A. Climate finance

Climate finance is an emerging interdisciplinary field. Simply put, climate finance is the transfer of financial resources from richer to poorer countries for climate change action. Climate finance is essential for rethinking existing patterns of production and consumption that are necessary to achieve sustainable development.Footnote ¹² As specified in paragraph 5 of the United Arab Emirates dialogue on implementing the global stocktake outcomes, finance is one of the critical enablers of climate action. Since it was introduced with the UNFCCC (1992), it is necessary to refer to the UNFCCC and its subject and purpose to explain climate finance.Footnote ¹³

The UNFCCC does not provide a precise definition of climate finance. In accordance with Article 4.5 of the UNFCCC, “The developed country Parties and other developed Parties included in Annex II shall take all practicable steps to…finance…particularly developing country Parties, to enable them to implement the provisions of the Convention”. In addition, under Article 4.3, those parties are also called upon to provide the financial resources required by developing country parties to meet the agreed full incremental costs of implementing measures.Footnote ¹⁴ Moreover, Article 4.4 requires them to provide climate finance to vulnerable countries to adapt to the negative impacts of climate change.

In general, under the UNFCCC, the term climate finance refers to financial resources allocated to address climate change by all public and private actors, particularly international financial flows from developed countries to developing countries to help them address climate change.Footnote ¹⁵ It means transboundary flows of climate finance from Annex I countries to non-Annex I countries triggered by public intervention.Footnote ¹⁶ The international dimension of climate finance recognizes the global nature of the climate change phenomenon. This implies a shared responsibility of the international community to mobilize resources to combat climate change.Footnote ¹⁷ Thus, under the UNFCCC, developed countries should not only meet their existing climate commitments but also provide financial assistance to developing countries to fulfill their commitments.Footnote ¹⁸

The Conference of the Parties (COPs) are vital platforms for the UNFCCC countries to assess progress, negotiate new agreements, and strengthen global cooperation on climate action.Footnote ¹⁹ Among COPs, COP15 in Copenhagen (2009) led to an essential shift in climate law in general and in climate finance law in particular by 2020.Footnote ²⁰ At this COP, developed countries pledged to provide at least $100 billion annually in climate finance for developing countries to respond to and mitigate the effects of climate change.

In the Paris Agreement (2015), Article 9 reaffirms that “developed country parties shall provide financial resources to assist developing country parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention”. Developed countries shall lead in mobilizing climate resources from various sources. According to Articles 6, 8, 9.7, and 10 of the Paris Agreement, climate finance is support for developing country parties provided and mobilized by developed country parties through public interventions. The Paris Agreement reemphasizes the commitment to climate finance by developed countries while introducing a mechanism that encourages voluntary participation by all parties. Article 9(2) recognizes that the level of finance should “represent a progression beyond previous efforts”. Likewise, under Article 53 of “Adoption of the Paris Agreement”, the 100 billion target proposed in the Copenhagen Accord was reaffirmed. In general, although it is not explicitly mentioned, climate finance is the only way to enable global climate action that limits global temperature rise to 1.5 degrees Celsius.Footnote ²¹ Therefore, to achieve the goals of the Paris Agreement, significant finance must be mobilized within a limited timeframe.Footnote ²² Despite the great importance of climate finance for achieving the goals of the Paris Agreement, it has always come with more broken and under-delivered promises.Footnote ²³ Furthermore, despite developing countries’ growing need for climate finance, statistics show that the commitment to mobilize $100 billion per year in climate finance by 2020 was not fully met.Footnote ²⁴ However, this goal was finally achieved in 2023.Footnote ²⁵

After COP15, the most important COP focused on climate finance has been COP29, which was recently held from 11 to 22 November 2024 in Baku, Azerbaijan. Many developing countries needed significant support to implement the “Outcome of the First Global Stocktake” (GST)Footnote ²⁶ that had been concluded at COP28.Footnote ²⁷ The negotiations were protracted and ended on 24 November 2024. A key outcome of the conference was the agreement on the NCQG. Para 8 of the NCQG on climate finance reaffirms Article 9 of the Paris Agreement. With developed country parties taking the lead, it set a goal of at least USD 300 billion per year by 2035 for developing country parties for climate action.

However, despite the lack of a universal definition of climate finance, there is considerable focus on the practical application of climate finance principles.Footnote ²⁸ Climate finance has two important characteristics: first, it is temporary, and second, it is reciprocal. International climate finance is only a temporary aid to countries that cannot really finance stronger domestic measures themselves.Footnote ²⁹ Thus, when a developing country no longer needs financial assistance to meet its mitigation targets, financial assistance from developed countries for climate mitigation will not be provided for domestic mitigation. Likewise, if the promised finance is not provided by developed countries, the fulfillment of the mitigation commitment by developing countries will be suspended. Therefore, climate finance can give countries the confidence and trust that others will reciprocate.Footnote ³⁰

B. Energy transition

Energy transition is the change in how human energy systems operate to respond to climate change.Footnote ³¹ It changes and challenges the traditional energy paradigm based on the production and use of fossil fuels.Footnote ³² In fact, energy transition is shaping the path of human progress for future generations as well as our own. States with greater transition capacity should help financially transition processes in countries with limited capacity.Footnote ³³

The UNFCCC does not make any explicit reference to the energy transition and the move towards renewable energies. Not only does it omit fossil fuels as a driver of climate change, it also supports fossil fuel-producing countries in light of the potential impact of climate change response measures on them.Footnote ³⁴ One of the reasons for this was the opposition of OPEC member states, especially Saudi Arabia, which has always been the main opponent of abandoning fossil fuels.Footnote ³⁵ Since decision-making in climate change treaties is based on consensus, even a small group of opposing countries can block a decision.Footnote ³⁶ Although the Paris Agreement contains no explicit commitment requiring its parties to phase out fossil fuels, some guidance can be drawn from the long-term temperature and financial goals of the Paris Agreement, which imply the need to align phase-out fossil fuels and the associated financial support.Footnote ³⁷ However, the absence of any reference to fossil fuels in international climate change treaties reflects the concerns of major fossil fuel-producing countries about the impact of mitigation measures on their economies.Footnote ³⁸

The recognition of the need for an energy transition culminated at COP28 in Dubai. Increasing renewable energy capacity and phasing down coal energy are among the “global efforts” that the parties agreed to in Dubai in 2023. Para 28(d) of the Outcome of the First Global Stocktake clearly called for “transitioning away from fossil fuels in energy systems”. Likewise, para 28(b) called on states to accelerate efforts to phase-down unabated coal power. However, this subparagraph is not comprehensive and does not include oil and natural gas.

At COP29, there was little discussion about energy transition.Footnote ³⁹ The just transition negotiations, including the need to move away from fossil fuels, faced challenges in COP29. Overall, the sharp divide among countries over the necessity of transitioning away from fossil fuels shaped the entire Baku negotiations about the just transition.Footnote ⁴⁰ The four COP29 final documents do not directly mention fossil fuels. Only para 14 of the United Arab Emirates dialogue on implementing the global stocktake outcomes reaffirmed the content of para 28 of Decision 1/CMA.5 of the COP28. It should have provided clear signals about the link between access to climate finance and the ability of countries to transition away from fossil fuels and realize a fair and funded phase-out of all fossil fuels.Footnote ⁴¹ Therefore, since energy transition was only re-emphasized indirectly in COP29, it appears that little progress was made on the energy transition in COP29, and discussion on this issue was postponed to COP30.

A. Quantity of climate finance

Financial transfers for energy transition are necessary.Footnote ⁴³ Although climate finance operates under conditions of significant uncertainty, its development has become an international consensus.Footnote ⁴⁴ Climate finance plays a key role in accelerating the transition to a low-carbon economy.Footnote ⁴⁵ The amount of financing shapes the trend of climate action. At the Copenhagen summit (2009), the financing commitment of developed countries was $100 billion per year. The Paris Agreement also set a target to mobilize $100 billion annually by 2020 to meet the needs of developing countries. Both the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA) have acknowledged that more finance is needed to achieve a 1.5°C pathway and provide secure, reliable, and sustainable access to energy for all.Footnote ⁴⁶ Hence, countries gathered in Baku to agree on an ambitious new climate finance goal, known as NCQG.

Developing countries tried to increase the climate finance goal to at least $1 trillion per year. In contrast, developed countries considered this amount beyond their capacity. Ultimately, despite strong opposition from developing countries, especially India, parties agreed on the NCQG to support developing countries at two levels: $1.3 trillion per year to be “mobilized” by all actors by 2035,Footnote ⁴⁷ and $300 billion per year by 2035 to be provided by developed countries. However, the variety of sources is wide, ranging from public to private and bilateral to multilateral. With the aim of increasing climate finance to at least $1.3 trillion per year by 2035, the “Baku to Belem Roadmap to 1.3T” was launched.Footnote ⁴⁸

Although NCQG is significantly higher than previous targets, it falls far short of the financial needs of developing countries.Footnote ⁴⁹ The difference in the assessment of needs on the one hand and available finance on the other is known as the climate-financing gap. The gap indicates the difference between current flows and the average needs to achieve the long-term goals of the Paris Agreement.Footnote ⁵⁰ Since climate finance commitments are not binding, contributing countries usually pledge large sums of money to projects without providing the full amount of funding pledged. If commitments were binding, there would be a smaller gap between projects committed and paid.Footnote ⁵¹ Under paras 3 and 4, there is a gap between climate finance flows and the needs of developing countries, and of course there is enough global capital to fill this global investment gap.Footnote ⁵² Nevertheless, the main shortcoming in climate financing is the lack of political will to mobilize financial resources.Footnote ⁵³ Achieving common goals and standards can help increase trust between donor and recipient countries.Footnote ⁵⁴ However, in allocating finance, priority is given to financial assistance to the least developed countries (LDCs) because of their limited capacity for climate action, and Small Island Developing States (SIDS) because of their high vulnerability to the impacts of climate change.Footnote ⁵⁵

B. Criteria for allocating climate finance

Allocation of international climate finance refers to the process of transferring funds from providers to recipients. It is answering the question of “who gets what?”: which countries are selected as recipients, and how much climate finance is allocated to the selected recipient countries?Footnote ⁵⁶ Although a quantitative goal for climate finance was determined in COP29, the criteria for allocating climate finance to developing countries for energy transition are still unclear. In general, it is influenced by a variety of factors, including political, economic, social, and cultural factors.Footnote ⁵⁷

Given the historical differences in developing countries’ contributions and different stages of development, different principles should be the basis for climate finance allocations.Footnote ⁵⁸ International climate finance is strongly influenced by all principles of climate change law,Footnote ⁵⁹ especially justice. To reduce persistent injustice between developing and developed countries, international public finance for energy transition in developing countries must be increased.Footnote ⁶⁰ For this reason, paras 25 and 27 of the United Arab Emirates dialogue on implementing the global stocktake outcomes explicitly use the term “just transition”. The basis for just transition is two important environmental principles that are explicitly mentioned in its Para 13: equity and the principle of Common But Differentiated Responsibilities (CBDR). According to the Paris Agreement, these principles themselves shall be interpreted in light of different national circumstances and in the context of sustainable development and efforts to eradicate poverty.

In general, the allocation of climate finance follows the principle of equity.Footnote ⁶¹ No climate action will succeed without equity.Footnote ⁶² Equity in the climate change regime is implemented through the principle of the CBRD and Respective Capabilities (CBDR-RC). Scholars have recognized the fundamental role of Principle CBDR-RC in realizing climate finance.Footnote ⁶³ The importance of the CBDR-RC relates to its potential to advance the goal of substantive equality in climate action.Footnote ⁶⁴ While a just transition can support equitable outcomes,Footnote ⁶⁵ COP29 failed to adequately address the necessary equity in finance.Footnote ⁶⁶

Developing countries emphasize that NCQG is subject to the principle of CBDR-RC enshrined in the UNFCCC and that they should not contribute to financing. The CBDR-RC included in the UNFCCC divides states into two categories and places financial obligations on the developed countries listed in Annex II. They consider this division equitable based on different historical responsibilities and capabilities. In this context, financial cooperation between developing countries through the south–south model is voluntary.Footnote ⁶⁷

Instead, developed countries consider the version of the CBDR-RC enshrined in the Paris Agreement equitable. The Paris Agreement focuses on the different national circumstances of states, rather than the traditional division of them into developed and developing. It demonstrates the need to enhance the potential of developing countries to participate more deeply in the process of action on climate change. According to developed countries, the principle of CBDR-RC should inspire action, not justify inaction.Footnote ⁶⁸

Although international cooperation based on the principle of CBDR-RC will be key to supporting developing countries that forgo extraction,Footnote ⁶⁹ there is disagreement among states about how to allocate climate finance to developing countries. The lack of specific standards for allocation has prevented the ideal implementation of the climate finance obligations.Footnote ⁷⁰ Due to these ambiguities about criteria for climate finance allocation, the energy transition pathway remains very uncertain.Footnote ⁷¹

C. Criticisms of the economic-based approach to climate finance for energy transition

There is increasing debate about the adequacy of finance and the effectiveness of existing financial mechanisms in addressing the evolving challenges of climate change.Footnote ⁷² Not only was the level of finance inadequate, but there were also allegations of unfair distribution of funds.Footnote ⁷³ Governance factors still play an important role in climate finance allocation.Footnote ⁷⁴ Among governance factors, the economic approach, arguments, and actions work against the equitable finance allocation.Footnote ⁷⁵ Economic solutions alone are not a sufficient solution to the climate finance problems.Footnote ⁷⁶ In practice, this approach has led to several problems in climate finance to phase out fossil fuels.

First, developed countries continue to invest in fossil fuels in developing countries, which serves to lock-in developing countries into a fossil fuel economy while investors reap the profits.Footnote ⁷⁷ In other words, developed countries are financing in the opposite direction. While positive climate finance supports the energy transition, significant amounts of finance still flow to investments that are detrimental to the energy transition, sometimes referred to as negative climate finance.Footnote ⁷⁸ It refers to finance directed to fossil fuel exploration, extraction, and related value chains.Footnote ⁷⁹ For example, the IPCC estimated that in 2020, about $511 billion was invested in upstream and downstream oil and gas supply.Footnote ⁸⁰ Likewise, the World Bank continues to finance fossil fuel projects.Footnote ⁸¹ The Russia-Ukraine war has increased investment by developed countries in the fossil fuel sector of developing countries.Footnote ⁸² The IPCC believes that public financial flows are being diverted in favor of fossil fuels and directly undermine efforts to phase out fossil fuels. For Africa in particular, financial flows—particularly from Europe and the United States—are shaping the fossil fuel future.Footnote ⁸³ Massive investments in fossil-fuel infrastructure and the development of new hydrocarbon reserves are hindering a just transition to renewable energy systems, with some African countries are gradually becoming fossil fuel exporters.Footnote ⁸⁴ According to developing countries, developed countries do not always act “green” in Africa, despite their “green” domestic policies.Footnote ⁸⁵ For developed countries, developing countries are both a source of energy resources and a dumping ground for outdated technologies.Footnote ⁸⁶

Second, the current climate finance model is based on additional debt (72%) rather than grants (25%), coupled with structural barriers facing the developing countries, including borrowing costs and weak currencies.Footnote ⁸⁷ Grants are given without interest and without an obligation to repay, but debts are subject to an interest rate and repayment schedule.Footnote ⁸⁸ This model exacerbates the debt burden of developing countries and makes it difficult for them to finance climate projects. In fact, to borrow for renewable energy projects, developing countries often pay interest rates 4 to 8 times higher than developed countries for similar projects.Footnote ⁸⁹ Debt-based climate finance means that developing countries, in contradiction to climate justice, pay the price for climate crises they did not cause. The principle of “polluter pays”, as one of the aspects of climate justice, indicates that the person who polluted must pay. The responsibilities arising from the “polluter pays” principle belong to those who have benefited from GHG emissions and to those who are victims of climate change. According to the preamble of the UNFCCC, “the largest share of historical and current global emissions of greenhouse gases has originated in developed countries”, and developing countries have not had much role in emerging this problem. It is thus unfair for developing countries to refund the environmental debts of developed countries.Footnote ⁹⁰ Therefore, debt-based climate finance for solving the climate change problem is contrary to climate justice. These debts limit the financial capacity to address fossil fuel supply, which could be exacerbated if the assets strand.Footnote ⁹¹ Developing countries have received huge loans from developed countries that need to be repaid, making it difficult to phase out fossil fuels.Footnote ⁹² If international climate finance continues to be largely through loans, it risks worsening debt problems.Footnote ⁹³

Third, instead of phasing out fossil fuels, states continue to provide subsidies amounting to trillion dollars per year.Footnote ⁹⁴ They spent $1.1 trillion on fossil fuel subsidies in 2022. The G20 spent three times as much on fossil fuel subsidies (about $535 billion) in 2023 as it did on renewable energy support ($168 billion). These subsidies delay the shift to renewable energy.Footnote ⁹⁵ As fossil fuel subsidies increase in developing countries, the incentive for climate finance under the UNFCCC decreases.Footnote ⁹⁶ Therefore, countries should act quickly to end explicit subsidies for fossil fuel production and consumption and redirect these funds to finance energy transitions and other mitigation measures. Particularly, higher-income countries can reduce fossil fuel subsidies.

Fourth, the global financial architecture leads to the formation of structural barriers to climate action in developing countries.Footnote ⁹⁷ Due to obvious economic constraints, many developing countries are delaying or abandoning their energy transition plans.Footnote ⁹⁸ Most of them have committed to achieving net zero emissions, but they continue to support, invest in, and plan to expand fossil fuel production.Footnote ⁹⁹ They are recently following the former fossil fuel trend of developed countries in light of liberalization, which appears to be stabilizing fossil fuel-based energy systems.Footnote ¹⁰⁰ According to para 6 of the NCQG, there is a need to remove barriers and address the vulnerabilities that developing countries face in financing climate action.

Therefore, based on the criticisms above, the existing economic-based approach to climate finance seems ineffective. Energy transition requires rethinking alternative paths for development beyond conventional growth patterns.Footnote ¹⁰¹ Traditional financial theories alone may not fully resolve these issues,Footnote ¹⁰² and addressing the challenges and issues within the global climate finance architecture requires a holistic approach.Footnote ¹⁰³ To address the gaps in the implementation of the Paris Agreement goals in this critical decade, as set out in para 2 of the NCQG, a bold shift in the international financial architecture is needed.Footnote ¹⁰⁴ In fact, a just transition approach should not be merely compensatory in nature but should be geared towards addressing existing social and economic injustices that have arisen from the status quo.Footnote ¹⁰⁵ The climate finance framework should be systematic, and climate justice should play a vital role in such a shift. Likewise, multilateral financial architecture needs reform to allow the provision of climate finance to be scaled up.Footnote ¹⁰⁶ Therefore, a new discourse is needed to better utilize the role of finance in addressing climate change.

A. Human rights discourse on climate change

Although the international climate change law is still state-centric, it should be developed in accordance with human rights because climate change affects the realization of most human rights.Footnote ¹⁰⁸ There is a growing concern about the impact of climate change arising from fossil fuel extraction on human rights. The UN Special Rapporteur on human rights and the environment has consistently emphasized that climate change threatens and violates human rights.Footnote ¹⁰⁹ Since fossil fuel extraction exacerbates the impacts of climate change on the realization of many human rights, including access to adequate food and water, clean air, culture, and livelihoods for all people, especially indigenous people and local communities,Footnote ¹¹⁰ the sovereign right to exploit fossil fuels must be limited by human rights rules. In this regard, the Office of the United Nations High Commissioner for Human Rights (OHCHR) notes that climate action should be consistent with existing human rights agreements, obligations, standards, and principles.Footnote ¹¹¹ In addition, the United Nations Development Programme sees climate justice in terms of putting human rights at the core of decision-making and action on climate change.Footnote ¹¹²

A human rights-based approach to climate finance means that human rights must be the primary starting point in financing policies and mechanisms.Footnote ¹¹³ It rejects a simplistic understanding of the energy transition that simply requires decoupling economic growth from environmental degradation. Instead, it requires a transformation of the energy system that involves addressing inequalities and injustices in energy systems. From a human rights-based approach, climate finance should not only be directed at addressing the climate crisis but also at preventing, minimizing, and compensating for its impacts on human rights.Footnote ¹¹⁴ In general, in the context of this approach, energy transition should be based on respect for human rights, and ensure that climate finance policies take into account existing inequalities.Footnote ¹¹⁵ In fact, it should protect against exacerbating social and economic inequalities and/or deepening inequity between countries. Given the impact of fossil fuel extraction on local and indigenous societies, states should intervene to prevent human rights violation.Footnote ¹¹⁶ This duty should be carried out by both fossil fuel-producing states and states that finance fossil fuel projects. Human rights bodies assessing the compliance of states with their human rights obligations could address their human rights violations.Footnote ¹¹⁷

Despite the increasing importance of human rights in the climate change area, human rights obligations have not yet been formally addressed in the UNFCCC and the Paris Agreement. The Paris Agreement refers to them only in its preamble, where parties are called to “respect, promote, and consider their respective obligations on human rights” when taking action to address climate change. However, it is argued that nationally determined contributions (NDCs) should clearly demonstrate how states’ commitments to implement human rights in actions to respond to climate change would be implemented in relation to energy projects.Footnote ¹¹⁸ States shall ensure that their financial commitments are aligned with their human rights obligations by incorporating human rights into their NDCs. Moreover, the Sharm el-Sheikh Implementation Plan at COP27 explicitly reemphasizes the importance of a human rights-based approach to all climate action, including climate finance.Footnote ¹¹⁹ Nevertheless, the final documents of COP29 did not refer expressly to human rights. In general, although climate finance should be based on human rights,Footnote ¹²⁰ it has not yet been consolidated in international climate change law.

B. Necessity of human rights-based approach to climate finance for FFPDCS

Fossil fuels are essential to realizing basic human rights such as the right to food, water, and work in FFPDCs.Footnote ¹²¹ Due to their rapid economic and demographic development, energy demand in these countries is increasing sharply.Footnote ¹²² Since fossil fuels provide low-cost energy in these countries, its immediate phase out increases the risks of energy poverty.Footnote ¹²³ Despite the negative impact on the realization of human rights, fossil fuel extraction has a positive impact on the realization of human rights in the FFPDC. On the one hand, domestic consumption of fossil fuels is essential for them to combat energy poverty for domestic consumption. On the other hand, revenues from the export of these resources can be essential for strengthening the development infrastructure of these countries and realizing their economic and social rights.Footnote ¹²⁴ For these countries, the production of fossil fuel can help realize the right to access energy and the right to development.

In FFPDCs, the impacts of the energy transition fall disproportionately on vulnerable populations, especially indigenous people.Footnote ¹²⁵ Indigenous people are disproportionately concentrated in “sacrifice zones”, located mainly in Latin America and Africa. A “sacrifice zone can be understood to be a place where residents suffer devastating physical and mental health consequences and human rights violations as a result of living in pollution hotspots and heavily contaminated areas”.Footnote ¹²⁶ Because of the environmental degradation, their habitat become dangerous and even uninhabitable—sometimes described as “racist sacrifice areas”. While everyone is vulnerable to climate change, those living in the sacrifice zones are particularly vulnerable to harm through exploitation and dispossession.Footnote ¹²⁷ There are numerous example of resistance from indigenous people against oil and gas extraction. They resist especially in cases where the extraction of fossil fuel resources leads to the destruction of their habitat.

The transition from fossil fuels to renewable energy sources should not increase inequality in access to electricity, especially among people in FFPDCs.Footnote ¹²⁸ Not only should phasing out fossil fuels not lead to a reduction in energy access in these countries,Footnote ¹²⁹ but it should also ensure industrial development through increased energy access. On the other hand, this access should be in line with sustainable development and transitioning away from dependence on fossil fuels. Phasing out fossil fuels should be complemented by access to affordable renewable energy sources for poor people.Footnote ¹³⁰ Therefore, the process of energy transition in FFPDCs should be based on respect for human rights in climate finance. It should ensure human rights for all, especially individuals, groups, and people in vulnerable situations.Footnote ¹³¹ Climate finance should be allocated to compensate for the impact of human rights arising from phasing out fossil fuels for vulnerable communities in FFPDCs.

A. Leaving fossil fuels underground

The energy transition is particularly challenging for FFPDCs,Footnote ¹³³ because they are likely to face reduced fiscal revenues due to phasing out fossil fuels.Footnote ¹³⁴ Energy transition will leave some of their fossil fuels unextracted. Approximately 40% of developed fossil fuel reserves must remain unextracted to limit global warming to 1.5°C.Footnote ¹³⁵ In this case, fossil fuel resources can become “stranded assets” by losing their economic value.Footnote ¹³⁶ Leaving unburned fuels untouched imposes economic costs on fossil fuel holders. About $5.4 trillion in financing is needed to offset fossil fuel resource owners who give up their rights to extract.Footnote ¹³⁷ Thus, FFPDCs need financial support to make a proper transition to sustainable development based on clean energy,Footnote ¹³⁸ because they have limited capacity to transition energy without compensation or external financial support.Footnote ¹³⁹ Since fossil fuel phase-out policies need international burden-sharing mechanisms, providing international financial support to them will be crucial.

According to FFPDCs, if they leave fossil fuels underground, they should be compensated for the loss of revenue they may face.Footnote ¹⁴⁰ Compensation could strengthen the transition to low-emission sustainable development pathways in these countries. FFPDCs claim that the recent climate finance does not correspond to historical legal responsibility.Footnote ¹⁴¹ Climate financing of the costs of remaining leaving fossil fuels underground requires consideration of the historical responsibility for accumulated extraction and the current capability to bear the burden of energy transition costs.Footnote ¹⁴² They argue that since developed countries have gained significant wealth through the exploitation of fossil fuels,Footnote ¹⁴³ they should pay required costs. Given that developing countries have so far emitted fewer GHGs, their right to develop entitles them to claim climate compensation.Footnote ¹⁴⁴ They believe that phasing out fossil fuels without compensation is a violation of the principal CBDR-RC.Footnote ¹⁴⁵

In contrast, developed countries claim that since compensation for the entire amount of lost revenue could lead to unfair results, FFPDCs may be entitled in some cases to some level of compensation for loss of income, but not in full and in all cases. This is because the financial resources available to compensate for the huge amounts of revenue foregone are limited. They argue that compensation is only needed for developing countries whose economies depend on fossil fuels and who need to finance the social costs of the transition to renewable energy.Footnote ¹⁴⁶ However, not this entire amount needs to be compensated, as some fossil fuel resources will remain underground due to changing social preferences and the move towards low-carbon technologies. Hence, according to them, paying full compensation to owners of unextracted fossil fuels may not only be an unacceptable solution to limiting global warming, but also a non-cost-effective one.Footnote ¹⁴⁷

Therefore, there is a disagreement between countries on the need for compensation for leaving fossil fuels underground. The issue of compensation is subject more to the economic interests and considerations of states. For example, SIDS have a strong and compelling reason to act due to their immediate and severe vulnerability to the effects of climate change,Footnote ¹⁴⁸ but member states of the Organization of the Petroleum Exporting Countries (OPEC) have a compelling reason not to act due to their economies’ heavy dependence on fossil fuels. FFPDCs seek maximum compensation for all cases and consider it economically quite logical, while developed countries consider it to be contrary to their economic considerations.

B. Economic-based compensation experiences

There have been several international experiences concerning compensation for phasing out fossil fuels. The first and most important international proposal by FFPDCs for compensation to keep a large oil reserve unexploited is Ecuador’s Yasuní–ITT Initiative. In 2007, the Ecuadorian government presented at the United Nations its initiative to receive half of the potential revenues from industrialized countries in exchange for leaving fossil fuel underground in the Yasuní National Park in the Ecuadorian Amazon.Footnote ¹⁴⁹ The park has both the importance of human rights and environmental importance. The park is a habitat of two indigenous groups and regarded as one of the most biodiversity hotspots in Ecuador. The indigenous people living in the park are the main victims of severe violations caused by oil exploitation. They are the poorest people in Latin America and are severely vulnerable to climate change. The sums of compensation were supposed to be invested in sustainable social development, conservation of the Amazon area and the development of clean energy. In 2010, Ecuador concluded an international agreement with the United Nations Development Programme (UNDP) to establish a fund under UN supervision. However, the proposal failed in 2013 due to lack of required international finance, and the Ecuadorian government began extracting oil in Yasuní Park, in association with the Chinese company. Following the failure of the initiative, indigenous people strongly protested against their human rights violations but failed to prevent the project. Nevertheless, Latin America continues to lead the way in proposals to keep fossil fuels underground.

The similar initiative was proposed under the “Just Energy Transition Partnerships” (JETP) at COP26 in 2021 in Glasgow.Footnote ¹⁵⁰ Western developed countries proposed an $8.5 billion contribution agreement through JETP to help South Africa reduce its use of coal for electricity generation and develop clean energy sources. Consequently, the Just Energy Transition Investment Plan (JETIP) was launched at COP27 in Egypt in 2022 in an effort to attract international investment in South Africa.Footnote ¹⁵¹ A similar model was launched in 2022 at the G20 summit for Indonesia to leave coal underground. The “Indonesia Just Energy Transition Partnership” is a 20 billion dollar agreement with developed countries to eliminate coal extraction for electricity use in Indonesia.Footnote ¹⁵² However, these initiatives, which were also proposed for Vietnam and Senegal, all focus solely on coal. It sounds that a consensus has been formed that coal is the first fossil fuel to be subject to phase-out/down efforts due to the higher carbon intensity and lower energy value.

Overall, states have different views on these initiatives based on their economic and political considerations. The experience of the Yasuní Park project indicates the politicization of the issue of financing for compensation. Developed countries claim that oil-rich countries can use this method to extort money.Footnote ¹⁵³ There is also no guarantee that FFPDCs would permanently give up their sovereign right to exploit their oil resources after compensation.Footnote ¹⁵⁴ Furthermore, compensation for avoiding oil extraction by a country cannot be a decisive solution to combat climate change since other countries can offset the shortage of fossil fuel supplies by increasing their own production.Footnote ¹⁵⁵ In contrast, FFPDCs claim that their economy is heavily dependent on the production and supply of fossil fuels and that it is impossible to avoid fossil fuel extraction without receiving compensation.Footnote ¹⁵⁶ If compensation is not paid, they will have no choice but to extract their fossil fuel resources. However, international experience suggests that the success or failure of proposals and initiatives to finance compensation is largely case-by-case and subject to economic and political considerations. Human rights do not yet have a clear place in the context of climate finance for compensation.

C. Towards human rights-based compensation

From a human rights-based approach, the plans and proposals made by states to keep fossil fuels underground in exchange for compensation should be viewed beyond the environmental perspective from a human rights perspective as well. Applying a human rights-based approach to climate finance will ensure that human impacts are considered in the distribution of climate finance among societies.Footnote ¹⁵⁷ Adopting a human rights approach to financing has two outcomes. On the one hand, it can prevent states from supporting fossil fuel exploitation projects that result in human rights violations.Footnote ¹⁵⁸ On the other hand, it could provide compensation for leaving fossil fuels underground to protect the people affected by the projects. Therefore, states should move away from financing fossil fuel projects and direct resources towards human rights protections.

Climate change is destroying many key determinants of human rights, including access to adequate food and water, clean air, culture, and livelihoods.Footnote ¹⁵⁹ Given that vulnerable individuals and communities bear the greatest impacts of climate change, they should be prioritized for compensation. Poverty is a reliable indicator of vulnerability against climate change.Footnote ¹⁶⁰ Due to the high dependence of FFPDCs on fossil fuels, the phasing out fossil fuels without compensation can deepen their extreme poverty and social and economic crises and ultimately disrupt the prospects of development for several more decades. In these countries, phasing out fossil fuels could significantly worsen conditions for millions of people and disrupt development prospects for decades.Footnote ¹⁶¹ The priority should be with poor people who are more vulnerable from fossil fuel extraction projects. In fact, since financing should help reduce poverty, compensation should be dedicated to projects that affect more poor and vulnerable people. Communities facing greater poverty should receive more climate finance. This understanding is also consistent with the provisions of the Paris Agreement, which stipulates that it shall be implemented in the context of sustainable development and poverty eradication. Indigenous people are among the poorest people whose human rights are violated by the implementation of fossil fuel extraction projects in FFPDCs. Compensation for FFPDCs in exchange for keeping fossil fuel underground could ensure the protection of the human rights of the poor and vulnerable indigenous peoples of these countries. Two criteria can be used to allocate climate finance for compensation of FFPDCs.

Human Rights Impact Assessment (HRIAs) is a tool for identifying and measuring the human rights impacts of policies, laws, programs, and projects.Footnote ¹⁶² Its main goal is to minimize the negative human rights impacts and maximize the positive human rights impacts.Footnote ¹⁶³ It ensures that the benefits of climate change programs are devoted to affected beneficiaries, such as poor and vulnerable people. In other words, priority should be given to plans and initiatives that provide greater support to vulnerable and poor people affected by fossil fuel extraction projects. According to the HRIAs, indigenous people whose habitats become sacrifice zones as a result of fossil fuel extraction projects are among the most vulnerable people who deserve compensation. They live mainly in poor countries, especially in Latin America and Africa.

The Human Development Index can also be used to allocate climate finance for compensation. Human development, which is different from economic development, is based on long and healthy life, being knowledgeable, and having a decent standard of living.Footnote ¹⁶⁴ This index gives a score between 0 and 1 to measure the level of development of countries. Countries with an index below 0.7 are mainly considered low-or medium-HDI countries. Most of the FFPDCs have a medium or low HDI.Footnote ¹⁶⁵ In these countries, due to absolute poverty, many instances of human rights, such as the right to health, the right to education, and the right to food, are not fulfilled and living conditions are undesirable. Compensating these countries for keeping fossil fuels underground could increase their HDI. Therefore, when climate financing for compensation, countries with low HDI should be given priority.

According to Article 9 of the Paris Agreement, developed country Parties shall provide financial resources to assist developing country Parties. Since direct assistance from developed countries can be a function of political and economic considerations, compensation through existing international financial institutions such as the World Bank and the Global Environment Facility (GEF) seems more efficient in order to comply with human rights considerations.Footnote ¹⁶⁶ In case of creating a new specialized fund to compensate FFPDCs, engagement of human rights institutions could be a catalyst for applying a human rights approach to climate finance.

In general, there is a clear contrast between these two approaches, especially in the field of compensation. The economic-based approach is based on economic and political considerations, and compensation is more in line with securing the state interests of FFPDCs. Under this approach, the amount of compensation is based on the level of development and economic indicators such as GDP. In contrast, the human rights-based approach is based on the level of human development, and compensation should be in line with securing the benefits of poor and vulnerable people affected by the implementation of fossil fuel extraction projects. Under this approach, the amount of compensation is measured based on the human Development Index and Human Rights Impact Assessment.