Five things to know about climate finance

Climate finance is one of the key elements to kick-start and support mitigation and adaption actions at all levels. This is why climate finance has been such a recurrent topic in climate change discourse, and, inevitably, will continue to be.

 

1. GOAL

When discussing climate finance the main goal to look up to is the one defined by the US$100 billion Roadmap, the collective commitment taken by richer countries. The target consists in mobilizing US$100 billion a year in climate finance from public an private sources by 2020 to support climate action in developing countries. The goal was put forth by UNFCCC Party developed countries in Copenhagen in 2009 and was confirmed under the Paris Agreement adopted at COP21 in 2015.

Specifically, the Roadmap outlines actions across four dimensions:

  1. Scaling-up public resources
  2. Significantly increasing finance for adaptation
  3. Using public finance and policy interventions to effectively mobilise private finance
  4. Supporting enhanced access, capacity building, and investment readiness

 

2. CURRENT FLOWS AND GROWTH PREDICTION

According to OECD study (2016) public climate finance is expected to grow by 60 percent in 2020, from an average of US$41 billion over 2013-14 to US$67 billion in 2020. The predicted amounts are allocated as follows:

  • bilateral finance accounting for $37.3 billion ($32.7 billion given by pledges, $3.7 billion by assumption on the persistence in 2020 of the same level of climate finance as in 2013-2014 and by $0.9 billion through multi-year pledge)
  • multilateral contributions accounting for $29.5 billion ($28 billion coming from Multilateral Development Banks and $1.4 billion being the expected overflows of climate funds)

Regarding the private sector, as reported by OECD, the private finance mobilised was US$12.8 billion in 2013 and US$16.7 billion in 2014. If the level of mobilisation per dollar in 2020 remains the same as in 2013-2014, above estimated levels of public finance in 2020 would mobilise US$24.2 billion in private finance.

The projections above, however, raised some criticism because of the adopted measurement approach: the OECD includes loans and equity and also considers the amount of private finance reached as a result of investment from governments and development banks (i.e. by public finance means). There is no general consensus on such approach: for instance, the Oxfam’s Climate Finance Shadow Report 2016 states otherwise, therefore lowering the level of the projections.

 

3. ADAPTATION FINANCE GAP

Current situation

The adaptation finance gap can be defined and measured as the difference between the costs, and thus the finance required, for meeting a given adaptation target and the amount of finance available to do so.

According to the Adaptation Finance Gap Report 2016, total bilateral and multilateral adaptation finance reached US$25 billion in 2014, of which US$22.5 billion targeted developing countries. Most of it (84 percent) flows from development finance institutions and is provided through low-cost (53 percent) or market-rate (26 percent) project debt. The main beneficiaries are developing countries in East Asia and the Pacific, with almost half of the funding. 55 percent of the total finance is directed towards water and wastewater management projects.

By the end of the 2015, 76 percent of the resources pledged to adaptation-focused climate funds has been approved for disbursement. Still, the total amount devoted to adaptation finance is only 17 percent of all public climate finance committed in 2014. The 50:50 mitigation/adaptation balance, set as goal by the Green Climate Fund, is far from being reached.

Projections

The Adaptation Finance Gap Report found that by 2030 the adaptation costs are likely to be in the range of US$140- 300 billion per year, whereas the World Bank estimate amounts to US$70-100 billion.

According to the Adaptation Finance Gap Report scenario, total finance for adaptation would thus have to be 6 to 13 times higher than current levels of international public adaptation finance to avoid an adaptation finance gap in 2030.

Moreover, the Report warns, “the potential adaptation finance gap in 2050 would be much larger – in the order of between 12 to 22 times current flows of international public adaptation finance.”

 

4. FINANCIAL TOOLS

A wide range of tools is used to catalyze the necessary amount of financial flows directed to climate change related projects. Non-concessional and concessional loans, grants and equity are only some of the diversified financial instruments used. Other possible tools include guarantees, that is a credit enhancement tool used to mitigate risk by protecting the investment against construction, operational or market risks and climate bonds, whose proceeds are earmarked for projects with environmental benefits, primarily climate change mitigation and adaptation (climate bond issuances increased from US$3 billion in 2012 to over US$42 billion in 2015, with a predicted amount between US$80 and US$100 billion for 2016).

 

5. REPORTS

Here the most important studies to take a closer look at the state of climate finance:

  • The Adaptation Finance Gap Report 2016, published by the United Nations Environment Programme (UNEP) in May 2016. The report assesses the difference between the financial costs of adapting to climate change in developing countries and the amount of money actually available to meet these costs – a difference known as the “adaptation finance gap”, and discusses the major issues linked to such deficit.
  • The Global Landscape of Climate Finance 2015, published on November 2015 by Climate Policy Initiative and presenting comprehensive information about which sources and financial instruments are driving investments, and how much climate finance is flowing globally.

 

(Photo credit: Iman Mosaad/Flickr)