What is climate finance?

Finance for climate change related activities, or climate finance, is a diverse concept. It is in some instances discussed separately or often times integrated with related and overlapping concepts of green finance, sustainable finance, or low-carbon finance.

While there is no single definition of climate finance, the closest one can get is provided by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance, which defines it as (PDF) as:

finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.”

This definition represents finance for climate change in its broadest form as it relates to the flow of funds to all activities, programmes or projects that support climate change related projects, whether mitigation or adaptation, anywhere in the world.

This broadness has arisen because there are many different elements that need to be considered, these include:

  • the type of finance provided (development aid, private equity, loans, or concessional finance);
  • the source of the finance (is it from public or private sources);
  • where the finance flows from (developed countries to developing countries, within developed or developing nations, developing to developed nations or from other sources such as multilateral development banks);
  • if this finance is over and above what would have been provided anyway (“new and additional”); and
  • what is ultimately financed (direct or indirect climate change related actions, or compensation for damages).

The actual term ‘climate finance’ is however most often associated with the international climate change negotiation processes. While sharing all the intentions of the UNFCCC definition, climate finance adds the additional dimensions of the provision of “new and additional financial resources” by developed countries to developing countries so that they can meet the full and incremental costs of climate change.

While climate finance has been a central element of the negotiations in one form or another since 1992, it is now most often associated with the target figure of mobilsing US$ 100 billion a year (PDF) by 2020 by developed countries for developing countries. This target was first agreed in the Copenhagen Accord in 2009 and expanded upon in the Cancun Agreements in 2010 where the Green Climate Fund (GCF) was established to act as a key delivery mechanism.  In the Paris Agreement in 2015 (PDF) this target was further reinforced, with a goal to raise the target after 2025 and that this funding would come from a “wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.”

The USD 100 billion target has now become a political focal point for further discussions around many aspects of climate change related finance, particularly those related to developing countries. The debate is now focused on the detail of how to deliver this in line with meeting the Paris targets and the sustainable development goals (SDGs). In particular how the USD 100 billion should be raised, if this target is enough, who should provide it, what financing mechanisms should be used, how it can be accessed and where it should be distributed.

Further information

Buchner, B.K., Oliver, P., Wang, Z., Carswell,C,. Meattle, C., and Mazza, F. 2017. Global Landscape of Climate Finance 2017. Available: https://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2017/

Bodnar, P., Brown, J. and Nakhooda, S. 2015. What Counts: Tools to Help Define and Understand Progress Towards the $100 Billion Climate Finance Commitment. Available: http://climatepolicyinitiative.org/publication/what-counts-tools-to-help-define-and-understand-progress-towards-the-100-billion-climate-finance-commitment/

Westphal, M.I., Canfin, P., Ballesteros, A. and Morgan, J. 2015. Getting to $100 Billion: Climate Finance Scenarios and Projections to 2020. Available: http://www.wri.org/publication/getting-100-billion-climate-finance-scenarios-and-projections-2020

 

First published July 2016 (Revised February 2018)