The COP29’s Climate Finance Action Fund could set a new green standard for petrodollar recycling, but its current targets are too modest to have a big impact
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In early 2023, the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment (AR6)synthesis report stressed the need for drastic, immediate, and lasting reductions in Greenhouse Gas Emissions (GHGEs) to cap global temperature rise at 1.5 degrees celsius as established in the Paris Agreement. Considering these findings, the COP28 UN Climate Change Conference initiated support for a ‘transition away from fossil fuels’ in its global stocktake.[1] “Whilst we didn’t turn the page on the fossil fuel era in Dubai, this outcome is the beginning of the end,” said UN Climate Change Executive Secretary Simon Stiell as COP28 laid the groundwork for future action. Considering the monetary and time cost required, COP28 also discussed the critical, crucial and catalytic role of climate financing in the proposed transition. Given these proceedings, COP29 released the Climate Finance Action Fund (CFAF) (among others) in its effort to turn the page that COP28 did not.
With its announcement in July 2024, CFAF was launched as the first private-public partnership fund to call on fossil fuel-producing countries and companies to contribute towards green financing with annual instalments, holding them partially accountable for the damage caused.
With its announcement in July 2024, CFAF was launched as the first private-public partnership fund to call on fossil fuel-producing countries and companies to contribute towards green financing with annual instalments, holding them partially accountable for the damage caused. Spearheading the initiative, Azerbaijan has placed itself as a founding contributor. In addition to funding adaptation, mitigation, and research and development, CFAF plans to use its resources to provide off-take guarantees to small and medium-scale renewable energy producers and bear initial losses for green industrial projects. Another major investment area for the fund is the net-zero emissions goal. In addition, 50 percent of the contributions are to be directed towards facilitating the development of the next generation of Nationally Determined Contributions (NDCs) towards meeting the 1.5-degree celsius temperature target. These propositions align with CFAF’s staunch focus on providing financing for mitigating global warming challenges. This is visible in its overt inclusion of not just coal but also oil and gas producers as climate change contributors. Previously, petroleum producers have not been asked to be overtly involved in climate endeavours at an international level. By drawing contributions from petroleum producers, CFAF has essentially created a long-awaited accountability channel that can redirect petrodollar revenue into green financing. With this initiative, CFAF may potentially set a new standard and definition for ‘petrodollar recycling’.
While ‘recycling’ is typically a term associated with environmentally friendly practices, ‘petrodollar recycling’ refers to the reinvestment of excess revenue from oil exports back into the global economy through foreign-held assets such as US Treasury Bonds and imports, while also financing domestic consumption and investment. Since its establishment in the 1970s, these petroleum-producing countries have maintained this recycling system while their export revenues have continued to see higher horizons. According to OPEC’s official data, real OPEC Reference Basket prices have surged above 1970s levels through the last two decades. Consequently, OPEC members alone have made upwards of US$ 500 billion in most years since 2005 and approximately US$679.7 billion in 2023 itself, exclusively through petroleum exports. Given historical trends and current conditions, with the persistence of petroleum production, these seismic revenues will continue to be accrued and recycled through preset avenues, i.e., not towards climate action. CFAF’s proposed methodology can change that by encouraging oil and gas producers to capitalise on the fund. Petrodollars may finally be put towards alleviating the climate stress caused by their production.
OPEC members alone have made upwards of US$ 500 billion in most years since 2005 and approximately US$679.7 billion in 2023 itself, exclusively through petroleum exports.
While petroleum revenues have been soaring higher and higher, so have global temperatures. 2023 was another record-breaking year with global average temperatures reaching 1.45 ± 0.12 degrees celsius above pre-industrial levels. Current petroleum production is estimated to be responsible for about 15% of global greenhouse gas emissions (GHGEs), i.e., approximately 5.1 billion tonnes of GHGEs. Even with a transition underway, the shift away from petroleum products will be gradual and subsequent production will continue to invite large sums of petrodollars into the recycling channel. With the temperature gap closing and financial needs growing, this revenue must be put towards mitigating urgent climate challenges and other adaptive measures. Thus, changing the direction of the ‘recycling’ channel towards investment in green projects is an essential step taken by the CFAF.
As the fund opens itself up for contributions following COP29, it hopes to initially fundraise US$1 billion after which it expects annual instalments from its members. Though voluntary at the moment, CFAF is concretizing the bedwork needed to build new standards of petrodollar recycling in upcoming years. However, aiming for a US$1 billion goal from an industry grossing well over US$500 billion in revenue per year is fairly minuscule and ‘far too modest,’ especially considering the seriousness of adversities caused and the investment required for their mitigation. The International Energy Agency’s (IEA)‘Emissions from Oil and Gas Operations in Net Zero Transitions’ report states that to halve the emission intensity within the next decade, a direct investment of about US$ 600 billion has become a requisite. Considering this staggering figure, CFAF’s current goal seems lenient and derisory. If the initial funding goal is to set an anchor for future contributions, the fund’s cash flow may be too meagre to effectively work towards its target. Nonetheless, as CFAF begins its fundraising, its finances may reach impressive depths.
The International Energy Agency’s (IEA)‘Emissions from Oil and Gas Operations in Net Zero Transitions’ report states that to halve the emission intensity within the next decade, a direct investment of about US$ 600 billion has become a requisite.
While transitioning away from coal, oil and natural gas is a crucial and inevitable solution to the climate problem, it is going to be anything but instantaneous. While we gradually enact this shift, the mitigative steps taken to make up for the damage caused are just as crucial. CFAF’s mechanism is an essential way of creating the accountability required from petroleum producers in the last few decades. Though not the seismic change that the climate crisis warrants, it is a definitive shift away from the status quo of petrodollar recycling activities. With this initiative, COP29 has the chance to test the possible hurdles in carving a new recycling pathway. This pathway can then be cemented in the coming years and scaled further up to match climate requirements. As the fundraising proceeds, the response to CFAF will be a clear indication regarding the future of this movement and whether a green financing channel can become a normative part of petrodollar recycling.
Diya Shah is a Research Intern at the Observer Research Foundation
[1] UNFCCC Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA), Outcome of the first global stocktake. Draft decision -/CMA.5. Proposal by the President, UN Climate Change Conference - United Arab Emirates, United Nations Framework Convention on Climate Change, 2023, https://unfccc.int/documents/636608.
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