International perspectives →

Climate finance

Under the UN climate convention, rich countries have pledged to help poorer ones constrain their carbon emissions and prepare for climate impacts. By 2020, the flow of money is supposed to reach $100bn per year.

However, there are differing views about what constitutes climate finance, how it relates to overseas aid, and how the money should be channeled.  

Climate Finance: A Brief History

The United Nations Framework Convention on Climate Change (UNFCCC), signed in 1992, is explicit: as developed nations have done most to cause climate change, they have the biggest responsibility for combatting it.

15078928487 c8b77aa160 o

The sums needed for climate protection amount to tens of billions of dollar per year. Image: Climatescope, Creative Commons licence

Two aspects of this responsibility include helping developing countries protect themselves against climate impacts ('adaptation'), and helping them constrain their carbon emissions through clean development such as renewable energy ('mitigation').

What is 'climate finance' spent on?

Some examples of projects funded by climate finance around the world

  • Adaptation: projects include flood protection, early warning systems for extreme weather, and introducing climate-resistant agriculture. Biggest funding recipients: Mozambique, Niger, Bangladesh.
  • Mitigation: projects include cutting energy waste, rural electrification and renewable energy. Biggest funding recipients: Morocco, Mexico, India.
  • REDD: projects include reforestation, nature protection and supporting indigenous people in forest management. Biggest funding recipients: Brazil, Democratic Republic of Congo, Mexico.

Data from http://www.climatefundsupdate.org

Money for these purposes is collectively termed 'climate finance'.

Some practices can help with both mitigation and adaptation. Forest protection and growth is one, and forms a further category of projects known as Reducing Emissions from Deforestation and forest Degradation (REDD). 

However, the UNFCCC does not say how much money is needed, nor how it should be channeled and managed.

A number of funding channels have been in existence for more than a decade within the UN system. 

The Least Developed Countries Fund addresses the special needs of the Least Developed Countries, while the Adaptation Fund helps developing nations prepare and implement national adaptation programmes. 

Money for adaptation is predominantly spent in least developed nations, whereas money for mitigation can give more 'bangs for buck' in countries that are fast developing. 

REDD funds, logically, are concentrated in the most forested developing nations.

Numbers emerge

In the lead-up to the 2009 UN climate summit in Copenhagen, developed and developing nations announced two agreements on funding. Rich countries would:

  • provide $10bn per year in the period 2010-2012 ('fast-start financing')
  • 'mobilise' $100bn per year from 2020 onwards.

Developed countries pledged that this climate finance would feature 'scaled up, new and additional, predictable and adequate funding as well as improved access (for developing countries)'. Money could come from public or private sources.

At the following year's summit in Cancun, Mexico, the $100bn per year pledge was formalised and a decision was taken to establish the Green Climate Fund (GCF) as the main vehicle for channeling and managing this money.

As of November 2015, the Green Climate Fund had raised $10.2 billion equivalent in pledges from 38 state governments. The UK put in £720 million (about $1bn at the time); the largest donor overall is the US and the largest per-capita donor is Sweden. 

In September 2015, China also promised to invest $3.1bn in climate finance, which as a developing nation it was not obliged to. 

In 2015, an OECD study [pdf link] said that climate finance from public and private sources reached $62bn per year in 2014. But developing countries disputed the figure, saying it included many loans, that much of the money was not 'new and additional' but instead drawn from existing overseas aid budgets, and that not enough was being spent on adaptation. 

The OECD calculates that 16% goes to adaptation-only projects and 7% to those with both an adaptation and mitigation component, the remainder being spent on mitigation-only activities. 

The agreement made at the 2015 UN summit in Paris says that there should be a 'balance' between spending on climate protection and reducing emissions. 

The Green Climate Fund came under attack in Donald Trump's June 2017 speech, during which he claimed that the US was contributing significantly more than other nations, having paid $1 billion to date. If Mr Trump follows through with his plans, other countries will be forced to take up the slack - an idea which gained general support from leaders of developed nations in the aftermath of the speech.

How much money is needed?

A number of studies have tried to analyse how much money is needed in order to help developing countries adapt to climate impacts and mitigate their emissions.

In 2007 the United Nations Development Programme (UNDP) put adaptation costs at $86-109bn per year, while the UNFCCC itself obtained the figures $49-171bn. 

Ducks-DfID-600x600

This UK-funded project helped villagers switch from chickens to ducks, which cope better with flooding. Image: DfID, Creative Commons licence

Organisations such as the International Institute for Environment and Development (IIED) argue that these figures underestimate the true costs, for a number of reasons.

The most important reason is that only limited adaptation is possible for many climate impacts, particularly at high levels of warming. Also, analyses may omit sectors such as manufacturing and tourism.

Global estimates of adaptation costs also assume warming is kept below 2C. If that limit is exceeded - which, with emissions rising at current rates, is likely - costs will be greater. 

Historically there has also been a gap between funds pledged and disbursed.

Estimates of the costs of helping developing countries to 'green' their economies also vary. In 2007, the UNFCCC put the annual cost of returning global emissions to current levels at $200-210bn.

‘New and additional’? Public or private?

The wording of the Copenhagen agreement - that climate finance should be 'new and additional' - implies that it should not come from developed nations' official development aid (ODA) budgets, but form an additional source of funding.

However, in practical terms there is a degree of cross-over. For example, adapting to climate change involves addressing factors that increase vulnerability, such as poverty - which is why at ground-level, some activities look like conventional development.

Case study: Mangrove forests in Bangladesh

tree-saplings-bangladesh.jpeg#asset:1006:url

Training on planting tree saplings in coastal Bangladesh. Source: UNDP

Bangladesh is highly vulnerable to climate impacts including sea level rise, cyclones and erosion.

The Ministry of Environment and Forests (MoEF), along with UNDP, has a project for coastal afforestation (tree planting) in five districts. Women were trained in growing and planting mangrove saplings, as well as timber and fruit trees. 

Mangrove forests offer protection against coastal erosion and storm surges, but also absorb CO2 from the air and store the carbon. The project is an example of integrating efforts to reduce emissions (mitigation) and reduce vulnerability (adaptation). 

Funded by the Least Developed Countries Fund, the project reached over 18,000 households, and won various awards. 

At least in public, developing countries insist that the $100bn per year should come predominantly from the developed world's public coffers. They argue that climate finance is 'money owed' from damage caused by rich countries becoming rich through burning fossil fuels. 

At the Paris summit of 2015, governments agreed that public funds had a 'significant' role, especially regarding the needs of least developed and most vulnerable countries.

In general, they also want funds channeled predominantly through UN institutions including the Green Climate Fund, as this gives them a degree of control over the funds and their disbursement.

However, with western governments tightening their purse-strings in recovery from the 2007/8 financial crisis, there has been a push to identify and mobilise private finance. 

Also, some developed countries prefer bilateral funding arrangements with countries that are within their general political orbit (for example, the US to support South American nations).

This makes assessing the current extent of climate finance complex, and estimates of how much actually flows each year vary widely depending on what is included and what isn't. 

The OECD report referenced above [pdf link] concluded that about 70% of climate finance is currently drawn from public coffers.

Looking back at the three-year Fast Start Finance period, the Overseas Development Institute (ODI) reported that donor countries exceeded the $30bn target, but 80% of the money was not 'additional' to development aid. 

Western governments have at times discussed raising climate finance through mechanisms such as a 'Tobin tax' (a levy on international financial transactions) or a charge on international sea and air journeys, but have failed to agree anything along these lines.

SolarInstallationRwanda-SolarEnema-848x600

Climate finance is boosting use of off-grid solar energy in African countries such as Rwanda. Image: SolarEnema, Creative Commons licence

Countries made some progress towards deciding what happens after 2020 during the 2015 Paris summit. 

The $100bn per year figure will stay as a lower limit on funding until 2025; and some time before 2025, governments will decide a new, higher figure to take effect afterwards.

While the actions of President Trump could slow the growth of the fund, developed nations should continue to take a lead in providing capital, although others - particularly the so-called developing countries that are in some case richer than western nations - are 'encouraged' to contribute.

To view this briefing as a PDF, click here.