Climate Finance

Overview of Climate Finance

Climate finance is a broad term that generally refers to the role of finance in facilitating efforts to address climate change. Climate finance is critical to addressing climate change, since large-scale investments are typically required to significantly reduce emissions, notably in sectors that emit large quantities of greenhouse gases. Climate finance is equally important for adaptation, for which significant financial resources will be similarly required to allow societies and economies to adapt to the adverse effects and reduce the impacts of climate change.

Additionally, while the focus of much of the climate finance world is on large-scale mitigation of greenhouse gases, for many of the low-income and vulnerable populations who are more likely to experience extreme weather and environmental risks relating to climate change, their immediate priorities are building resilience to climate risks, adapting to changing climatic conditions, and in some cases transitioning to new livelihoods. Therefore, financial services are an indispensable tool to help low-income and vulnerable people prepare for climate-related events and recover from them when they happen.

The Global Stage

By 2023, developed countries will have spent up to $100 billion on climate finance initiatives, according to the OECD.
Annual climate finance flows in 2019/20 reached USD 653 billion on average, which was 15% higher than in 2017/18.
Global climate finance almost doubled in the last decade, with a cumulative USD 4.8 trillion in climate finance committed between 2011-2020
We need at least USD 4.3 trillion in annual finance flows by 2030 (CAGR 21%) to avoid the worst impacts of climate change.
Private sector investment is increasing, but not at the scale and speed necessary for the transition; the growth rate of private climate finance was slower (4.8%) than that of the public sector (9.1%)
Continued fossil fuel support remains a barrier to achieving global climate goals. For example, the total fossil fuel subsidies in 51 major countries alone were 40% higher than the total global investment in climate finance between 2011 – 2020.
76% of climate finance was raised domestically, primarily concentrated in East Asia & Pacific, North America, and Western Europe

A Solution Oriented Approach

Climate transition presents tremendous investment opportunities across a range of sectors and regions. However, the current rate of climate investment increase will fail to secure the low carbon and climate resilient development needed. To match the 20% year-on-year increase in climate finance needed through 2030, four key actions to focus on in this decade are:

1: Adopt holistic sectoral strategies. Current blind spots in our response to climate change must be acknowledged and addressed. This means building sector-wide decarbonization and resilience strategies that spur systemic transformations and ensure implemented solutions are well integrated.

2: Shift to a new finance paradigm. To implement holistic sector strategies, further public and private actor coordination is necessary. Every actor should know which part they can play and who they should be working with. But that alone will not be enough. Investors also need to look beyond short-term financial returns, use longer-term and multifactor informed investment strategies, and explore innovative financial mechanisms that could be deployed at scale.

3: Policies to create enabling environments for private finance mobilization. The successes achieved in the energy sector must be mirrored in other sectors and in emerging economies through a coordinated set of actions and policy decisions around reducing technology costs, promoting innovation in hard-to-abate sectors, scaling proven technologies, redirecting fossil fuel support, and creating predictable environments that accelerate net-zero transition.

4: Make decision-critical data on climate finance flows available: The public and private sectors should collaborate on a common definition of climate expenditure. This will help improve disclosure and build a climate investment data platform to channel climate finance to where it will have the most impact.

Fluid Ice Foundation Research Summaries

Climate and Carbon Finance

Raj Mehta (Founder & CEO, Fluid Ice Foundation)

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 financing 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.