Climate Finance: Meaning, Need and Challenges – Explained, pointwise

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At the opening of the COP27 of the United Nations Framework Convention on Climate Change (UNFCCC), former Vice President of the US and Environmentalist, Mr. Al Gore remarked that, “We are not doing enough“. He was referring to the renewed focus on exploitation of fossil fuels and the lack of flow of Climate Finance (money) to the developing countries to enable them to adapt to the Climate Change. Developed nations at COP15 (Copegnhagen, Denmark) in 2009 had pledged US$ 100 billion in assistance each year. However, they have failed to fulfil the pledge with the funding falling short of the target. Developing nations, including India, have voiced their concerns in COP27 for a new global climate finance target by 2024 (known as the New Collective Quantified Goal on Climate Finance (NCQG)). Developing countries argue that the magnitude of climate finance should be in trillions as the costs of addressing and adapting to climate change have grown. The differences between developed and developing nations has made Climate Finance as one of the most contentious issue of climate negotiations.

What is the meaning of Climate Finance?

According to UNFCCC – Climate finance refers to “local, national or transnational financing, drawn from public, private and alternative sources of financing, that seeks to support mitigation and adaptation actions that will address climate change“.

In simpler words, climate finance relates to the money which needs to be spent on the activities (like renewable energy generation) which will contribute to slowing down climate change and help the world to reach the target of limiting global warming to an increase of 1.5°C above pre-industrial levels.

Under Article 3 of the UNFCCC, developed countries committed to provide funding for the “agreed full incremental costs” of climate change in developing countries, meaning the additional costs of transforming fossil fuel-dependent economic growth strategies into low-emission climate-resilient development pathways.

The Convention, the Kyoto Protocol and other follow-up agreements and decisions by the Conference of the Parties (COP) have laid out some of the key principles relevant to the financial interaction between developed and developing Other important principles, which can be instructive for a climate finance governance framework, stem from Parties’ existing human rights obligations or a larger body of environmental law outside of the UNFCCC (such as the Rio Declaration and follow-up outcomes).

The Copenhagen Accord commits “developed countries to a goal of mobilising jointly USD 100 billion a year by 2020 to address the needs of developing countries”. This financing is
intended to be balanced between climate change mitigation and adaptation and will come from a wide variety of sources – including public and private, bilateral and multilateral, and alternative and innovative sources of financ

What is the need for Climate Finance?

Climate Change is a big threat. IPCC reports have pointed out the evidence of climate change and its catastrophic outcomes. The world is already experiencing rising average temperatures, shifts in the seasons and an increasing frequency of extreme weather events along with the slow onset events. Both adaptation and mitigation measures (climate action) are required to address the climate change and limit the rise to 1.5°C above pre-industrial levels.

Read More: The IPCC Sixth Assessment Report (Part 2) – Explained, pointwise

Mitigation deals with reducing/curbing Greenhouse Gas (GHG) emissions and is mostly identified with renewable energy and energy efficiency. Adaptation refers to taking preemptive action to protect communities from the consequences of climate change. Adaptation includes adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts.

Both mitigation and adaptation involve significant costs (e.g., shift to Electric Vehicles requires investments in battery/charging ecosystem). Developing countries lack the resources to undertake climate action.

Moreover, the climate change is due to historic GHG emissions contributed by the developed nations. Their societies enjoy better lifestyle today at the cost of historic emissions. Hence, they have a responsibility to provide assistance to developing nations to undertake climate action while also allowing for development of their societies.

Impacts of Climate Change are not limited to particular region. In fact, developing countries are more vulnerable. Addressing climate change requires an urgent, comprehensive and collective global response. The longer climate action efforts are put off, the more difficult and expensive it would be to address climate change.

Read More: Climate Reparation: Loss and Damage – Explained, pointwise

The New Climate Economy Report, issued in 2018, found that bold climate action could yield a direct economic gain of US$26 trillion through to 2030 compared with business-as-usual—a conservative estimate

What are the frameworks and conventions associated with Climate Finance?

United Nations Framework Convention on Climate Change (UNFCCC): Under the UNFCCC, developed countries agreed to support climate change activities in developing countries by providing financial support for action on climate change, above and beyond any financial assistance they already provide to these countries. A system of grants and loans has been set up through the Convention and is managed by the Global Environment Facility.

Kyoto Protocol: The Kyoto Protocol laid the groundwork for the Adaptation fund to “facilitate the development and deployment of technologies that can help increase resilience to the impacts of climate change”.

Paris Agreement: In 2015, the Parties to the UNFCCC reached an agreement to accelerate and intensify the actions and investments needed for a sustainable low carbon future. The agreement aims to make finance flows consistent with a low GHG emissions and climate-resilient pathway.

What are the current mechanisms for Climate Finance?

Several financial mechanisms to address climate change are currently in place, including the following:

Global Environment Facility (GEF) was established by UNFCCC to operate the financial mechanism under the Convention on an on-going basis, subject to review every four years to provide funds to developing countries.

Special Climate Change Fund (SCCF) was created in 2001 to complement other funding mechanisms to finance projects relating to: (a) capacity-building; (b) adaptation; (c) Technology Transfer; (d) Climate change mitigation and economic diversification for countries highly dependent on income from fossil

Least Developed Countries Fund (LDCF) is intended to support a special work programme to assist the LDCs.

Clean Development Mechanism (CDM) allows a developed country with an emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets.

Adaptation Fund became operational with the first commitment period of the Kyoto Protocol in 2008 to finance practical adaptation projects and programmes in developing countries and support capacity-building activities.

Climate Investment Fund (CIF) was established in 2008 by several multilateral development banks. The CIF has balanced and equitable governance with equal representation from developed and developing countries. It includes: (a) Clean Technology Fund: Finances transfer of low carbon technologies; (b) Strategic Climate Fund: Targeted programs to pilot new approaches and improvements.

Community Development Carbon Fund provides carbon reduction financing to small scale projects in the poorer rural areas of the developing world. The Fund is a public/private initiative designed in cooperation with the International Emissions Trading Association and the UNFCCC. It became operational in March 2003.

The World Bank and the International Finance Corporation have also developed carbon funds with (co-)funding by States. A number of nationally-based financing instruments also exist, including: the Carbon Trust in United Kingdom, the Green Financing in the Netherlands, and the Energy for Rural Transformation in Uganda.

What are the challenges associated with Climate Finance?

Funding Biases: Despite the existence of various financing sources, there has been an inherent funding bias (more than 80%) in favour of climate-change mitigation activities. Adaptation measures remain under-funded. This can be attributed to: (a) Results from mitigation investment are perceptible in the short run, g. returns on investments in energy efficiency or in renewable energy can be perceived through the financial cost savings, as well as from the estimable break-even periods. The same is not true for adaptation projects. For instance, returns on investment in cyclone-resistant structures might not be perceptible if cyclones do not occur; (b) Adaptation projects find less traction amongst funding agencies because of the “public goods” nature of such projects. The private sector does not consider financing “public goods” as viable investments.

Missed Target: According to an expert report prepared at the request of the UN Secretary-General, the US$ 100 billion target is not being met (available data for 2018 is US$ 79 billion), even though climate finance is on an “upward ” trajectory. Moreover, the annual US$ 100 billion commitment, “is a floor and not a ceiling” for climate finance, according to the UN.

Gap in Finance, Low Target: The UN Environment Programme (UNEP) estimates that adaptation costs alone faced by developing countries will be in a range of US$ 140-300 billion per year by 2030, and US$ 280-500 billion annually by 2050. IPCC estimates that US$ 1.6–3.8 trillion is required annually to avoid warming exceeding 1.5°C. In this context, the target of US$ 100 billion per year is very low.

Pandemic and its economic effects: The Climate Policy Initiative (CPI), a non-profit research group based in San Francisco, California, warns that the pandemic and its economic effects have put an emphasis on spending in areas such as public health (developed nations spent trillions to deal with the COVID-19 pandemic), making the mid-to-long-term prospects of climate finance uncertain.

What should be done going ahead?

Climate finance has to be made predictable and assured. The developed countries should own up their responsibility and provide enhanced funding for adaptation.

In addition to enhanced support, processes and mechanisms must be developed to ensure transparency in funding (e.g., to check greenwashing) and proper use of funds (to prevent diversion). Proper auditing and reporting mechanisms can ensure transparency. National Budgets can also have separate line items to provide clarity on funding receipts and usage.

Climate Financing must be guided by principle of equity. The focus should be on providing assistance to the poor and the most vulnerable nations while ensuring development to raise living standards.

Gender aspects should be given due consideration, as women remain disproportionately affected by climate change. In this context, a framework has been suggested by a UK-based think tank.

Framework for Climate Finance UPSC

Source: Climate Finance should be based on principles of transparency, accountability, adequacy, equitable representation and gender equality at each stage (mobilization, governance, allocation and disbursement, implementation).


Climate Finance so far has remained an unfulfilled promise. As Al Gore emphasised, it is time to realize that the window to act to address climate change is getting shortened and developed countries are “not doing enough”. Climate Finance is the most potent tool to mitigate and adapt to effects of climate change. The faster the consensus on climate finance is reached, the better. In this context, all levers, public and private should be mobilized to meet the enhanced financing target.

Syllabus: GS III, Conservation, Environment pollution and degradation

Source: The Hindu, UNFCCC, UN, ORF,

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