Climate finance is a type of financing from public, private and alternative financing sources for mitigating the impacts of climate change and supporting actions to adapt to a changing climate. Climate finance funds large-scale investments needed to reduce emissions and adapt to climate change.
Following the Paris Summit, the importance of financing has increased in the new era in the fight against climate change. In order to reach the “2 degree” target agreed in Paris, infrastructure investments to be made between 2015 and 2030 need to support a low-carbon economy. It is estimated that approximately 700-1,000 billion USD will be needed annually for this transformation.
The global climate finance system is complex and constantly evolving. Funds are provided through multilateral channels, both inside and outside the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement financial mechanisms. An increasing number of bilateral, regional and national climate change funds are also involved in the financing system. Tracking climate finance flows on a global scale is difficult in the absence of an agreed definition of what constitutes climate finance or consistent accounting rules. The large number and variety of climate finance mechanisms makes coordination and harmonization difficult. But developments in this area continue to simplify access while increasing inclusiveness.
Today, climate finance comes from many different sources, both public and private. It is available both to developing countries facing the impacts of climate change and to private sector entrepreneurs. Climate finance ranges from grants and concessional loans to guarantees and private equity, and is provided by a wide range of institutions. We have compiled the prominent institutions and financing methods in climate finance.
Established in 1991, the Global Environment Facility (GEF) was created with the main objective of combating global environmental problems and supporting the implementation of the United Nations Conventions on Biological Diversity and Climate Change in countries that are parties to these conventions. The Fund, which aims to provide financial support to projects in the fields of biodiversity conservation, combating climate change, soil degradation and sustainable forest management in transition economies and developing countries, has funded projects that support climate change in many different fields since its establishment. Within the scope of GEF 8, which covers the 2022-2026 period, 29 countries have committed to grant 5.33 billion USD. Financing support is provided to countries through many different programs and funds under the GEF umbrella.
The Adaptation Fund (AF) is a GEF program established under the Kyoto Protocol. The program provides financial support to developing countries to mitigate the harmful effects of climate change. The program is funded by governments, private sector donors and the proceeds of emissions sales under the CDM (Clean Development Mechanism). Since 2009, the AF has provided 1.4 billion USD in funding.
The GEF also manages the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF) under the guidance of the UNFCCC COP. These funds support adaptation to climate goals through smaller-scale projects (such as a funding ceiling of USD 20 million per country). As of December 2022, the LDCF has approved a budget of USD 1.4 billion for 312 projects, with cash transfers of USD 530 million to projects, while the SCCF has approved USD 284 million for 73 projects, with cash transfers of USD 181 million.
Established in December 2015, the Green Climate Fund (GCF) is the most comprehensive fund for climate finance. The $100 billion in annual resources that developed countries have committed to provide by 2025 will be channeled through the GCF. Working in line with UNFCCC COP operations, the fund's resources will be equally divided for climate change mitigation and adaptation activities. Half of the fund allocated to climate change adaptation will be allocated to least developed countries, small island developing states and African countries that are directly affected by the impacts of climate change. By the end of 2022, the Fund has received pledges of up to USD 10 billion from 34 donor countries.
The Climate Investment Fund (CIF) is an investment fund managed by the World Bank in cooperation with international development banks that provides loans to developing countries to adapt to and mitigate the impacts of climate change. Operating since 2008, the countries funding the fund have pledged a total of USD 10.6 billion in support.
The Clean Technology Fund (CTF) program within the CIF allocated 7.9 billion USD by the end of 2022 to projects promoting the use of low-carbon technologies in the fields of renewable energy, energy efficiency and sustainable transportation. The Strategic Climate Fund (SCF), another program in the fund, had a budget of USD 2.69 billion in 2022.
Under the SCF, the Forest Investment Program (FIP) supports deforestation prevention and reforestation efforts. The Pilot Program on Climate Resilience (PPCR) was established to provide additional resources to the public and private sectors to help developing countries integrate climate resilience into their development plans to improve the capacity of ecosystems to adapt to changes caused by climate change. The Scaling Up Renewable Energy in Developing Countries Program (SREP) aims to increase communities' access to clean energy and support economic development.
Multilateral Development Banks (MDBs) are also among the important actors of climate finance. MDBs committed USD 41.12 billion in climate finance in 2021 alone. Many have integrated climate change criteria into their core lending and operations, and many are financing regional or thematic climate action initiatives.
Forest Carbon Partnership Facility (FCPF) established by the World Bank's carbon finance unit carbon market revenues to reduce emissions from deforestation and forest degradation, forest conservation, sustainable forest management and increasing forest carbon stocks (REDD+). The carbon finance unit also manages the Partnership for Market Readiness (PMR), which aims to help developing countries create market-based mechanisms to respond to climate change, and the BioCarbon Fund, a public-private partnership that finances initiatives working to capture carbon in the land use sector.
Institutions within the United Nations are also involved in climate finance. For example, under the UN REDD project launched in 2008, the United Nations Development Programme (UNDP), the United Nations Environment Programme (UNEP) and the Food and Agriculture Organization of the United Nations (FAO) came together to support REDD+ activities.
There are also many different instruments used in climate finance.
Green bonds: These bonds are a type of debt issued by a public or private organization. Unlike other credit instruments, they commit to use the funds for environmental purposes. Introduced to support projects with positive environmental impacts, green bonds were first launched in 2007 by the World Bank and the European Investment Bank (EIB).
Debt swaps: Countries that borrow from multilateral development banks or other countries make investments to improve their climate adaptation capabilities in return for the debt. If the investment increases the climate adaptation capability of the debtor country, the debt is written off by the creditor institution.
Guarantees: Guarantees are a commitment by a guarantor that the borrower will fulfill its obligations to the lender in the context of climate change activities.
Concessional Loans: Concessional loans are loans for climate change mitigation and adaptation activities that differ from conventional loans with longer repayment periods and lower interest rates.
Grants and donations: These instruments are non-repayable sums awarded to projects related to tackling the climate emergency.
References
"Climate Finance in the negotiations" https://unfccc.int/topics/climate-finance/the-big-picture/climate-finance-in-the-negotiations
https://climatefundsupdate.org/