Climate finance, essential for mitigating and adapting to climate change
The fight against climate change needs more than just good intentions. Adaptation and mitigation processes, crucial to stopping the planet from deteriorating over the coming decades, requires financing, and this flow of money can come from both private and public sources. The United Nations, though the UNFCCC, is responsible for supervising transfers from developed to developing countries..
Climate change is a global problem that requires huge amounts of money to transform production and consumption patterns all over the planet. It is particularly costly for developing countries, which are often the most vulnerable to this phenomenon. This is where climate financing comes in, as it allows mitigation and adaptation.
Another feature of climate change is that some of the countries most seriously threatened by its effects tend to be those that cause the least pollution. One example of this is Kiribati. At the same time, relocating manufacturing to countries with cheap labour, such as China and India, among others, has caused their greenhouse gas emissions (GGE) to skyrocket.
Article 9, Paris Agreement
Developed countries shall provide financial resources to assist developing countries with respect to both climate change mitigation and adaptation
What is climate finance
According to the United Nations Framework Convention on Climate Change (UNFCCC), climate finance is local, national or transnational funding from public, private and alternative sources that seeks to support climate change mitigation and adaptation actions.
Another definition is that of the UNFCCC's Standing Committee on Finance (SCF), according to which climate finance aims at reducing emissions, and enhancing greenhouse gas sinks and aims at reducing vulnerability and maintaining and increasing the resilience of human and ecological systems to negative climate change impacts.
A basic milestone for climate finance was the Copenhagen Agreement, reached in 2009 at COP15. In the agreement, developed countries pledged 30 billion dollars between 2010 and 2012 for developing countries to carry out mitigation and adaptation activities, and 10 billion dollars per year until 2020. This commitment was reiterated in the Paris Agreement in 2015, extending this aid until 2025. The election of Joe Biden as president of the United States, which has an ambitious climate plan External link, opens in new window., is a boost for the future of climate finance.
Climate finance sources and instruments
Climate finance can come from very different sources, which can include: public or private, national or international, bilateral or multilateral. There are also numerous types of instruments, some of the most common of which are:
- Green bonds. These are a kind of debt issued by a public or private institution. Unlike other types of credit instrument, they undertake to use the funds for environmental purposes, such as fighting climate change, for example.
- Debt swaps. These entail the sale of foreign currency debt by the creditor country to an investor — e.g. an NGO — which can then swap the debt with the debtor country for the development of mitigation and adaptation projects.
- Guarantees. These are commitments whereby a guarantor promises to fulfil the obligations undertaken by a borrower to a lender in the context of climate change activities.
- Concessional loans. These are loans for climate change mitigation and adaptation activities that differ from traditional loans in that they have longer repayment periods and lower interest rates, among other preferential conditions.
- Grants and donations. These are amounts granted to projects related to the fight against the climate emergency, which do not need to be repaid.
Main funds of climate finance
Climate finance funds are provided by multilateral institutions including development banks and the financial institutions established under the UNFCCC itself. The following are the main examples:
Green Climate Fund (GCF)
Set up by the UNFCCC in 2010, it is the world's largest fund devoted to helping developing countries reduce their GHG emissions and adapt to the impact of climate change, paying particular attention to the needs of the most vulnerable countries. The GCF plays an essential role in compliance with the Paris Agreement, channelling climate finance to developing countries.
Special Climate Change Fund (SCCF)
Administered by the Global Environment Facility (GEF), it offers four different finance services: adaptation to climate change; technology transfer; energy, transport, industry, agriculture, forestry and waste management; and economic diversification for countries dependent on fossil fuels.
Least Developed Countries Fund (LDCF)
Also administered by the Global Environment Facility (GEF), its purpose is to support the almost 50 countries classified as least developed by the United Nations to tackle their high vulnerability to climate change and implement their national adaptation plans.
Created in 2008, also as part of the UN, its objective is to reduce the emissions caused by deforestation and forest degradation in developing countries, helping governments to prepare and implement national REDD+ strategies.
Bilateral climate finance funds include institutions as the United States Agency for International Development (USAID), the European Union's Global Climate Change Alliance+ (GCCA+), and the Japan International Cooperation Agency (JICA), etc.