The trillion dollar climate finance challenge (and opportunity)
It’s overwhelmingly accepted that climate change is a very significant threat to humanity and while there are countless solutions to tackling what has been described by the UN as the “existential threat” of our times, it is still not fully clear how these solutions will be paid for.
Investments in renewable energy and sustainable infrastructure are growing, however from January 2020 to March 2021, globally, more money was spent on fossil fuels, which when burned, create the harmful gasses driving climate change.
Many countries lack the financial resources to make the transition to clean energy and a sustainable way of life that could reverse climate change. The UN says that climate finance is the answer because not investing will cost even more in the long-term, but also because there are significant opportunities for investors.
What is Climate finance?
Broadly speaking, climate finance relates to the money which needs to be spent on a whole range of activities which will contribute to slowing down climate change and which will help the world to reach the target of limiting global warming to an increase of 1.5°C above pre-industrial levels.
To reach this goal, the world needs to reduce its greenhouse gas emissions to practically zero by 2050; the phrase net-zero is also heard a lot in the context of financing climate action (you can read more about it here).
Initiatives that must be financed to reach net-zero, include those which reduce emissions of harmful gasses as well as enhancing or protecting the natural solutions which capture those gasses, like forests and the ocean.
The finance also aims to build the resilience of populations most affected by climate change and help them to adapt to changing climatic conditions, measures which in turn will help to reduce warming.
The finance exists and so do the solutions, to transition to what the UN calls a green economy. Renewable energy which provides electricity without producing carbon dioxide or other forms of air pollution is a crucial building block for powering sustainable economic growth.
Why is it important?
With global temperatures rising, along with changing weather patterns, sea-level rise, increases in droughts and floods, the world’s most vulnerable populations are facing ever-increasing risks, food insecurity and have fewer chances to break out of poverty and build better lives.
In fact, the UN estimates that climate change could drive an additional 100 million people into poverty by 2030.
Significant financial resources, sound investments and a systematic global approach are needed to address these worrying trends.
So how much is needed?
Significant investments are needed and international cooperation is critical. More than a decade ago, developed countries committed to jointly mobilize $100 billion per year by 2020 in support of climate action in developing countries.
It may sound like a lot but compare that to world military expenditure in 2020 which was estimated at just under $2 trillion or $2,000 billion, or the trillions of dollars spent by developed countries on COVID-related relief for their citizens.
According to an expert report prepared at the request of the UN Secretary-General, the $100bn target is not being met (the latest available data for 2018 is $79bn), even though climate finance is on an “upward trajectory.”
So, there is still a big gap in finance.
Does it make financial sense?
The real question is whether the world can afford not to invest in climate action.
Communities in all parts of the world are already suffering from the financial effects of climate change, be it crop loss due to drought, or major damage to infrastructure caused by flooding or other extreme weather.
The UN Special Envoy on Climate Action and Finance, Mark Carney, says the huge amount of investment required represents an opportunity and not a risk, arguing that the benefits that flow from these investments dramatically outweigh any upfront costs.
It is also increasingly accepted that climate investments make economic sense. The financial and business cases for clean energy are stronger than ever. In most countries, going solar is now cheaper than building new coal power plants. Clean energy investments also drive economic growth, with a potential to create 18 million jobs by 2030; and that’s including the inevitable fossil fuel job losses.
Where is the money coming from?
This is where it becomes complicated but, generally speaking, finance is coming from a wide range of public and private funding sources, which are supporting innovative climate action initiatives at a local, national or transnational level.
A variety of financial instruments can be used to provide climate finance from green bonds to direct project-based loans to direct investments in energy or technology providers.
The UN says it seeks to combine the “determination of the public sector with the entrepreneurship capacities of the private sector,” supporting governments in making climate investments easier and more attractive for private sector companies.
Fortunately, the UN reports that “efforts to engage the private sector in meeting the Paris goals are gaining momentum”.
A lot of climate funding is channeled through numerous UN funds and programmes.
The annual $100bn commitment, “is a floor and not a ceiling” for climate finance, according to the UN.
The UN Environment Programme (UNEP) estimates that adaptation costs alone faced by just developing countries will be in a range of $140 billion to $300 billion per year by 2030, and $280 billion to $500 billion annually by 2050.
It’s worth remembering here that adaptation is only one part of the complicated climate action puzzle. Once mitigation and decarbonization efforts and global resiliency efforts, in both the developing and developed world are factored in the annual cost will greatly exceed $500 billion and possibly even more than a trillion dollars.
But the benefits of the investments will be far greater-- shifting to a green economy could yield a direct economic gain of $26 trillion through 2030 compared with business-as-usual.
UN-backed international climate funds
- Countries recognized the need for specific climate financing in the Paris Agreement the legally binding treaty adopted by the international community in December 2015.
- It calls for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. ”
- Climate Investment Funds (CIFs): The $8 billion fund “accelerates climate action by empowering transformations in clean technology, energy access, climate resilience, and sustainable forests in developing and middle-income countries.”
- Green Climate Fund (GCF): Set up by the UNFCCC in 2010, GCF is the world’s largest dedicated climate fund, mandated to support mitigation and adaptation action equally in developing countries.
- Adaptation Fund (AF): The fund has committed some $830m since 2010 to help vulnerable communities in developing countries adapt to climate change
- Global Environment Facility GEF aims to “catalyze transformational change in key systems that are driving major environmental loss”, in particular energy, cities and food.
- UN-REDD: Three UN agencies (UNEP, UNDP and FAO) teamed up a decade ago to protect forests, a “pre-eminent nature-based solution to the climate emergency”.
- Clean Technology Fund (CTF): The $5.4bn is “empowering transformation in developing countries by providing resources to scale up low carbon technologies”.