For nearly three decades, the United Nations has brought together countries and world leaders at global climate summits called COP’s (“Conference of the Parties”) – in an effort to make the issue of climate change a global priority. As the 26th annual COP kicked off this week in Glasgow, countries are expected to update their plans for reducing emissions. Among the main topics to be discussed will be climate finance.
What is Climate Finance?
Climate finance refers to local, national or transnational financing – drawn from public, private and alternative sources – that supports mitigation and adaptation actions to address climate change. In short, the goal of climate finance is to attract and deploy enough capital to mitigate climate change.
Climate finance calls for significant contributions of financial resources to adapt to the adverse effects of a changing climate. However, the contribution of countries to climate change, and their capacity to prevent and cope with its consequences, varies enormously. That is why the Convention and the Protocol have called on parties with more resources to assist those less endowed and more vulnerable. Specifically, developed country parties (Annex II Parties) are required to provide financial resources to assist developing country parties in stabilizing their greenhouse gas emissions. To facilitate this, the convention established a “Financial Mechanism” to provide funds to developing country parties.
Climate Finance Key Players
Developed countries will continue to play a lead role in mobilizing climate finance from a wide variety of sources, instruments and channels. In addition to calling on their public funds, through a variety of actions, including supporting country-driven strategies, developed countries must take into account the needs and priorities of developing country parties.
This is where the financial mechanism plays a key role in facilitating the flow of climate finance to developing economies. A financial mechanism can be any entrusted international entity, of which the longest standing operating entity is the Global Environment Facility (GEF). At COP17, parties decided to designate the Green Climate Fund (GCF) as an additional operating entity of the financial mechanism. Together, both entities are responsible for administering climate finance, while adhering to the COP’s climate change policies, program priorities and eligibility criteria for funding.
Both the GCF and GEF use innovative equity, grant, guarantee and lending instruments to de-risk scalable projects and contribute to achieving Paris Agreement goals in developing countries. One key approach to highlight is Blended Finance, where development capital is used to mobilize additional private finance to drive green investments and create new climate finance markets.
The Future of Climate Finance
Significant financial resources and investments are needed to combat climate change. However, according to the UN, the benefits that flow from these investments will dramatically outweigh any upfront costs. Studies and reports conducted before the COVID-19 pandemic showed that investments in climate action would go far to build a sustainable economy. According to October 2019 data from the World Bank , the world will need to make significant investments of around US$90 trillion by 2030 to address climate change. But it can recoup those investments by transitioning to a green economy, unlocking new economic opportunities and jobs. An investment of US$1, on average, yields US$4 in benefits.
Investment decisions now will determine whether we create or destroy wealth and potential paths to prosperity. It is increasingly clear that the world cannot afford to burn all of its fossil fuel reserves if we are to succeed in limiting climate change to sustainable, livable, levels. The long-term economic reality is that only a fraction of proven fossil fuel reserves can be burned if we are to keep temperature rise to 1.5°C.