Climate finance entails any funds, public or private, that are used for investment into projects that are at least in part intended to either mitigate the impacts of, adapt to, or compensate for, climate change. This blog offers an overview of some of the important questions relating to climate finance, including the mechanisms, the parties, and the challenges associated with delivering it.
The target and the type of finance
Arguably the most common number heard in relation to climate finance is $100 billion. At COP 15 (2009), rich nations pledged to provide this amount annually to less wealthy nations by 2020. This commitment was not achieved in 2020 or at COP26 last year. Although the estimated amount of finance has gradually increased from around $50bn in 2013 to nearly $80bn in 2018, it is important to note that $100bn is a fraction of the trillions of dollars that are thought to be ultimately necessary every year (recently estimated to be $2trillion by 2030). The $100bn pledge is seen as iconic or as a critical test of the possibility of large-scale climate finance flowing between wealthy and less wealthy countries over the longer term.
Criticism of the lack of achievement relates to the level committed thus far but also to the type of finance on offer. Most climate finance is provided for mitigation (arguably of greater benefit to the wealthier countries), most is for discrete projects (not of the choosing of the countries in receipt of the finance), and critically, most is provided as loans (increasing indebtedness of some already very indebted countries). 60% of low-income countries are thought to be in or nearly in debt-distress i.e. are unable to fulfil their financial obligations with debt restructuring required. In some countries it has been estimated that a large proportion of the increase in their debt (50% in Barbados) is associated with paying for the consequences of natural disasters. If only grants and the benefit accrued from lending at below-market rates is counted (not the full value of loans) then Oxfam estimated public climate financing was around $19 billion–$22.5 billion in 2017–18.
How funds are raised
So far, the bulk of climate finance (about 70%) that has been made available is in the form of loans rather than grants. The loans that have been issued are also often non-concessional i.e. at market interest rates. The Scottish Government’s loss and damage fund will, however, be provided as grants, and funds provided from the UK more widely have also been almost all delivered as grants (87%).
There are a huge variety of ways that funds could be raised for climate action with some of the options receiving the most attention at COP27 set out below:
- Climate / Green bonds: a means of raising funds for climate relevant investments, that can be issued by wide variety of actors including banks, governments and businesses. The UK Government recently won awards for its climate bonds and wants to be first ‘net zero aligned financial centre’.
- Private finance and carbon credits: some political leaders believe that ‘western taxpayers’ cannot be expected to contribute large amounts and that private finance should be the primary source of funding. At COP27, John Kerry (the US Envoy for Climate) proposed a carbon credits scheme whereby companies buy credits which then fund the deployment of renewable energy in less wealthy countries.
- Global financial system overhaul: the Bridgetown Agenda / Initiative, proposed by the Prime Minister of Barbados is focused on the global financial system in its entirety. Involving various recommendations it, in part, wants institutions such as the World Bank and the International Monetary Fund (IMF) to loosen their lending requirements potentially resulting in a trebling of available climate finance. It includes the suggestion of ‘special drawing rights’ which would allow members to ‘borrow from each other’s reserves at very low interest rates’ with an initial release of $650bn from the IMF stimulating an additional $2trn in private investment. These proposals have received substantial attention at COP27 and received partial backing from the French President amongst others.
- Debt deferrals: another innovation is debt deferrals whereby debt repayment could be suspended for countries hit by climate disasters. At COP27, the UK Government announced that its export credit agency would provide these debt clauses on its loans.
- Fossil fuel company taxes: A large group of media organisations (and others) have proposed that there should be a tax on the profits of fossil fuel companies which is directed toward funding climate change action.
The Scottish Government launched a Climate Justice Fund (CJF) in 2012, and it currently has a budget of £36million across this Parliament. This CJF has been used to support projects in Malawi, Zambia and Rwanda. The UK Government pledged to increase their climate adaptation budget to £1.5bn at COP27.
Who pays what?
Arguably the first and most critical consideration in global climate finance is who pays what amount. There is no agreed method for determining this and there are different interpretations of what is fair. Some use gross national income, current territorial emissions and population, while others think that historical emissions totals should play a role.
Some argue that a national fair share of finance should relate to how quickly emissions are reduced. For example, Stop Climate Chaos Scotland estimate that if the UK reduced its emission to zero by 2030 it would owe around £1 trillion but if it waited till 2050 to do this ‘its financial obligations are considerably greater.’
A recent summary of which countries have contributed what can be found from the Overseas Development Institute although (as highlighted) many of these contributions are part grant and part loan.
What is paid for?
Thus far, the vast majority of global climate finance has been directed toward mitigation. The predominance of loans also links to the focus on mitigation projects being financed as these generally provide financial returns e.g. renewable energy investments generate energy. Adaptation and loss and damage investments generally have much less opportunity for returns and thus have a much greater requirement for grants.
A developing issue in climate finance is that of compensating for the impacts of loss and damage from climate change. The Scottish Government was the first country to offer funds for a solely loss and damage climate fund, and it has followed up on this pledge with more funds offered this year. A growing number of countries have followed suit (Denmark, Belgium, and New Zealand). As climate change impacts intensify in coming years this developing area of climate finance will become much more prominent and likely highly contentious.
Niall Kerr, Senior Researcher – Climate Change and Net Zero