Climate finance refers to financing channeled by national, regional and international entities for climate change mitigation and adaptation projects and programs. They include climate specific support mechanisms and financial aid for mitigation and adaptation activities to spur and enable the transition towards low-carbon, climate-resilient growth and development through capacity building, R&D and economic development. The term has been used in a narrow sense to refer to transfers of public resources from developed to developing countries, in light of their UN Climate Convention obligations to provide "new and additional financial resources", and in a wider sense to refer to all financial flows relating to climate change mitigation and adaptation.
Flows of climate finance
A number of initiatives are underway to monitor and track flows of international climate finance. Analysts at Climate Policy Initiative have tracked public and private sector climate finance flows from a variety of sources on a yearly basis since 2011. In 2015, they estimated that climate finance reached $437 billion. This work has fed into the United Nations Framework Convention on Climate Change Biennial Assessment and Overview of Climate Finance Flows  and the IPCC Fifth Assessment Report chapter on climate finance. This and other research suggests a need for more efficient monitoring of climate finance flows. In particular, they suggest that funds can do better at synchronizing their reporting of data, being consistent in the way that they report their figures, and providing detailed information on the implementation of projects and programmes over time.
The estimates of the climate finance gap - that is, the shortfall in investment - vary according to the geographies, sectors and activities included, timescale and phasing, target and the underlying assumptions. The 2010 the World Development Report preliminary estimates of financing needs for mitigation and adaptation activities in developing countries range from USD 140-175 billion per year for mitigation over the next 20 years with associated financing needs of USD 265-565 billion and USD30 – 100 billion a year over the period 2010 - 2050 for adaptation. The International Energy Agency’s 2011 World Energy Outlook (WEO) estimates that in order to meet growing demand for energy through 2035, USD 16.9 trillion in new investment for new power generation is projected, with renewable energy (RE) comprising 60% of the total. The capital required to meet projected energy demand through 2030 amounts to $1.1 trillion per year on average, distributed (almost evenly) between the large emerging economies (China, India, Brazil, etc.) and including the remaining developing countries.
Multilateral climate finance
The multilateral climate funds (i.e. governed by multiple national governments) are important vehicles for disbursing climate finance. The largest multilateral climate funds are the Green Climate Fund, Adaptation Fund, Climate Investment Funds and Global Environment Facility. In 2016, these four funds approved $2.78 billion of project support. India received the largest total amount of single-country support, followed by the Ukraine and Chile. Tuvalu received the most funding per person, followed by Samoa and Dominica. The US is the largest donor across the four funds, while Norway makes the largest contribution relative to population size. Most multilateral climate funds use a wide range of financing instruments, including grants, debt, equity and risk mitigation options. These are intended to crowd in other sources of finance, whether from domestic governments, other donors or the private sector.
The Green Climate Fund is currently the largest multilateral climate fund, and climate change and development practitioners alike are focused on seeing these resources flow.
Private climate finance
Public finance has traditionally been a significant source of infrastructure investment. However, public budgets are often insufficient for larger and more complex infrastructure projects, particularly in lower-income countries. Climate-compatible investments often have higher investment needs than conventional (fossil fuel) measures, and may also carry higher financial risks because the technologies are not proven or the projects have high upfront costs. If countries are going to access the scale of funding required, it is critical to consider the full spectrum of funding sources and their requirements, as well as the different mechanisms available from them, and how they can be combined. There is therefore growing recognition that private finance will be needed to cover the financing shortfall.
Private investors could be drawn to sustainable urban infrastructure projects where a sufficient return on investment is forecast based on project income flows or low-risk government debt repayments. Bankability and creditworthiness are therefore prerequisites to attracting private finance. Potential sources of climate finance include commercial banks, investment companies, pension funds, insurance companies and sovereign wealth funds. These different investor types will have different risk-return expectations and investment horizons, and projects will need to be structured appropriately.
Governments have a range of financing and funding mechanisms available to secure finance from private investors, including equity, debt, grants or risk mitigation instruments such as guarantees. Some of these instruments will be used routinely as part of a government’s funding base; others may be deployed to mobilise the investment for a specific climate project.
- Green Climate Fund
- Fossil fuel divestment
- Climate Finance Landscape - http://www.climatefinancelandscape.org/
- Barbara Buchner, Angela Falconer, Morgan Hervé-Mignucci, Chiara Trabacchi and Marcel Brinkman (2011) “The Landscape of Climate Finance” A CPI Report, Climate Policy Initiative, Venice (Italy), p. 1 and 2.
- Oscar Reyes (2013), "A Glossary of Climate Finance Terms", Institute for Policy Studies, Washington DC, p. 10 and 11
- Buchner, B., Trabacchi, C., Mazza, F., Abramskiehn, D., and Wang, D. (2015) Global Landscape of Climate Finance 2015 http://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2015/
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- World Bank Group(2010), "World Development Report 2010: Development and Climate Change, World Bank Groupe, Washington DC, ch. 6, p. 257
- International Energy Agency (2011). World Energy Outlook 2011, OECD and IEA, Paris (France), Part B, ch.2
- International Energy Agency (2011). World Energy Outlook 2011}, OECD and IEA, Paris (France), Part B, ch.2
- "Mapped: Where multilateral climate funds spend their money". Carbon Brief. 2017.
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- Understanding ‘bankability’ and unlocking climate finance for climate compatible development, Climate & Development Knowledge Network, 31 July 2017
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