What is climate finance and what is its relevance to fighting climate change?
It’s all nice to talk about many interesting solutions to reduce CO2 emissions, but it is an entirely different story when it comes to walking the talk. Because implementing any of these solutions depend on two aspects: Technical and Economic Feasibility.
Interestingly, the technical feasibility of a wide range of solutions needed to abate greenhouse gas emissions is fairly well established.
The economic feasibility of many of these however are still doubtful. Even if the projects have attractive returns, many of these require significant capital expenses. These two aspects of the economics – high capital costs and debatable returns – are becoming bottlenecks for many countries to attempt a whole range of climate projects.
Which is where climate finance comes in.
Climate finance involves flows of funds from developed to developing nations to help poorer countries to cut their emissions and adapt to climate change.
Climate finance has been a central element of the international climate change agreements from the outset. The UN Framework Convention on Climate Change, agreed in 1992, stated that developed countries shall provide new and additional financial resources to developing countries.
Some initial commitments from donor countries had been met, and over $30 billion in additional climate finance has been provided since Copenhagen (2009). But globally there is no clear path to ramp up support to the target $100 billion by 2020.
In 2010, UN Secretary General Ban Ki-Moon established a high-level advisory group and tasked it to find the best sources of climate finance. The group concluded that a combination of sources was needed, including aid-style government pledges, market levies and possible new sources such as a tax on international aviation and shipping, which would begin to regulate this so-far uncapped source of emissions, or a financial transaction tax, a policy that has been much-debated in Europe as a way to increase financial stability. A large share of income would also have to come from the private sector through mechanisms like carbon trading.
Finance sourced from diverse sources can be channelled through various intermediaries, notably BFIs, MFIs, development cooperation agencies, the UNFCCC, non-governmental organisations and the private sector. The financials flows can flow from developed to developing countries, from developing to developing countries, from developed to developed countries and domestic climate finance flows in developed and developing countries.
The estimations for the needed financing for climate change vary according to the geographic, sectorial and activity coverage, timescale and phasing, target and the underlying assumptions. 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 USD 30 – 100 billion a year over the period 2010 – 2050 for adaptation. 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.
One indication of the extent of financing required is contained in the majority of the intended nationally determined contribution (INDCs) submitted by developing countries to the Paris Agreement. In the energy sector alone the projects totalled around US$13.5 trillion over the next 15 years, or around US$ 900 billion per year. Other studies have estimated that around US$5 to 6 trillion per year will be required for the next 15 years solely to invest in infrastructure to support the low-carbon transition. Of this amount 60% would need to be invested in new infrastructure in developing countries.
Currently, private sector sources contribute about 60% and public sector sources 30% to climate finance. Public sector contributions, to support reaching the political target of the US$ 100 billion, still remain low.
Read also: My review of Bill Gates’ book How to Avoid a Climate Disaster.