Understanding Climate Finance
Climate finance is a type of sustainable finance, and is defined by the United Nations Framework Convention on Climate Change’s Standing Committee on Finance (UNFCCC’s SCF), which states that climate finance aims to reduce emissions, improve greenhouse gas sinks, reduce vulnerability, and maintain and boost the resilience of ecological and human systems to the adverse effects of climate change. These climate change mitigation and adaptation efforts are often supported by local, national, or international funding from public, private, and alternative sources.
Climate finance is a global objective and need; several developed countries, and both public and private sectors aim to provide “developing” nations with climate financing funds to help them achieve their sustainable development objectives, especially since developing countries also play a critical role in global climate change – approximately 63% of global carbon emissions comes from developing nations. For example, several developed nations pledged $30 billion between 2010 and 2012 for developing countries to carry out critical climate change mitigation and adaptation initiatives under the Copenhagen Agreement in 2009 at COP15, and pledged an average of $10 billion per year, until 2020. The Paris Agreement in 2015 has reaffirmed this pledge and extended this funding through 2025. In addition, in 2016, developed nations raised approximately $75 billion in climate money to distribute/share to many less developed nations worldwide. Governments contributed $57 billion of the $75 billion, with the remaining funds coming from the private sector.
Therefore, climate finance is crucial, since one of its applications is by giving developing countries the funding they need to create sustainable energy projects that will lower carbon emissions and improve climate change.
Understanding Carbon Finance
Another type of sustainable finance is carbon finance, with a goal of global carbon emissions reduction. It works as a financial tool to encourage and offer chances for businesses and people to lower their carbon emissions. By encouraging greenhouse gas (GHG) emission reductions, carbon finance provides an immediate opportunity to lessen the overall effects of climate change. Carbon finance entails the production, allowance, and trading of carbon credits, or carbon offsets in both compliance-based and voluntary markets. Through the purchase or use of carbon credits, which each reflect the removal of one metric ton of carbon dioxide from the environment, businesses and people can effectively reduce their greenhouse gas emissions.
Carbon Credits
When one metric ton of carbon dioxide (CO2) is removed from the atmosphere, a carbon credit is produced. Projects that remove greenhouse gases from the environment, such as wind energy, forestry, methane gas capture, and other initiatives, are responsible for this mitigation. For each ton of CO2 that these projects’ owners remove from the atmosphere, they create a carbon credit. Then, anyone who want to offset their emissions, including people and companies, can buy these credits.
Carbon credits are available for purchase or sale on voluntary or compliance markets. In voluntary markets, carbon credits are exchanged between the companies that own and operate offsetting projects and the businesses and individuals who want to offset their emissions. Businesses who are involved in compliance markets are given a set number/amount of credits annually. With the help of this financial mechanism of carbon credits, carbon reduction as a whole becomes a tradeable good. With the help of carbon finance, there is remarkable potential to fund green energy projects all around the world and help businesses and people make positive impacts toward climate change. Additionally, by converting emission reductions into tradeable carbon credits, a market is established that both the economy and the environment may benefit from.
Climate and carbon finance could provide effective solutions for reducing the effects of climate change, and potentially achieving net-zero emissions in the future. Therefore, public and private sector participation and cooperation is critical, and could result in significant financial contributions to sustainability projects around the world that would potentially help save our planet and reduce carbon footprint.
