Climate Finance: A Brief Overview
A month ago, global world leaders flocked to Paris to discuss green growth, the debt crisis and how to effectively utilise the private sector as a source of investment. Perhaps the most important topic that was touched upon was climate finance. In this blog, I will provide an overview of this entity, how it is measured, and two examples of it.
What is Climate Finance?
As defined by the United Nations, climate finance refers to ‘local, national or transnational financing’, which comes from public, private and other sources of funding, with the aim of supporting actions towards addressing climate change. These actions specifically target mitigation and adaptation tactics.
Mitigation - Reducing the flow of greenhouse gases into the atmosphere. Finance is needed for this as large scale investments are significant in reducing emissions.
Adaptation - The ability to adapt to the changing climate (considering the future of how the climate may change). Finance is also needed for this as it contributes to the success of adjusting to adverse climate effects (such as sea level rise and extreme weather), along with reducing the impacts of the changing climate.
Over the decades, various agreements have called for countries with more financial resources to support those with less provisions, i.e., the developed world supporting the developing world. On average, global climate flows were $803 billion per year on average between 2019 and 2020, a 12% increase from 2017-2018.
Nevertheless, this flow is small in comparison to other types of finance flows within the wider system. For example, an average of US892 billion per year in global fossil fuels, while US1.89 trillion for environmentally harmful subsidies in 2019- 2020.
Measuring Climate Finance
Climate finance can be seen through several different dimensions. These include:
The source of finance - public, private, mixed or from national governments, development banks, financial institutions or any other type of institution.
The type of finance - whether it is a form of development aid, equity or debt
Where finance flows from - this could be bilaterally (from on country to another) or multilaterally (from many countries to another)
The purpose of the activity - whether it is related to mitigation, adaptation or compensation for damages
Often, due to these dimensions, climate finance can be a complex entity to measure. Here are a few reasons why:
A lack of consistency and transparency: There is no standardised method for tracking climate finance across different countries, organisations and projects. Oftentimes, reporting finance varies and there may be a lack of transparency in certain flows, both of which makes it difficult to compare and compile data.
Convolution of climate projects: Not only are climate projects complex in nature, they also tend to involve multiple stakeholders, funding operations and timeframes, often making it difficult to apprehend a full picture of financial implications.
Combining with other development finance: Climate finance is often integrated with other development finance such as aids and bonds, thus, making it difficult to isolate.
Time lags: Projects can have long implementation periods with funds being committed over a series of years. This ‘lag’ can create challenges in measuring finance flows over time.
Lack of common definition: Despite the UN’s definition above, there is not a universally acknowledged definition of what constitutes climate finance, something which leads to ambiguity and discrepancies in reporting.
Examples of Climate Finance
The Global Climate Fund is the biggest global fund dedicated to helping fight climate change. Here are two projects which they are currently working on in Africa:
South Africa 🇿🇦
Ranked vulnerable to water - related vulnerability, the government’s National Adaptation Plan emphasises the need for water efficiently. GCF’s project aims to establish and develop a ‘national water reuse programme’ (WRP) that helps address water scarcity by transforming South Africa’s wastewater system. This project will activate the water reuse market, contributing to a knock on effect for the country’s economic development.
Côte d'Ivoire is expected to be hit by rising temperatures, frequent dry spells and irregular precipitation patterns in the near future. In the country’s Poro region, 90% of households - many of which are female-headed - rely on agriculture which is being directly impacted by the changing climate.To help cope with this issue, a ‘gender transformative’ approach will be adopted to help overcome technical, financial and knowledge barriers, along with enhancing the resilience of women within these communities. Not only will this project contribute to sustainable business plans within the region, but it will also support the empowerment of women who work within the sector and in turn, their families.
Overall, climate finance can be seen as playing a pivotal role in addressing the urgent challenge of the changing climate. Especially recently through the flooding in India and the extreme hot weather in mainland Europe, it has become even more evident that tackling the crisis is evident.
