Azerbaijan announces a voluntary financial instrument to which oil and gas producing countries and fossil companies will contribute. Resources will be used to support energy, industrial and agro-food projects to accelerate the transition in developing countries
Climate transition finance is central to the next climate summit
On 19 July, Azerbaijan launched a $1 billion fund from oil and gas-producing countries and fossil companies to finance the climate transition. The country that will host COP29 in Baku this year is thus trying to promote the principle that the main contributors to the climate crisis must contribute more. But the fund is a repayment solution, chosen by the Azerbaijani government after the shipwreck of a more ambitious proposal: a global tax on the production of fossil fuels.
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What is the climate transition fund and how it will work
The financial vehicle announced by Azerbaijan – whose official name is the Climate Finance Action Fund (CFAF) – will be purely voluntary. At the moment there is no list of donors, but Baku says it aims to obtain contributions, on an annual basis, from at least 10 fossil-producing countries and some gas and oil companies. Azerbaijan itself, whose economy is based on fossil gas, will contribute to the fund. 90% of the Caucasian country’s exports consist of gas, which weighs 30-50% of the national GDP.
The fund will be based in Baku and administered by a board comprising donor representatives. Internal regulations on decision-making procedures for allocating fund shares and ensuring access to funds have yet to be formalized. However, the Azerbaijani government explains that its intention is to equip itself with an instrument for the climate transition of developing countries. The resources will be used for climate crisis mitigation and adaptation actions and research and development.
More specifically, the fund will support projects that enable less economically developed countries to increase their climate ambitions. It will provide financial guarantees in several ways. For example, by concluding off-take contracts (long-term agreements between producer and buyer in which goods are sold at a fixed price agreed in advance) with small and medium-sized renewable energy producers. Or through capital guarantees to cover any initial losses in green industrial projects. In addition to the energy and industry sector, a focus of the fund will be the agri-food sector.
In addition, 20% of the investment revenues will be fed to a specific financial vehicle, the Rapid Response Funding Facility (2R2F), which will guarantee facilitated loans and lost fund contributions to countries affected by extreme events. The rest of the profits will be reinvested into the general fund.
The node of climate finance at COP29
The Baku initiative is part of the main line of discussions to be held next November at COP29. The climate finance dossier will be central to the climate summit. The summit will have to agree on the post-2025 climate finance framework, finally wrap up the Loss and Damage Fund, and try to rewrite the rules of climate financing more than 30 years after they were first drafted.
All spinning spots. Starting with questions on which delegates have not reached an agreement for two years. Who should contribute? Only the countries described as “developed” by the UNFCCC agreements of the early 1990s, or the countries today have developed economies (and therefore also China and some fossil-fuel producing countries)? Who is entitled to receive funding for climate change, all developing countries or only those vulnerable to the climate crisis? And what figure must be mobilised every year to ensure a fairer transition? The old agreement set the ceiling at $100 billion a year, but UN estimates say something like $1,000 – 2,400 billion is needed today.
