Climate finance encompasses all types of financing and investment activities that support taking action to address climate change, including the costs of mitigation, adaptation, and covering losses and damages for extreme weather events and land erosion
In the face of the devastating effects of climate change that threaten our food, water, and other natural systems vital to human survival, it is imperative to take proactive measures to mitigate, adapt and compensate for losses and damages. Financial investments are key to materialize these efforts to fight climate change.
Climate finance includes all types of financing and investment activities that support taking action to address climate change, including the costs of mitigation, adaptation, and covering losses and damages for extreme weather events and land erosion. These investments can be at a local, national or global level through public, private, and alternative financing sources. Not only is climate finance important to enable the reduction of greenhouse gas emissions(mitigation) but also to support adaptation and cover and compensate from losses and damages caused by climate change.
Addressing mitigation, adaptation, and losses and damages
While mitigation as a proactive response aims to curtail and capture emissions to prevent climate change from becoming worse, adaptation aims to address ongoing losses and damages from climate change. Thus, adaptation is also an environmental justice issue. In 2018, climate-related damages due to natural disasters and worldwide economic stress were estimated to be 165 billion dollars, of which 50% was uninsured (WEF 2019). These losses are estimated to reach ten trillion dollars if not hundreds of trillions by 2100 (idem).
In contrast to adaptation, mitigation is often more attractive for the private sector as there is potential for wealth creation through innovation and adoption of new technologies and services. As a consequence of the differential preference for climate change financing, in 2019-2020, the private sector had already invested close to $308 billion in mitigation efforts. However, despite the magnitude of these investments, these also fall short to meet the climate objectives. To achieve climate targets, annual climate finance must ramp up by at least 550% to 4.35 trillion dollars by 2030 particularly in hard-to-decarbonize sectors such as concrete, steel, refrigerants, and transportation infrastructure.
Climate change induced disasters like droughts, floods, hurricanes and wildfires have become more frequent and severe. These disasters disproportionately impact communities in the Global South that have limited resources to overcome the aftereffects of these disasters. Despite the urgency to cover losses and damages, there is limited funding and investment in this space with only 46 billion dollars invested in 2019-2020. As one would anticipate, much of this funding comes from the public sector given the public welfare aspect of adaptation. The field of adaptation has mostly taken the form of water and wastewater management, climate-smart agriculture (e.g. productivity increase, drought resilient crops, mixed crop-livestock systems, etc.) and disaster risk reduction. These efforts have been mostly funded by governments and international or regional development agencies (e.g. development banks, UN agencies, climate funds, etc.).
Actual investment Versus Required Investments
Current investment levels are nowhere close to limiting global warming to 1.5°C
Climate Finance is a Climate Justice Issue
There has long been scientific consensus that human-induced climate change is driving catastrophic climate events and threatening our food, water, and other natural systems vital to human survival. Industrialized countries account for 63% of global greenhouse gas emissions, which has led to ongoing debate between developed and developing countries as to who is responsible for bearing the cost of climate change mitigation and adaptation.
Responsibility for funding Climate Finance
The debate over “who pays” for climate change mitigation and adaptation has been addressed through numerous policies, treaties, and market instruments over the past half century. Climate finance is an all encompassing term that captures the many ways that the costs of climate change mitigation and adaptation can be met. A key issue to consider when thinking about climate finance is “who is paying” “who is benefiting?” and “how will these costs be sustained.” At its heart, experts in climate finance consider the multitude of ways that paying for the transformation to a low-carbon economy can be equitably distributed.
Making Climate Financing equitable
Climate Finance calls for Multi-stakeholder Action
The deleterious impacts of climate change affect the poorest populations hardest, a fact that distributes the onus of financing climate adaptation and mitigation in developing countries upon multiple agents, including developed country actors in both the public and the private sector (UNFCCC 1997, UNFCCC 2015, UN 2016). The public sector is responsible for protecting the wellbeing of vulnerable and marginalized communities. However, the public sector can’t act alone to mobilize the resources to mitigate, adapt, and respond to the effects of climate change at the required global scale. Thus, the private sector and multilateral partnerships are important to complement not only the pool of capital, but also the strategic and administrative capabilities to deploy their investments.
Multilateral partnerships and the need for common but differentiated responsibilities
Multilateral partnerships and development finance institutions have an important role to play when it comes to the transfer of funds from developed countries to developing ones. Since the beginning of the global climate negotiations, developing countries have fought to include a transfer of financial resources from industrialized countries to facilitate mitigation and adaptation efforts. Diplomatic efforts have led to internationally endorsed declarations, agendas and conventions governing climate change that reflect the developing countries’ history and current needs. This has created both the concept of “common but differentiated” responsibility and placed industrialized nations in a leadership role in the climate regime.
The need for a commitment to a significant transfer of finances is mainly due to two factors -
1. The historical burden of climate change rests upon the industrialized countries as the developed countries have contributed to 70% of the anthropogenic greenhouse gasses (GHGs) since 1850 (Stern 2009).
2. The costs of climate change are enormous and beyond the financial capacity of developing nations. The estimates of the cost of adaptation for developing countries for 2030 vary from USD 80-90 billion to 134-230 billion per year (UNDP 2007).
Thus, it is imperative that funds and investments flow from developed countries to developing ones and that the amounts pledged align with targets set to limit global warming.
Role of Private sector and Public sector
On the other hand, the private sector has the capacity to innovate and reach scale far more effectively than the public sector. Private sector instruments have a critical role to play in incubating, accelerating, and scaling up disruptive technologies and other sustainability solutions to the climate crisis. For reasons explained before, the private sector is predominantly engaged in climate change mitigation as opposed to adaptation. In terms of investments into mitigation, instruments can range from de-risking the investment in new technologies (i.e. a climate fund’s willingness to commit senior capital and to absorb the risks should the investment fail) to the act of making direct investments in new firms and technologies on based on return of investment (i.e. the Tesla story). The public sector also plays a role in supporting the market case for investments in climate change mitigation and adaptation through policy drivers. For example, between 2000 to 2020, feed-in tariffs for renewable energy generation supported the growth of solar and wind power in Germany and the UK neither of which are very sunny places!
Key drivers for climate finance
De-risking investments in new technology
Direct investments in potentially lucrative ventures
Climate friendly regulations
Leverage regulatory drivers towards climate finance investments
International commitments to publicly support climate change investments for the most vulnerable
Promote investments via Kyoto Protocol’s flexible mechanisms, Paris Agreement’s Article 6, etc.
Examples include corporate commitments to achieve net zero emissions, carbon removal, etc.
Further readings and resources
Five ways finance can unlock robust climate action from G20 countries
by Overseas Development Institute
*Disclaimer - views expressed in this article are the expert's and not associated with any company or organization