1. INTRODUCTION AND OVERVIEW
What is climate finance?
Climate finance refers to local, national or transnational financing, which may be drawn from public, private and alternative sources of financing. Climate finance is critical to addressing climate change because large-scale investments are required to significantly reduce emissions, notably in sectors that emit large quantities of greenhouse gases, and to adapt to the adverse effects and reduce the impacts of climate change .
The Paris Agreement includes the goal of ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’, clearly signalling that all sources of finance need to be aligned with the adaptation and mitigation goals set in the Agreement. Through the Agreement countries commit to preparing Nationally Determined Contributions (NDCs) which contain the climate action they commit to as part of the global effort to transition to a low carbon, climate resilient world. These NDCs will be updated every 5 years with a view to increasing their ambition so as to reach the temperature goals set in the Paris Agreement.
Developing countries signal in their NDCs the actions that they can implement with their domestic resources and the actions they can take if they received international support.
Sources of finance for climate action and NDC implementation
Finance to support climate action and to implement NDCs comes from multiple sources and will not always be labelled or clearly recognisable as climate finance. For example, support to the health sector may be building capacity to cope with the increased prevalence of vector borne diseases associated with warmer temperatures, and investments in the agriculture sector may support for greater resilience to drought. In fact, given the considerable overlaps between activities to implement the Paris Agreement, the SDGs and the Sendai Framework, development finance will play a significant role, especially in the LDCs and SIDS, in supporting climate action .
Development assistance will also play a role in leveraging private sector finance for climate action through, for example, the use of risk guarantee instruments or blended finance arrangements.
The climate funds are important sources of finance for climate action and NDC implementation.
The international climate funds include the Global Environment Facility (GEF), the Green Climate Fund (GCF), the Adaptation Fund (AF) and the funds led by the Multilateral Development Banks such as the Climate Investment Funds and bilateral funds specialising in climate. As a result, the climate finance landscape is very fragmented which increases the challenges associated with accessing finance and reduces overall efficiencies. This is why country ownership is essential, to guide resources to where they are most needed and to target the funds best suited to a country’s needs. The diversity of funds can have advantages, allowing for specialisation, for example, by focusing on LDCs or on specific aspects of climate action such as technology or adaptation.
It is important to match countries’ or communities’ needs to the most appropriate source of climate finance. The procedures for direct access to the GCF or the AF may place these funds beyond the immediate reach of countries with very weak capacity, and in these cases access to finance via an international intermediary (e.g. UN agency) or through bilateral development assistance may be appropriate, while in parallel applying for readiness support to enable direct access accreditation in the future. Like development assistance, philanthropy has a role to play in catalysing other sources of finance for climate action, to fill any gaps (thematic or geographical) and to provide risk guarantees in order to attract private sector investment. Flexible and catalytic funding are as important as large scale investments and there is demand for both small amounts of easily accessible finance (e.g. through the GEF Small Grants Programme) as well as transformational finance at scale for major climate initiatives (e.g. through the GCF). Finding the right source of finance for a country or project is important – there is no one size fits all.
Tools like the NDC Funding and Initiatives Navigator can help to identify the best fit fund for a particular context.
How much is needed?
The UNEP Finance Initiative estimates that the costs of the transition to low-carbon and climate-resilient economies will need investment at an order of magnitude of at least USD 60 trillion, from now until 2050. This includes approximately USD 35 trillion to decarbonize, through renewable energy and energy efficiency, the world’s energy system; USD 15 trillion to adapt manmade infrastructure to changing meteorological conditions; and 2 USD trillion to reorganize global land-use is ways that meet growing demands for agricultural commodities while stopping tropical deforestation.
The UNEP Adaptation Finance Gap report estimates that the costs of adapting to climate change in developing countries could rise to USD 280–500 billion per year by 2050, a figure that is four to five times greater than previous estimates .
There is of course a narrower definition of climate finance based on commitments made under the UNFCCC and focused on the commitment made by developed countries in Copenhagen in 2009 to mobilise USD100 billion per year in support for developing countries by 2020. Note that this includes both public and private sources of finance.
There are efforts under way to measure progress towards the USD 100 billion target and climate finance mobilisation more broadly.
This includes the work of the UNFCCC Standing Committee on Finance which has a mandate in relation to the Financial Mechanism of the Convention in terms of:
• Improve coherence and coordination in the delivery of climate change financing,
• Rationalize the Financial Mechanism,
• Mobilize financial resources, and • Measurement, reporting and verification of support provided to developing country Parties.
The committee produced the 2016 Biennial Assessment and Overview of Climate Finance Flows Report which provides an overview of climate finance flows from developed to developing countries as reported in biennial reports, multilateral climate funds, climate finance from multilateral development banks and private climate finance.
In 2015 the French and Peruvian Governments in their capacities as Presidents of COP 21 and 20, commissioned a study by respectively the OECD and CPI ‘2020 Projections of Climate Finance Towards the USD 100 Billion Goal’ which concluded that USD 62 billion in public and private sources were directed to developed countries from developing countries in 2014.
The OECD DAC uses the Rio Markers to track development finance that supports climate action in developing countries. Bilateral climate-related ODA from DAC members reached USD 29 billion per year in 2014-156 . Of this 49% (USD 14.3 billion) addressed mitigation only; 29% (USD 8.4 billion) addressed adaptation only; and 22% (USD 6.3 billion) addressed both adaptation and mitigation.
The OECD countries regularly report to the UNFCCC about their international climate finance support. They report in the form of National Communications (every four years) and Biennial Reports (every two years). This system of reporting will eventually be replaced by a new reporting system within the transparency framework under the Paris Agreement. The monitoring of climate finance flows is difficult and often contested as there is no clear definition of what constitutes climate finance and transparency is frequently an issue.