Climate finance
Climate finance is an umbrella term for financial resources such as loans, grants, or domestic budget allocations for climate change mitigation, adaptation and/or resiliency. Finance can come from private and public sources and can be channeled by various intermediaries such as multilateral development banks or other development agencies. Development agencies are particularly important in the transfer of public resources from developed to developing countries in light of their UN Climate Convention obligations.[2] : 7
For broader coverage of this topic, see Economic analysis of climate change.
There are two main sub-categories of climate finance based on different aims. Mitigation finance is investment that aims to reduce global carbon emissions. Adaptation finance aims to respond to the consequences of climate change.[3] Globally, there is a much greater focus on mitigation, accounting for over 90% of spending on climate.[4][5]: 2590 Renewable energy is an important growth area for mitigation investment and has growing policy support.[6]: 5
Finance can come from private and public sources, and sometimes the two can intersect to create financial solutions. It is widely recognized that public budgets will be insufficient to meet the total needs for climate finance, and that private finance will be important to close the finance gap.[7]: 16 Many different financial models or instruments have been used for financing climate actions. For example, green bonds (or climate bonds), carbon offsetting, and payment for ecosystem services are some promoted solutions. There is considerable innovation in this area as well as transfer of solutions that were not developed specifically for climate finance such as public–private partnerships and blended finance. There are also many challenges including that of measuring and tracking financial flows, on equitable financial support to developing countries for cutting emissions and adapting to impacts, and on incentivizing further private sector investments.
Challenges[edit]
Tracking climate finance flows[edit]
Information on climate finance flows is much better for international climate finance than for domestic climate finance.[3]: 1566 International public finance from multilateral and bilateral sources can be tagged to specify that it is targeting climate mitigation or adaptation or both (i.e. is cross-cutting).[70] A number of initiatives are underway to monitor and track flows of international climate finance.[71] For example analysts at Climate Policy Initiative (CPI) have tracked public and private sector climate finance flows from a variety of sources on a yearly basis since 2011.
This work has fed into the United Nations Framework Convention on Climate Change Biennial Assessment and Overview of Climate Finance Flows[72] and in the IPCC Fifth Assessment Report and IPCC Sixth Assessment Report chapters on climate finance. These suggest a need for more efficient monitoring of climate finance flows.[73] In particular, they suggest that funds can do better at synchronizing their reporting of data, being consistent in the way that they report their figures, and providing detailed information on the implementation of projects and programs over time. There is also a need for improved reporting and tracking by domestic and private climate finance actors. This could be achieved through national regulations for mandatory and standardized disclosure.[22]: 55
Climate finance gap[edit]
Research finds substantially lower bilateral climate finance numbers than current official estimates.[74][75][76][77] Reasons are among others a lack of universally agreed-upon definitions of what qualifies as international climate finance and no oversight.[78] This has led to an inclusion of non-climate projects, a lack of transparency and ultimately a credibility issue regarding official international climate finance reporting.[78]
The estimates of the climate finance gap - that is, the shortfall in investment - vary according to the geographies, sectors and activities included, timescale and phasing, target and the underlying assumptions. The 2018 Biennial Assessment estimated financing needs for mitigation between 2020 and 2030 to be USD$1.7-2.4 trillion per year.[72]