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What is climate finance?

Climate Financing
Climate Financing

Climate change is a global problem that requires collective action and determination. Large sums of money, in addition to serious determination, are paramount to solving this issue. This acknowledgement makes it difficult for many least developed, vulnerable and developing countries to overcome the climate crisis. Therefore, climate financing is one of the actions needed to mitigate and adapt to climate change, but what exactly is climate finance? This article briefly overviews some of the definitions of climate finance and shows why not having a standard definition does more harm than good.

There is no single definition of climate finance. The United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance provides the closest thing to an official version. It states that “climate finance aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing the vulnerability of and maintaining and increasing the resilience of human and ecological systems to negative climate change impacts.” Another definition the Grantham Research Institute on Climate Change and the Environment provides is that climate finance is a multifaceted concept. It gelrtsnerally refers to finance for activities aiming to mitigate or adapt to the impacts of climate change.

The Grantham Research Institute’s definition of climate finance represents the flow of funds to all activities, programmes or projects intended to help address climate change, for both mitigation and adaptation, in all economic sectors, anywhere in the world. Climate finance helps countries reduce greenhouse gas emissions by funding renewable power like wind or solar and allows communities to adapt to the impacts of climate change.

The term ‘climate finance’ is also frequently associated with international diplomacy on climate change. In this context, climate finance implies “new and additional financial resources” provided by developed countries to developing countries so that they can meet the full and incremental costs of climate change and decarbonisation. In 2009, at the Copenhagen Climate Change Conference, developed countries promised to assist with US$30 billion to developing countries to help fight climate change. From 2010 to 2012, this assistance was given and increased to US$100 billion until 2020.

In 2022, before the COP27 UN climate conference, the Standing Committee on Finance reviewed definitions relating to climate finance. However, differences between developed, least developed, vulnerable and developing countries on this issue held back an agreement on documentation and methodologies for the collective financial goal. Being unable to decide on one definition of climate finance damages the efforts of small states. In a paper by Mac Clune, who explored the experiences of small states in southeast Asia when trying to access climate adaptation finance, he observed that adaptation finance suffers under the multi-scale nature of climate change. Also, because the definitions for adaptation finance are constantly changing, it is difficult to pinpoint precisely how much of it is flowing currently and how much is needed. He indicates that these barriers are not only seen in Southeast Asia but are reflective of the worldwide issues when trying to receive climate adaptation finance to address local contexts and needs.

Also, definitions that only include finance flowing directly to assets and activities and leave out financial market activity, such as bank loans to companies or investments in private and public equity, adhere to the core principle of avoiding ‘double counting’. This counts both a loan from a bank to an energy utility and the investments in renewable energy generation made by the recipient company; using the proceeds from the loan would mean counting finance for the same activity twice. Not having a standard definition of climate finance increases the occurrence of double counting, making attempts of tracking it difficult. Also, climate finance is sometimes conflated with the related and overlapping concepts of green finance, sustainable finance, and low-carbon finance.

There is a lot to do on climate and a short time to do it, so all relevant agencies need to start keeping past promises. In the Paris Agreement, wealthier countries committed to providing the least developed, vulnerable and developing countries with at least $100 billion annually by 2020 for climate mitigation and adaptation. They also agreed to increase adaptation finance significantly. While progress has been made on both goals, it still falls short.

Consequently, there must be an organised approach to ensuring that the least developed, vulnerable and developing countries are given the necessary climate finance to deal with climate mitigation and adaptation. Significant concerns emerge from The United Nations Framework Convention on Climate Change (UNFCCC). The (UNFCCC) complains the countries that have felt the most direct effects of this crisis are those with a minuscule contribution to world pollution. Meanwhile, big nations such as China and the United States, which are rivalling to become the largest economies in the world, are some of the many countries that contribute the most greenhouse gas emissions.

Definitions of climate finance continue to vary, especially if the author resides in the developed or developing worlds. Without a definition that is accepted by all, we will always encounter problems on what constitutes climate finance. Until this is rectified, the amount of money being received by vulnerable states will be impacted.

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