What is climate finance?
Climate finance is a term that refers to the funding needed to overcome climate change. This funding can come from public, private, or alternative sources, and can be local, national, or transnational. Climate finance aims to support mitigation and adaptation actions that will reduce greenhouse gas emissions and increase the resilience of human and ecological systems to the negative impacts of climate change.
Why is climate finance important?
Climate change is a major threat to humanity and the planet. According to the 2021 IPCC report, global average temperatures have increased by about 1.1°C since the pre-industrial era, and will continue to rise if greenhouse gas emissions are not drastically reduced. Climate change causes various adverse impacts, such as increasing the frequency and intensity of natural disasters, rising sea levels, changing weather patterns, decreasing agricultural productivity, ecosystem damage, the spread of disease, and social conflict.
To avoid more severe impacts, the world needs to achieve the target agreed in the 2015 Paris Agreement, namely limiting global temperature rise to a maximum of 1.5°C above pre-industrial levels by the end of the century. To achieve this target, the world needs to reduce greenhouse gas emissions to net zero by 2050. This means that any emissions produced must be balanced by the absorption or reduction of emissions carried out.
To transition to a low-carbon, climate-resilient economy, massive investment is needed across sectors and regions. Climate finance can help finance these investments, both to reduce emissions and to improve adaptation. Climate finance can also help more vulnerable and less capable developing countries to face climate change by providing financial and technical assistance.
What are the sources and instruments of climate finance?
Climate finance can come from various sources, both public and private. Public sources include government budgets, official development assistance (ODA), environmental taxes, or emissions trading. Private sources include commercial banks, institutional investors, insurance companies, or philanthropists. Alternative sources include migrant remittances, crowdfunding, or voluntary markets.
Climate finance can also use various financial instruments, such as grants, loans, equity, or risk mitigation instruments. These instruments are intended to attract other sources of funding, whether from domestic governments, other donors, or the private sector. Financial instruments can also be tailored to the characteristics of the project or program being funded, such as scale, time horizon, level of risk or environmental impact.
What are the challenges and opportunities for climate finance?
Climate finance faces multiple challenges in increasing its scale and effectiveness. Some of the main challenges are:
– Lack of consistent definition of what constitutes climate finance, making it difficult to identify and measure funding flows related to climate change.
– Lack of transparency and accountability regarding the origins, objectives, use and impacts of climate finance, making it difficult to monitor and evaluate performance and results.
– Lack of coordination and harmonization between various stakeholders involved in climate finance, such as donors, beneficiaries, project implementers, regulators or auditors.
– Lack of incentives and capacity to integrate climate change considerations in financial decision making, in both the public and private sectors.
– Lack of access and affordability of climate finance for developing countries, especially the most vulnerable and least developed, due to obstacles such as administrative requirements, loan conditions, or political and foreign exchange risks.
On the other hand, climate finance also offers various opportunities to increase investment and its impact. Some of the main opportunities are:
– Increase political commitment and ambition to address climate change, both at the national and international levels, by setting targets and policies that support a low-carbon and climate-resilient transition.
– Increase cooperation and partnerships between various stakeholders involved in climate finance, both between countries, between sectors, and between levels of government, by building dialogue platforms, information exchange, or coordination mechanisms.
– Increasing innovation and diversification of climate finance sources and instruments, both by developing new financial products and services that suit market needs and preferences, as well as by utilizing funding sources that have not been utilized optimally, such as remittances or crowdfunding.
– Increase capacity and knowledge about climate finance for financial actors, both in the public and private sectors, by providing technical guidance, training, or tools to identify, plan, implement, and report projects or programs related to climate change.
– Increasing public awareness and participation in climate finance, both as providers and beneficiaries of funding, by increasing access to information, stakeholder involvement, or complaint and dispute resolution mechanisms.
What is the role of the United Nations in climate finance?
The UN has an important role in facilitating and supporting climate finance at the global level. Some of the main roles of the UN are:
– Providing a legal and normative framework for climate finance through the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement. This framework sets out the principles, objectives, obligations and mechanisms for climate change financing among UN member states.
– Provide financial mechanisms for climate finance through operational bodies appointed by the UNFCCC, such as the Global Environment Fund (GEF), Green Climate Fund (GCF), or Adaptation Fund (AF). These mechanisms aim to allocate and manage funding sources provided by donor countries to support climate change projects or programs in developing countries.
– Provide technical assistance and capacity for climate finance through various UN specialized agencies with mandates and expertise related to climate change, such as the United Nations Development Program (UNDP), the United Nations Environment Program (UNEP), or the World Meteorological Organization (WMO). This assistance aims to assist developing countries in planning, accessing, using, and reporting on climate change finance.
– Provide data and analysis on climate finance through various research and monitoring initiatives conducted by the UN or its partners. This data and analysis aims to provide accurate, reliable and comprehensive information about the flow of climate change funding in the world.
The following are some examples of climate finance:
– In 2023, the World Resources Institute (WRI) identified six key shifts in the financial sector that could drastically change how investment is scaled up and allocated for a sustainable future.
These shifts include: measuring, disclosing and managing financial risks related to climate and nature, increasing the use of innovative financial instruments, increasing access and affordability of climate finance for developing countries; increasing private sector involvement and participation; improve coordination and partnership between various stakeholders, and increase commitment and political ambition to tackle climate change.
– In 2021, the Climate Policy Initiative (CPI) reports that total climate finance has increased steadily over the last decade, reaching USD 632 billion in 2019/2020, but the flow of funds has slowed in recent years. This report also shows that finance for adaptation continues to lag, reaching only USD 46 billion in 2019/2020. The report also analyzes the sources, intermediaries, instruments, objectives and beneficiaries of climate finance at the global level.
– In 2015, the United Nations Framework Convention on Climate Change (UNFCCC) reached the Paris Agreement, which set a goal of limiting global temperature rise to a maximum of 1.5°C above pre-industrial levels by the end of the century. To achieve this goal, the UNFCCC establishes a legal and normative framework for climate finance among UN member states. The UNFCCC also provides financial mechanisms for climate finance through operational agencies appointed by it, such as the Global Environment Fund (GEF), Green Climate Fund (GCF), or Adaptation Fund (AF). The UNFCCC also provides technical and capacity assistance for climate finance through various UN specialized agencies with mandates and expertise related to climate change.
