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FRIDAY, JULY 25, 2025
Will climate finance be enough?

Supplement

Masudul Haque
29 January, 2024, 10:35 am
Last modified: 29 January, 2024, 11:53 am

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Will climate finance be enough?

Creating new and additional climate financing areas and increasing the scope of climate financing is the need of the hour

Masudul Haque
29 January, 2024, 10:35 am
Last modified: 29 January, 2024, 11:53 am
Masudul Haq, climate finance expert. Sketch: TBS
Masudul Haq, climate finance expert. Sketch: TBS

The concept of climate financing is relatively new, and in the last three decades, the issue has come to the fore in addressing climate change and its impact. 

In 1992, the Global Environment Facility (GEF) fund was initially launched to deal with the effects of climate change. The strategy of addressing climate change through the creation of funds may have initially been fruitful. For that reason, several funds such as Least Developed Country Fund, Green Climate Fund, and Adaptation Fund were born in the last part of the last century and at the beginning of this century. 

But later, when the problem of climate change and its depth began to be exposed in front of the world through scientific research, it became clear that it is not possible to deal with the impact of climate change based on only these small funds. 

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Based on the sources of all those scientific studies, we began to know the multifaceted effects of climate change. We also came to know that the impact of climate change is universal, but not everyone is equally responsible. 

Consequently, the concept of climate financing becomes even more important when it comes to tackling this global problem.

Despite differences in accounting methods, all experts agree on the need for $2.7 trillion to $3 trillion annually to address climate change impacts. The developed countries have not hesitated to accept their responsibility for global warming. 

As a result, at the 15th Conference of Parties (COP 15) of the UNFCCC in Copenhagen in 2009, developed countries committed to a collective goal of mobilising $100 billion per year by 2020 for climate action in developing countries, in the context of meaningful mitigation actions and transparency on implementation. 

The goal was formalised at COP 16 in Cancun, and at COP 21 in Paris, it was reiterated and extended to 2025. The issue of climate finance started to gain importance mainly with the commitment of developed countries to invest $100 billion every year in developing countries.

But interestingly, the UNFCCC has managed to get developing countries to agree to take responsibility for tackling climate change in its convention despite being responsible for far less carbon emissions.

Right from the beginning of negotiations, the community acknowledged that to be effective and secure participation, any global climate change agreement needs to be perceived as fair by the countries involved in it. The UNFCCC, therefore, considers countries' common but differentiated responsibilities and respective capabilities (CBDR-RC). 

The CBDR-RC principle acknowledges that all countries have a shared obligation to address climate change but denies that all of them have equal responsibility. As a result, all the rich and poor countries of the world began to express their determination to invest resources from the internal market as well as mobilising resources from abroad through the formulation of NDC. Climate finance has become quantitatively broader, with domestic investment combined with foreign investment.

The UNFCCC is also able to engage the private sector in climate finance through "Making finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development" according to 2.1c of the Paris Agreement. 

Though the private sector is not a signatory party individually or collectively, in Article 2.1c, the signatory states accept the responsibility of including the private sector in climate finance. The Paris Agreement is able to institutionalise climate finance by creating this three-way financing pathway – domestic, foreign and private sector.

Although climate financing has been institutionalised through the Paris Agreement, we see a wide gap between expectations and realisations. Data released by the OECD shows that the developed world provided just $58.5 billion in developed world finance in the year following the Paris Agreement. 

However, in the following years, this funding increased significantly and reached $89.6 billion dollars by 2021 — pretty close to the $100 billion promise. But regrettably, developed countries never reached their much-anticipated $100 billion milestone. Furthermore, we do not see any outline of how the difference between pledged funds and committed funds already created each year will be delivered.

Meanwhile, Oxfam has raised questions about the OECD's report through the Climate Finance Shadow Report 2023. They claim that the $83.3 billion that the developed world claims to provide in 2020 is not reasonably substantiated. The organisation thinks the amount could be between $21 billion and $24.5 billion in real terms. 

Apart from saying that the alleged financial cooperation of developed countries is not enough, the question of fairness is also being discussed relevantly these days. Many experts believe that, in addition to the amount of money, it is important to consider how the money is being spent. Oxfam also claimed in their above-mentioned report that the amount of funding disbursed by the developed world is very low. 

Moreover, a large part of the financial aid demanded by the developed world has been provided as loans, and a large part of these loans have been identified as non-concessional loans. Such informational and procedural differences are creating distance between developed countries and developing countries. 

Under the concept of 'Common but differentiated responsibilities and respective capabilities' most of the low and middle-income countries started investing from domestic resources. Contribution of developing countries is now not less than $100 billion per year. The participation of developing countries in climate financing is significant and encouraging, despite their economic constraints, but the sense of responsibility of the developed countries, from whom participation was most desired, remains questionable. 

But it would be unfair not to commend developed countries for creating favourable policies to encourage private sector climate financing. The CPI (2021) Global Landscape to Climate Finance 2021 report shows that investment in climate finance in the private sector was $274 billion in 2017/18 and $310 billion in 2019/20. This investment includes sector as well as commercial financial institutions and even individual participation. It would not be wrong to assume that most of this private sector investment has taken place in developed countries. 

Where developing countries are quite behind. In addition to resource constraints, it can be assumed that it will take some time to build their capacity to create supportive policies involving the private sector. 

It is also true that the economic value of the money and resources that marginalised people in developing countries invest in protecting themselves against climate change is not reasonably measured.

This implies that a lack of climate financing will not delay global warming. Nature will continue at its own pace and the earth will gradually lose human habitability. So, it is not possible to solve the problem by blaming someone's disability. 

Therefore, creating new and additional climate financing areas and increasing the scope of climate financing is the need of the hour. We will notice that in addition to applying pressure on the developed countries to provide additional money, efforts are also being made to create new areas of climate financing. 

International financial institutions have already started to change their business models to support climate financing. Various new ideas such as debt swapping, green bonds, highly concessional loans, climate insurance, guarantees, debt poses are becoming popular day by day. 

Through these changes, climate financing will continue to evolve as a stronger and more multidimensional concept. And if this transformation process takes place, we will get the answer to how much of this 'climate financing' will allow the world to reach net zero.

The author is a certified expert in climate adaptation finance and a fellow of the climate prosperity program (CPP) of the Climate Vulnerable Forum.

TBS anniversary / food / energy / environment / Food energy and environment

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