Climate Finance

Climate Finance
Climate Finance


The action needed to tackle climate change will cost tens or even hundreds of billions of dollars each year, but many analysts say that this will save money in the long-term by reducing the costly future impacts of climate change.

Finance is needed for two main things — mitigation activities that reduce the concentration of greenhouse gases in the atmosphere, and adaptation activities that increase the vulnerability of communities, infrastructure and ecosystems to the impacts of climate change.

Much of the money needed for these activities in developing nations will have to come from industrialized countries, and this is a principle that all parties to UN Framework Convention on Climate Change (UNFCCC) have agreed to.

The UNFCCC has set up four funds. The Least Developed Countries Fund and the Special Climate Change Fund are both managed by the Global Environment Facility (GEF, see below). The Adaptation Fund has its own board and reports directly to the conference of parties to the UNFCCC.

The Green Climate Fund, created in 2010, works under the guidance of the conference of the parties to the UNFCCC. The membership of its board will be balanced between developed and developing nations and it seeks to allocate resources towards greener technology in developing countries. It aims to have half of its measures as mitigation projects and the other half as adaptation.

The GEF, the World Bank, European Commission and other donors also have a number of other climate funds, such as the World Bank’s CarbonFinance Unit, which uses money from governments and companies in OECD countries to pay for project-based greenhouse gas emission reductions in non-OECD countries.

The private sector also plays a role in climate finance, particularly through investments in renewable energies.

So far, however, finance from all of these sources is just a small fraction of what will be needed. Estimates vary but all suggest that tens of billions of dollars will be needed each year for adaptation and mitigation measures. They tend to agree with the 2007 Stern Review on the Economics of Climate Change, which said the costs of doing nothing would be much higher.

In 2007, parties to the UNFCCC agreed that finance would be one of four essential building blocks of a comprehensive global agreement on climate change. One strand of their negotiations towards that global agreement, has focused on how to generate, manage and spend the money.

However, by 2009′s UNFCCC conference, countries had failed to reach an agreement. Instead the meeting produced a non-binding political accord — the Copenhagen Accord. In it rich nations agreed to provide $10 billion a year from 2010-12, with a goal of US$100 billion a year from 2020, to help poor nations deal with climate change.

These funds are meant to be ‘new and additional’ — in other words, they should not come from existing aid budgets — but already many countries have made pledges that include repackaged aid money.

Nongovernmental organizations and developing nations argue that this is morally wrong, because industrialized nations have contributed most to climate change and should pay compensation. They add that any diversion of aid would remove funding for education, health and other existing development challenges.

There are also concerns that this funding will come in the form of loans, rather than grants, and that this would create additional debts.

After the 2015 Paris Agreement, there has been a renewed effort by various international financial groups such as the World Bank to help form and review the Intended Nationally Determined Contributions of developing countries.

Additionally, with the technological improvements of renewable energy production, both public and private interests are dedicated more funds towards renewables as a more cost-effective investment than traditional fossil fuels.

Various proposals exist for new and innovative ways to raise the funds needed to tackle climate change. In 2010, the UN Secretary-General Ban Ki-Moon established a High-Level Advisory Group on Climate Change Financing (AGF) to study potential sources of finance to meet the targets in the Copenhagen Accord. It is looking at six possible sources of public money:

  • direct budget contributions
  • carbon market auction revenues
  • revenue from international transport (shipping and airline taxes)
  • carbon taxation
  • multilateral funds (most notably, International Monetary Fund Special Drawing Rights)
  • an international financial transactions tax

It is also considering two streams of private finance.

  • Using public finance to leverage private investment (including debt swaps and insurance schemes)
  • carbon markets (which includes money generated through reform of the Clean Development Mechanism)

The advocacy organization Oxfam believes that these moves could generate large amounts of finance –-  as much as US$100 billion a year from a global financial transactions tax and US$20-30 billion a year through the creation of emissions trading schemes for international aviation and shipping, for instance.

Journalists will have many opportunities in the coming years to report on the need to find, manage, access and spend climate finance.

One area for media attention is whether rich countries keep their promises to fund climate action in developing nations, and whether the money really is ‘new and additional and not from existing aid budgets.

The government of the Netherlands, with support from some other developed and developing countries has created a similar website to “to provide transparency about the amount, direction and use of fast start climate finance”.

Other sites, set up by nongovernmental organizations to provide similar scrutiny of climate finance include those created by the World Resources Institute and by the Overseas Development Institute.

Another topic to report on is the battle for control of the funds the Copenhagen Accord is meant to generate. The GEF, World Bank and other agencies are all keen to control the money.

The GEF currently controls a number of climate funds, but developing nations have been critical of it because there is a lot of bureaucracy involved in applying to it for funding and it can take years for the GEF to make a decision and disburse funds.

The United States and some other donor nations favor the World Bank because they trust it to deliver. Yet developing nations are less trusting in the World Bank and would prefer the money to be managed through the UNFCCC — like the Adaptation Fund is (see Case Study, below).

As climate finance begins to flow, other areas for journalists to report on will emerge. Countries will begin to compete to access the money.

Until 2010, the priority countries for funding were identified as the Least Developed Countries, the Small Island Developing States and countries in Africa. But now other countries argue that they too are vulnerable to climate change and need finance.

There will also be a big debate about how much climate finance should come from public funds and how much from the private sector (which would be unlikely to show interest in funding small-scale adaptation projects that are needed because they offer little chance of a return on any investment).

Lastly, there will be plenty of opportunities to report on how the money is spent, particularly in countries where governments have weak capacity or poor governance.

An understanding of financial language and data journalism will become increasingly important as countries seek to implement their INDCs from the Paris Agreement.

Adaptation Fund

Assessing the Costs of Adaptation to Climate Change

Little Book of Climate Finance [PDF]

Oxfam briefing note – Climate Finance Post-Copenhagen [PDF]

World Resources Institute on Climate Finance

UNFCC on Climate Finance

Climate Policy Initiative

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