Climate financing – Better said than done? 

The bulk of greenhouse gas (GHG) emissions come from a few nations, with highly industrialized economies releasing noticeably more CO₂ per person than low and middle-income nations. Developing nations have been seeking greater climate justice for decades after realizing these imbalances. Although the Paris Agreement of 2015 acknowledges that different nations have distinct roles to play and varying capacities, there are still significant gaps on how this pertains to money. It is crucial to examine how specific characteristics sustain and exacerbate disparities across countries, and to especially examine international climate financial flows through the lens of climate justice.

Challenges from the source: In 2019, the private sector contributed 49% of the total annual climate finance, compared to the public sector’s 51% ($321 billion). What is remarkable is that in the economically developed regions of Western Europe, the US and Canada, and Other Oceania private financing, sponsored the majority of climate related projects, whereas the rest obtained their climate investments mostly from public sources.  It is even more important to change investment patterns and encourage the private sector to engage in emerging economies because the increase in climate finance is anticipated to come from the private sector. Private money, runs the risk of shielding the most underprivileged populations in low-income nations from access to chances for growth if the correct terms are not negotiated in the contractual agreements.

Debt Bias: The preferred and traditional method for providing climate funding is still debt as a financial instrument. The majority (around 61%) of the $384 billion in climate finance raised in 2019–20 was in the form of debt, with only 12% of it coming from public institutions and 75% of it being issued at market rates at the project level. On the opposite end of the spectrum, grants account for only 6% of total flows, while equity investments account for 33% of the whole mix. Debt-laden investments are unsustainable alternatives that frequently come with unfavourable conditions and do not necessarily correspond with the demands of developing countries or their most vulnerable populations given that many of them are already in debt distress, which has been made worse by the epidemic.

Adaptation is Relatively Ignored: About 90% of the overall climate financing donated and mobilized by industrialized countries went toward climate mitigation, while just 7.4% went toward adaptation. Projects that fulfilled both objectives received an additional 2.5 percent of pledges. As opposed to adaptation, which has more regional benefits, attempts to reduce global warming are at the centre of climate negotiations and financing. Due to their extreme vulnerability to looming climate shocks, low and middle-income countries are those that require adaptation financing the most. This is because of their poor resilience to climate change and they do not have widespread access to cash, particularly from private sources.

Sectoral Preferences: Nearly half of all climate funding supplied and mobilized in 2019 went to the energy and transportation sectors. Nearly 54% of the mitigation finance flows to the renewable energy sector in 2019–20 were provided by private investors. Low-carbon transportation accounted for 31% of all mitigation funding during that time. It is simpler to make a financial case for energy and transportation projects today than it is for agriculture, forestry, or land-use initiatives since they are more commercially viable. Investments and innovation in these industries will have a significant impact on the results of cumulative emission reduction at both the global and local level because many developing economies rely more heavily on the agriculture sector.

Unclear Status of the US$100-Billion Commitment

In any case, the US $100 billion commitment made at COP 16 is still in place, despite not being sufficient to close the gap in developing countries’ transition financing, and the commitment’s deliverable has been delayed by a few years, leaving less developed countries with more promises than guarantees.

The current financial system is incapable of applying a climate justice prism when making investment decisions and fails to incorporate measures related to climate change into its capital allocation and distribution procedures. The continued reliance on financial mechanisms to pursue development goals exposes the shortcomings of financial instruments to achieve climate parity and necessitates a new paradigm that will allow an effective allocation of capital along with an ideal pathway for carbon reduction, particularly in the Global South. Financial systems must be restructured by active legislation at an international level since the private sector lacks incentives to invest through a lens of climate justice. The marginal cost of reducing emissions is substantially lower in low- and middle-income nations and the environmental benefit may be maximized at the lowest possible cost, public funding should be used to catalyse and direct private flows there.

Delivery and tracking of funds are currently challenging since the various organizations within the climate finance ecosystem all operate in silos with conflicting mandates. A Green Bank established by an international organization like the United Nations Framework Convention on Climate Change that provides services like co-lending, risk mitigation, and credit enhancements (like guarantees, first loss capital, and green bonds) may prove to be an all-encompassing solution for combining and allocating both public and private capital toward mitigation and adaptation projects, particularly in developing nations. Additionally, it can support the advancement of framework standardization, disclosure transparency and innovation in financial instruments and regional institutions. In order to level the playing field by advancing the interests of the Global South in the pursuit of an equitable and just climate transition, platforms like the G20—particularly with the troika formed by Indonesia, India, and Brazil—must advance the agenda of climate finance and jointly influence other member-nations in defining and implementing inclusive policies. To expedite the pathway to carbon reduction and fulfill the promises of constructing an equitable and sustainable global economic system, the primacy of climate justice in climate finance talks and transactions need to be reviewed and re-established.