Climate finance refers to local, national or transnational financing, which may be drawn from public, private and alternative sources of funding, used to finance projects and initiatives that reduce emissions or help countries adapt and respond to the impacts of climate change.[1]

 

At the Copenhagen climate change conference in 2009, governments committed to increase climate finance to USD100 billion per year from public and private sources by 2020. The current value of climate finance investments may be in the region of USD350 billion annually. [2]

A complex set of funding mechanisms has evolved to allocate and administer climate funding. They include: multilateral funds; bilateral climate finance initiatives within donor development institutions; and country-level funds in developing countries, set up to receive funds. Climate finance may come in the form of grants and concessional loans, guarantees and private equity.

Initially climate funding was channelled directly or indirectly through the Global Environment Facility, established following the UN Framework Convention on Climate Change of 1992 in which governments committed to providing ‘new and additional’ climate finance resources. Many of the newer funds are led by consortiums of developed countries, bilateral aid agencies (such as the Norwegian-sponsored Amazon Fund (based on the principle of Payment for Ecosystem Services)) and multilateral development banks, notably the World Bank.

Most mechanisms are financed with public funds but some are financed in part or wholly through innovative mechanisms. The Adaptation Fund, for example, is funded by a levy on international carbon market transactions and Germany’s International Climate Initiative is funded in part through the sale of national tradable emission certificates.

Additional sources of climate finance mooted to help reach the USD100 billion commitment include market levies and taxes and a financial transaction tax.

Examples

Climate finance for resilience. The World Bank has launched the Pilot Program for Climate Resilience (PPCR), which draws funds from the Strategic Climate Fund (SCF) of the Climate Investment Funds (CIF). The PPCR funds technical assistance and investments to integrate climate risk and resilience into development planning and implementation. The PPCR targets low-income and small-island states, offering low-cost finance for investments such as: improving agricultural practices and food security; building climate-resilient water supply and sanitation infrastructure; monitoring and analysing weather data; and conducting feasibility studies for climate-resilient housing in coastal areas.

Synergies between climate adaptation and humanitarian risk factors. Humanitarian, development and climate sources of finance currently operate independently in funding resilience and recovery efforts. However, there are a number of initiatives to explore synergies among humanitarian donors and organisations as well as think tanks and private sector companies. The Moving Energy Initiative, for example brings together London-based policy institute Chatham House, the UK Department for International Development (DFID), the Global Village Energy Partnership (GVEP) and a consortium of other organisations including Practical Action and Norwegian Refugee Council (NRC) to meet energy needs of refugees and internally displaced persons (IDPs) in a manner that reduces both financial and environmental costs.

Carbon offsetting. There are a handful of examples of small-scale investments using funds derived from carbon offset funding from the travel industry. UNHCR’s partnership with atmosfair, a joint initiative between German travel agencies and environmental and development organisations, has pioneered the use of more efficient cook stoves for refugees in Rwanda.

Considerations

Adaptation a low priority. Although climate funding is clearly substantial, finance for adaptation remains relatively low. Climate finance would in principle be primarily applicable to addressing the root causes of vulnerability and building resilience to climate-related risk, which may correspond with adaptation investments. Climate finance flows to developing countries to date however have focused on investing in carbon emission reduction efforts with adaptation falling a distant second priority (around 15%)[3] Disbursement of adaptation funds has been slow – and some of the most vulnerable countries have received little or no funding. For example, Haiti and Zimbabwe, which are both in the top three of the world’s most vulnerable countries according to the Climate Change Vulnerability Index, had received just USD6.6 and USD6.9 million respectively for adaptation from dedicated climate funds by 2012.[4]

Complementarity of investments. Despite the great combined potential of humanitarian, development and climate adaptation finance, there are considerable differences in actors’ approaches, perspectives, objectives and methodologies.[5] There are currently relatively few platforms to facilitate discussions and build synergistic approaches.

[1] See: <http://unfccc.int/focus/climate_finance/items/7001.php#intro>.

[2] Buchner et al., 2013 as cited in Nakhooda, S. Watson, C. and Schalatek, L. (2013) The Global Climate

Finance Architecture, Climate Finance Fundamentals 2, November 2013, Overseas Development Institute.

[3] ODI estimated in 2012 that “Just 15% percent of the financing approved since 2004 to flow from the dedicated climate finance initiatives that we monitor on CFU supports adaptation.” Schalatek, L. Böll, H., Nakhooda, S., Barnard, S., and Caravani, A. (2012) Climate Finance Thematic Briefing: Adaptation Finance, Climate Finance Fundamentals 3, November 2012, Overseas Development Institute.

[4] Ibid.

[5] See: <http://reliefweb.int/sites/reliefweb.int/files/resources/Financing%20Recovery%20for%20Resilience%20Report.pdf>.

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