents a major step forward towards joint efforts in response to climate change. 

In accordance with the practices of the Joint Report on MDB Climate Finance, the OPEC Fund publishes details of the climate finance measures for its approved portfolio (excluding trade finance) retrospectively from the previous year. The first annual Climate Finance Report, released at COP29 in Baku, provides a detailed overview. 

The climate (financing) is heating up 

• The OPEC Fund’s level of climate financing has notably advanced in recent years. Comparing the baseline period of 2018-2021 to the year 2023, there has been a significant increase from 20 percent to 34 percent. 
• Adaptation finance increased from 5 percent to 17 percent, and mitigation finance increased from 15 percent to 18 percent. The contribution of the public sector to the OPEC Fund’s climate finance has averaged around 70 percent over the baseline period, primarily driven by energy and multisectoral projects. Climate finance in the private sector accounted for approximately 30 percent, led by the energy sector, with additional contributions from banking and finance as well as multisectoral (financial intermediaries) projects. 
• When calculating its climate reach the OPEC Fund first analyzed the period 2018-2021. The overall portfolio included 134 projects with total OPEC Fund funding of US$4.13 billion. Of this portfolio, 57 projects (42 percent of the total number of investments) addressed climate finance: 23 projects (17 percent) were dedicated to adaptation finance, 19 projects (14 percent) to mitigation finance and 15 projects (11 percent) were a mix. Total OPEC Fund climate finance for the period was US$826 million, accounting for 20 percent of the total portfolio. 
• The analysis of OPEC Fund climate finance in 2023 was based on net project approvals for 2022 (year of approval), excluding trade finance projects. The analyzed portfolio included 37 projects with total OPEC Fund financing of US$1.54 billion. Out of these 37 projects, 25 (67.6 percent of the total number of investments) addressed climate finance, 5 projects (13.5 percent) involved climate change adaptation finance, 10 projects (27 percent) involved climate change mitigation finance and 10 projects (27 percent) were a mix of both. 
• Total OPEC Fund climate finance in 2023 was US$515.4 million, accounting for 33.4 percent of the total portfolio, well ahead of the 25 percent target for 2025. Of that total, adaptation finance amounted to US$146.6 million (9.5 percent of total OPEC Fund financing), while mitigation finance amounted to US$368.8 million (23.9 percent). 
• When the OPEC Fund adopted its Climate Action Plan in 2022 the institution emphasized “the pivotal role that climate finance plays in shaping a resilient and equitable future.” Two years on, delivery is well on track. But given the size of the task this can only be seen as encouragement to redouble all efforts.