Climate finance

Climate finance is “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”, as defined by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance.[1] The term has been used in a narrow sense to refer to transfers of public resources from developed to developing countries, in light of their UN Climate Convention obligations to provide "new and additional financial resources", and in a wider sense to refer to all financial flows relating to climate change mitigation and adaptation.[2][3]

Top 10 clean energy financing institutions 2014

The 21st session of the Conference of Parties (COP) to the UNFCCC (Paris 2015) introduced a new era for climate finance, policies, and markets. The Paris Agreement adopted there defined a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2 °C above preindustrial levels. It includes climate financing channeled by national, regional and international entities for climate change mitigation and adaptation projects and programs. They include climate specific support mechanisms and financial aid for mitigation and adaptation activities to spur and enable the transition towards low-carbon, climate-resilient growth and development through capacity building, R&D and economic development.[4]

As of November 2020, development banks and private finance had not reached the $100 billion USD per year investment stipulated in the UN climate negotiations for 2020.[5] However, in the face of the COVID-19 pandemic's economic downturn, 450 development banks pledged to fund a "Green recovery" in developing countries.[5]

Flows of climate finance
Financial flows for climate change mitigation and adaptation in developing countries

A number of initiatives are underway to monitor and track flows of international climate finance. Analysts at Climate Policy Initiative have tracked public and private sector climate finance flows from a variety of sources on a yearly basis since 2011. In 2015, they estimated that climate finance reached $437 billion.[6] This work has fed into the United Nations Framework Convention on Climate Change Biennial Assessment and Overview of Climate Finance Flows [7] and the IPCC Fifth Assessment Report chapter on climate finance. This and other research suggests a need for more efficient monitoring of climate finance flows.[8] In particular, they suggest that funds can do better at synchronizing their reporting of data, being consistent in the way that they report their figures, and providing detailed information on the implementation of projects and programmes over time.

The estimates of the climate finance gap - that is, the shortfall in investment - vary according to the geographies, sectors and activities included, timescale and phasing, target and the underlying assumptions. The 2010 the World Development Report preliminary estimates of financing needs for mitigation and adaptation activities in developing countries range from USD 140-175 billion per year for mitigation over the next 20 years with associated financing needs of USD 265-565 billion and USD30 – 100 billion a year over the period 2010 - 2050 for adaptation.[9]

The International Energy Agency’s 2011 World Energy Outlook (WEO) estimates that in order to meet growing demand for energy through 2035, USD 16.9 trillion in new investment for new power generation is projected, with renewable energy (RE) comprising 60% of the total.[10] The capital required to meet projected energy demand through 2030 amounts to $1.1 trillion per year on average, distributed (almost evenly) between the large emerging economies (China, India, Brazil, etc.) and including the remaining developing countries.[11] It is believed that over the next 15 years, the world will require about $90 trillion in new infrastructure – most of it in developing and middle-income countries.[12] The IEA estimates that limiting the rise in global temperature to below 2 Celsius by the end of the century will require an average of $3.5 trillion a year in energy sector investments until 2050.[12]

It has been estimated that only 0.12% of all funding for climate-related research is spent on the social science of climate change mitigation.[13] Vastly more funding is spent on natural science studies of climate change and considerable sums are also spent on studies of impact of and adaptation to climate change.[13] It has been argued that this is a misallocation of resources, as the most urgent puzzle at the current juncture is to work out how to change human behavior to mitigate climate change, whereas the natural science of climate change is already well established and there will be decades and centuries to handle adaptation.[13]

Multilateral climate finance

The multilateral climate funds (i.e. governed by multiple national governments) are important for paying out money in climate finance. The largest multilateral climate funds are the Climate Investment Funds (CIFs), Green Climate Fund (GCF), Adaptation Fund (AF), and Global Environment Facility (GEF).[14] In 2016, these four funds approved $2.78 billion of project support. India received the largest total amount of single-country support, followed by the Ukraine and Chile. Tuvalu received the most funding per person, followed by Samoa and Dominica. The US is the largest donor across the four funds, while Norway makes the largest contribution relative to population size.[15] Most multilateral climate funds use a wide range of financing instruments, including grants, debt, equity and risk mitigation options. These are intended to crowd in other sources of finance, whether from domestic governments, other donors or the private sector.

The Green Climate Fund is currently the largest multilateral climate fund, and climate change and development practitioners alike are focused on seeing these resources flow.

Climate financing by the world’s six largest multilateral development banks (MDBs) rose to a seven-year high of $35.2 billion in 2017. According to IRENA, the global energy transition could contribute $19 trillion in economic gains by 2050.

Private climate finance

Public finance has traditionally been a significant source of infrastructure investment. However, public budgets are often insufficient for larger and more complex infrastructure projects, particularly in lower-income countries. Climate-compatible investments often have higher investment needs than conventional (fossil fuel) measures,[16] and may also carry higher financial risks because the technologies are not proven or the projects have high upfront costs.[17] If countries are going to access the scale of funding required, it is critical to consider the full spectrum of funding sources and their requirements, as well as the different mechanisms available from them, and how they can be combined.[18] There is therefore growing recognition that private finance will be needed to cover the financing shortfall.

Private investors could be drawn to sustainable urban infrastructure projects where a sufficient return on investment is forecast based on project income flows or low-risk government debt repayments. Bankability and creditworthiness are therefore prerequisites to attracting private finance.[19] Potential sources of climate finance include commercial banks, investment companies, pension funds, insurance companies and sovereign wealth funds. These different investor types will have different risk-return expectations and investment horizons, and projects will need to be structured appropriately.[20]

Governments have a range of financing and funding mechanisms available to secure finance from private investors, including equity, debt, grants or risk mitigation instruments such as guarantees. Some of these instruments will be used routinely as part of a government’s funding base; others may be deployed to mobilize the investment for a specific climate project.

Methods and means

Debt-for-climate Swaps

Debt-for-climate Swaps happen where debt accumulated by a country is repaid upon fresh discounted terms agreed between the debtor and creditor, where repayment funds in local currency are redirected to domestic projects that boost climate mitigation and adaptation activities.[21] Climate mitigation activities that can benefit from debt-for-climate swaps includes projects that enhance carbon sequestration, renewable energy and conservation of biodiversity as well as oceans.

For instance, Argentina succeed in carrying out such a swap which was implemented by the Environment Minister at the time, Romina Picolotti. The value of debt addressed was $38,100,000 and the environmental swap was $3,100,000 which was redirected to conservation of biodiversity, forests and other climate mitigation activities.[22] Seychelles in collaboration with the Nature Conservancy also undertook a similar debt-for-nature swap where $27 million of debt was redirected to establish marine parks, ocean conservation and ecotourism activities.[23]

See also

References
  1. "Documents | UNFCCC". unfccc.int. Retrieved 2018-09-08.
  2. Oscar Reyes (2013), "A Glossary of Climate Finance Terms", Institute for Policy Studies, Washington DC, p. 10 and 11
  3. http://www.eldis.org/go/topics/resource-guides/climate-change/key-issues/climate-finance/adaptation-finance/adaptation-finance
  4. Barbara Buchner, Angela Falconer, Morgan Hervé-Mignucci, Chiara Trabacchi and Marcel Brinkman (2011) “The Landscape of Climate Finance” A CPI Report, Climate Policy Initiative, Venice (Italy), p. 1 and 2.
  5. "Banks around world in joint pledge on 'green recovery' after Covid". the Guardian. 2020-11-11. Retrieved 2020-11-12.
  6. "Global Landscape of Climate Finance 2015". CPI.
  7. "Biennial Assessment and Overview of Climate Finance Flows | UNFCCC". unfccc.int.
  8. "Watson, C., Nakhooda, S., Caravani, A. and Schalatek, L. (2012) The practical challenges of monitoring climate finance: Insights from Climate Funds Update. Overseas Development Institute Briefing Paper" (PDF).
  9. World Bank Group(2010), "World Development Report 2010: Development and Climate Change, World Bank Groupe, Washington DC, ch. 6, p. 257
  10. International Energy Agency (2011). World Energy Outlook 2011, OECD and IEA, Paris (France), Part B, ch.2
  11. International Energy Agency (2011). World Energy Outlook 2011}, OECD and IEA, Paris (France), Part B, ch.2
  12. "Climate Finance". World Bank. Retrieved 2018-09-08.
  13. Overland, Indra; Sovacool, Benjamin K. (2020-04-01). "The misallocation of climate research funding". Energy Research & Social Science. 62: 101349. doi:10.1016/j.erss.2019.101349. ISSN 2214-6296.
  14. "Climate Finance | UNFCCC". unfccc.int. Retrieved 2018-12-03.
  15. "Mapped: Where multilateral climate funds spend their money". Carbon Brief. 2017.
  16. Gouldson A, Colenbrander S, Sudmant A, McAnulla F, Kerr N, Sakai P, Hall S, Papargyropoulou E, Kuylenstierna J (2015). "Exploring the economic case for climate action in cities". Global Environmental Change. 35: 93–105. doi:10.1016/j.gloenvcha.2015.07.009.
  17. Schmidt TS (2014). "Low-carbon investment risks and de-risking". Nature Climate Change. 4 (4): 237–239. doi:10.1038/nclimate2112.
  18. Understanding ‘bankability’ and unlocking climate finance for climate compatible development, Climate & Development Knowledge Network, 31 July 2017
  19. Colenbrander S, Lindfield M, Lufkin J, Quijano N (2018). "Financing Low-Carbon, Climate-Resilient Cities" (PDF). Coalition for Urban Transitions. Archived from the original (PDF) on 2018-04-12. Retrieved 2018-04-11.
  20. Floater G, Dowling D, Chan D, Ulterino M, Braunstein J, McMinn T, Ahmad E (2017). "Global Review of Finance for Sustainable Urban Infrastructure". Coalition for Urban Transitions.
  21. Picolotti, Romina; Zaelke, Durwood; Silverman-Roati, Korey; Ferris, Richard (2020). "Debt-for-Climate Swaps" (PDF). Institute for Governance and Sustainable Development: 3. Cite journal requires |journal= (help)
  22. November 13; 2020. "Debt-for-Climate Swaps Can Help Developing Countries Make a Green Recovery". Sustainable Recovery 2020. Retrieved 2020-12-01.CS1 maint: numeric names: authors list (link)
  23. Goering, Laurie (2020-09-07). "Debt swaps could free funds to tame climate, biodiversity and virus threats". Reuters. Retrieved 2020-12-01.
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