In Brief

Why Climate Finance Is Critical for Accelerating Global Action

To combat climate change, governments and institutions should increase their funding to poorer nations to pay for adaptation and mitigation measures.

Efforts to address climate change can cost billions of dollars, often making them out of reach for poorer nations, which have contributed far fewer greenhouse gas emissions than developed countries. As a result, financing has emerged as a potential flash-point issue this year as global climate discussions gain momentum.

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Many less developed countries and small island nations lack the financial resources to prepare for and cope with the impacts of climate change—including deeper droughts, more intense storms, greater heat extremes, bigger wildfires, and rising sea levels—and to transition to clean energy. The UN Environment Program estimates that developing countries could need $300 billion per year by 2030 to cope with climate change.

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Climate finance—funding from private or public sources to pay for adaptation and mitigation measures—is therefore crucial for combating the climate crisis. Access to such funding will help developing countries transition to clean energy and invest in reducing climate risks. Climate finance will likely emerge as a stronger appeal, at least among developing nations, in November during the twenty-sixth Conference of the Parties (COP26) in Glasgow, Scotland.

What’s the rationale for mobilizing climate finance?

In 1992, when nations adopted the UN Framework Convention on Climate Change (UNFCCC), the first international agreement to address climate change, they included the principle of “common but differentiated responsibilities and respective capabilities.” This principle recognizes that developed nations, which have likely contributed more to the accumulation of greenhouse gases because they industrialized earlier, should play a larger role in solving the climate crisis and helping the countries that contributed less to its creation.

How much has been pledged so far?

In 2009, during COP15, wealthier countries pledged that by 2020, they would mobilize $100 billion per year in financing from a variety of sources, including governments, multilateral institutions, and private entities, to assist less developed nations in transitioning to green energy and adapting to worsening climate impacts. So far, however, that promise has gone unfulfilled. According to estimates by the Organization for Economic Cooperation and Development, financing was still $20 billion short of the goal in 2018.

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Moreover, about 70 percent of funding between 2013 and 2018 went to mitigation efforts, while only 21 percent went to adaptation, the most pressing need for developing nations. Although no country is immune to climate impacts, developing countries face disproportionately severe risks from climate change for a host of reasons, including their geographical locations in some instances.

How does climate finance plunge developing countries into debt?

Climate finance has increasingly come in the form of loans rather than grants, posing a daunting hurdle for developing countries. In 2018, loans made up nearly three-quarters of the $78.9 billion of overall climate funding mobilized by developed nations pursuant to the 2009 promise. And borrowing often comes at a high cost. That same year, more than sixty countries could only access loan capital at interest rates higher than 18 percent for projects lasting longer than two years. The precarious financing options for developing nations mean that the revolution in green finance has excluded some of the world’s most vulnerable countries.

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A girl stands on a bench as sea water flows into her home.
Indonesia is one of many countries that is threatened by rising sea levels. Willy Kurniawan/Reuters

The costs of borrowing could soar even higher given the poor financial outlooks for countries at the highest risks of suffering climate impacts. For example, index provider FTSE Russell estimates that, with unmitigated climate change, Malaysia could suffer a projected loss in gross domestic product (GDP) per capita of over 31 percent in 2050 due to the severe impacts wrought by global warming. 

How much has the United States contributed?

Between 2010 and 2015, the United States mobilized a total of $15.6 billion in climate finance for adaptation and mitigation efforts. In 2014, President Barack Obama pledged that the United States would contribute $3 billion to the UN Green Climate Fund (GCF), the largest global fund dedicated to helping developing nations respond to climate change by investing in low-emission and climate-resilient initiatives. To date, the United States has only paid $1 billion to the GCF.

Just before President Joe Biden’s climate summit in April, the White House issued its international climate finance plan, promising to triple its financing of climate adaptation to $5.7 billion annually by 2024. Although the plan pledged to work with development banks to push for increased climate finance targets and acknowledged that “U.S. government agencies must do more to improve the quantity and quality of financing for adaptation and resilience,” many officials in developing countries expressed concern about the adequacy of funding.  

Earlier in April, Biden unveiled his administration’s fiscal year 2022 budget proposal [PDF], which allocates $1.2 billion to the GCF to serve as a down payment in honoring Obama’s outstanding pledge. This proposal was also criticized for falling short.

What’s next?

Without additional funding, rumblings over climate finance could culminate in a roar when talks resume in Glasgow. Alok Sharma, the president-designate for COP26, has said that to build trust for the upcoming conference, the United Kingdom and other countries “must deliver for those at the front line of climate change.” Sharma has identified priorities for COP26 that include facilitation of “a significant increase in the scale of adaptation finance” and “delivering on the $100 billion mobilization goal.”

If developing countries lose faith in the developed world’s willingness to assist, this distrust could block progress at COP26. Adequate climate finance will be vital for global efforts to combat the climate crisis. Failure to deliver on funding to reduce emissions and promote adaptation could mean global warming will move beyond safe thresholds, forcing every country to contend with a hotter, more volatile planet.

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