The Breakdown: Climate Finance

What is “climate finance”?

‘Climate finance’ is a catch-all term that in its broadest sense constitutes public and private investment intended to mitigate and adapt to climate change. Under the United Nations Framework Convention on Climate Change (UNFCCC), developed, high-income countries responsible for most historical greenhouse gas emissions committed to mobilize climate finance to address the needs of developing countries. Together, they pledged to invest approximately USD 100 billion by 2025 (after the first 2020 deadline for the goal was missed).  

Why is it so essential for achieving long-term sustainability goals?

Humanity is currently in unprecedented territory. Atmospheric CO2 concentrations are higher than at any time in at least 2 million years. Finance is imperative to safeguard global food systems and precipitation patterns, stabilize ice sheets and glaciers which maintain current sea levels and provide drinking water for millions, and avoid catastrophic levels of climate refugees and forced migration. Climate stability remains the cornerstone of achieving long-term sustainability. 

How has climate finance been used in an innovative, powerful way?

The scale of the climate challenge has led to creative and impactful financing solutions at local, national, regional, and global levels. 

California has played a leading role locally through a cap-and-trade program for greenhouse gas emissions, setting a state-wide limit on 85% of sources. It sets a clear price signal that ramps up over time as the state reduces annual emission allowances (the cap) at an accelerating pace.  

At the national level, Rwanda has developed the Green Fund (FONERWA), which has mobilized USD 216 million in financing for innovative climate and environment projects. Funded projects support electrifying Rwanda’s fleet of moto taxis, zero-carbon affordable housing, wetland and watershed restoration and agroforestry and mini-hydro power projects among others.  

And at the global level, 25 countries, including the United States and Canada, recently announced a pledge to stop public financing of overseas fossil fuel projects by the end of 2022. This critical commitment is a step forward to transitioning global investment away from carbon and towards clean energy.  

What recent trends have you seen, and how will they shape our future?

Tracking the Growth and Flow of Climate Finance

Based on the Climate Policy Initiative’s (CPI) Global Landscape of Climate Finance 2021, tracking, global climate finance flows have grown steadily over the past decade from $364 billion in 2011/12 to $632 billion in 2019/2020, but have started to plateau in recent years, even prior to the impacts of COVID-19.  Mitigation investments focused on renewable energy consistently dominate adaptation efforts. In 2019/2020, 90% or  $571 billion went towards mitigation and only 7.4% or $46 billion towards adaptation. The 2.5% of remaining funds went to projects with multiple objectives.  

Three-quarters of tracked climate mitigation and adaptation investments flowed domestically. This highlights the importance of strengthening national policies to encourage domestic investment in risk reduction and low-carbon transition opportunities. Geographically, almost half of global climate finance went to East Asia & Pacific, with 81% concentrated in China due to its significant public spending, and only a quarter to Sub-Saharan Africa and all other regions.  

A Slow Progress in Renewable Sector

Although renewable energy represents approximately 60% of global mitigation financing, renewables investments need to at least triple to keep warming within 1.5 degrees Celsius by mid-century in line with the Paris Agreement. Private sources continue to provide most renewable energy finance. 

Future Trends

Low-carbon transport is the fastest-growing sector, driven by battery electric vehicles and chargers, while investments in rail and public transport are lagging.  It will be critical to address this latter area as public transport networks are underdeveloped as alternatives to private vehicles and road freight in many countries.

Climate stability remains the cornerstone of achieving long-term sustainability.