What is climate finance?

Climate finance involves the flow of funds to help countries to cut their emissions and adapt to climate change. Such funds are likely to play a crucial role in efforts to implement the Paris Agreement commitments on the ground. The question of how financing can help to support the climate change transition is a common theme in all related discussions from mitigation and adaptation to technology transfer, development or capacity building.

The achievement of targets laid out in the Paris Agreement and scaling up of efforts to keep global warming below 2oC will be directly contingent on the amount of finance that is accessible and how it is used.

Although climate finance plays a critical role in global efforts to tackle climate change it can be a complex and confusing issue. This FAQ addresses some key questions such as: What is climate finance? How much is required? And how much is currently being raised?

Defining climate finance

The United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance defines climate finance as follows:

Climate finance 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, arising out of convergence between nations, represents climate finance in its broadest form. In this broad form 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 is the closest attempt yet to a single definition, but it has not yet been endorsed by all countries. This is because there are many different elements to climate finance. These include: the type of finance provided (e.g. development aid, equity, low cost loans etc.), the sources of this finance (is it public or private?) and where the finance flows from (developed countries to developing countries, within developed nations or from other sources). These nuances add complexity, uncertainty and challenges when attempting to come up with a common definition that is accepted by all.

The first reference to finance for climate change in international negotiations was its inclusion in the UNFCCC agreed in Rio in 1992. It explicitly stated that developed countries shall provide “new and additional financial resources” to developing countries to support meeting the full and incremental costs of climate change. This inclusion was based on the premise that developing countries will require financial support to alter or change their development paths to a low-carbon trajectory, while also needing financial assistance to adapt to the potential impacts of climate change.

This basis for climate finance has evolved and is included in negotiations to this day. However the original intent as articulated in the UNFCCC has become to be known as international climate finance. This is now a sub-set of the broad climate finance definition, which includes private sector climate finance and public sector climate finance from domestic sources. The emergence of these various sub-sets, all with their unique characteristics, has presented challenges for assessing progress, tracking flows and understanding progress.

International climate finance

The centrality of initiating finance for climate change is shown in the critical role played by international climate finance in global climate change negotiations since 1992. During such negotiations it has often been the subject of a polarised debate between nations.

In the Copenhagen Accord (2009), the figure of US$ 100 billion a year to be jointly mobilised by 2020 to address the needs to developing countries was agreed as a target. This figure has now become the political focal point for discussion around climate finance. It was agreed that this funding would come from a “wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.”

This commitment was further reinforced in the Cancun Agreements in 2010 where the Green Climate Fund (GCF) was established to act as a key mechanism to deliver large scale financial resources to developing countries.  Most recently in the Paris Agreement in 2015 it was stipulated 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”.

While the broad agreement on the amount of international climate finance to be provided has been reached, the debate is now focused on the fine detail of how to deliver this. In particular, how this figure should be raised, what financing should classify, and how should it be distributed. The area of debate is also continuing around the definition of “new and additional”. Central to this is whether public international climate finance should be considered as part of, or distinct from, already agreed development aid flows (ODA), or if it should solely come from new sources.

The definition in this sense is a key barrier to universal agreement as developing countries do not want traditional development aid to be reclassified as climate finance and thus limit access to resources, while developed countries want recognition for current spending on climate related activities. This debate is sure to continue as negotiations progress.

What is required?

The scale of the climate change challenge is enormous, as are the financial requirements needed to deal with it. While the quantum of finance needed is not yet fully known, there is an increasing understanding of what is required. One indication is contained in the majority of the intended nationally determined contribution (INDCs) submitted by developing countries to the Paris Agreement. In the energy sector alone the projects totalled around US$13.5 trillion over the next 15 years, or around US$ 900 billion per year.

Other studies have estimated that around US$5 to 6 trillion per year will be required for the next 15 years solely to invest in infrastructure to support the low-carbon transition. Of this amount 60% would need to be invested in new infrastructure in developing countries, while the remainder would be used to replace existing infrastructure in developed countries.

These requests are predominantly focussed on mitigation actions, and a lot less is understood about the adaptation finance requirements, but they are expected to be large. If future climate change negotiations fail to increase ambition then there is the potential that these requirements will increase substantially.

What is currently being provided?

Currently the global climate finance spend (under the broad definition) is estimated to be around US$ 391 billion (in 2014), with private sector sources contributing 62% and public sector sources 38%. However this figure only includes finance from private and certain public finance sources (development finance institutions and international finance). Other sources such as domestic public finance are not currently tracked, and could reach at least US$ 60 billion a year.

In the context of international climate finance there are large uncertainties in the total amount currently being channelled due to the challenges with the definition. As such there are large variations and it is estimated that anywhere between US$ 40 to US$ 175 billion per year is currently flowing from developed to developing countries for climate change related initiatives.

Public sector contributions, to support reaching the political target of the US$ 100 billion, still remain low. One of the main vehicles to channel and manage funds, the GCF, has public pledges to date of US$ 10.2 billion, but only has US$ 5.8 billion available for disbursement. The GCF has also had problems in approving suitable projects that meet the criteria for support, both as a result of institutional politics but also because of a lack of suitable projects submitted for consideration so far.

What is clear is that to mobilise the sheer scale of the finance required to support the low-carbon transition it will have to come predominantly from the private sector. But public finance sources such as those through the GCF, or from the MDBs, ODA and other components of international climate finance, will have a critical component to play to create the supportive environment to enable private sector finance, particularly in developing countries.

Further Readings

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/

Buchner, B.K., Trabachhi, C., Mazza, F., Abramskiehn, D. and Wang, D. 2015. Global Landscape of Climate Finance 2015. Available: http://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2015/

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

 

July 2016