Climate Finance

At COP29 in Baku, Azerbaijan, climate finance emerged as the central issue, highlighting its importance in addressing global climate challenges.

Climate finance involves mobilizing resources to support mitigation and adaptation actions, particularly in vulnerable developing countries, as mandated by agreements like the Kyoto Protocol and the Paris Agreement.

While developed nations pledged increased financial commitments, actual contributions often fall short of the growing needs, leaving developing nations underfunded and overburdened.

COP29 saw a modest increase in financial targets, but the Global South remains dissatisfied with the insufficient and delayed actions by wealthier nations, underscoring the need for a more equitable and transparent financial framework.

Understanding Climate Finance

Definition and Purpose

Climate finance involves financial resources—whether local, national, or international—sourced from public, private, or alternative means.

These funds are aimed at supporting initiatives that address climate change by focusing on both mitigation and adaptation.

Mitigation requires substantial investments to reduce greenhouse gas emissions, while adaptation demands significant resources to manage the adverse effects of a changing climate.

Global Framework For Climate Finance

The Convention, the Kyoto Protocol, and the Paris Agreement all emphasize the need for wealthier nations to financially assist less affluent and more vulnerable countries.

This approach acknowledges the disparities in nations’ contributions to climate change and their capacity to address its consequences.

Principles Guiding Climate Finance

The principle of “common but differentiated responsibilities and respective capabilities” underpins the framework for climate finance.

According to this principle, developed nations are obligated to provide financial resources to support developing countries in achieving the objectives of the United Nations Framework Convention on Climate Change (UNFCCC).

The Paris Agreement reinforces this obligation while encouraging voluntary contributions from all Parties.

Developed nations are also expected to lead the way in mobilizing funds through diverse channels, including public and private sources, while aligning efforts with the priorities of developing countries.

Mobilizing Resources for Mitigation and AdaptationFor climate finance to be effective, it is crucial to achieve a balance between mitigation and adaptation.

Governments and stakeholders must assess the financial requirements of developing nations and identify strategies for mobilizing these resources.

Efforts should focus on supporting initiatives that align with national strategies and reflect the needs and priorities of climate-vulnerable regions.

Climate Finance Under the Paris Agreement

The Paris Agreement emphasizes making financial flows consistent with pathways toward low-carbon, climate-resilient development.

Assessing progress in the provision and mobilization of resources is a critical component of the global stocktake process under the Agreement.

The Agreement also prioritizes transparency and predictability in the delivery of financial support, ensuring accountability and fostering trust among nations.

Recent Trends in Climate Finance

In recent climate negotiations, adaptation-oriented finance has gained prominence. This focus stems from two key factors: the political challenges of addressing fossil fuel dependency and the strong advocacy of climate-vulnerable nations for resources to mitigate the impacts of climate change.

As global efforts continue, the interplay between adaptation and mitigation financing will remain pivotal in addressing the multifaceted challenges of climate change.

Historical Context: The Evolution Of Climate Finance

The Copenhagen Commitment

The foundation of global climate finance was laid at the 2009 Copenhagen Agreement. Here, developed nations committed to providing $30 billion to support developing countries between 2010 and 2012.

This initiative was further strengthened by a long-term pledge of $100 billion annually, a goal reaffirmed in the Paris Agreement.

Frameworks Supporting Financial Assistance

Key international agreements such as the UN Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement emphasize the responsibility of wealthier nations to offer financial aid to poorer, more vulnerable countries.

These agreements recognize the differing capacities of nations to address and adapt to the challenges of climate change.

The Role of Climate Finance in Mitigation

Addressing climate change effectively requires significant investment in mitigation strategies. Climate finance plays a pivotal role in reducing greenhouse gas emissions by funding large-scale initiatives and technologies aimed at achieving substantial emission cuts.

Provisions Of The Paris Agreement On Climate Finance

The Paris Agreement stands as a pivotal framework in the global effort to combat climate change, emphasizing both accountability and inclusivity in climate finance. Its financial provisions are essential for achieving its overarching goals.

• Leadership by Developed Countries: Developed nations are expected to take the lead in generating climate finance, primarily through public funds, while encouraging contributions from private and other sources.
• Enhanced and Sustained Efforts: The agreement mandates that climate finance contributions must surpass previous commitments, focusing on strategies tailored to individual countries’ needs and circumstances.
• Addressing Developing Countries’ Needs: Climate finance should prioritize the specific needs and priorities of developing nations. This includes assessing their financial requirements and identifying effective strategies to mobilize necessary resources.
• Balancing Adaptation and Mitigation: Financial resources should be allocated equitably between adaptation measures and mitigation efforts to ensure a comprehensive approach to climate action.
• Aligning Finance with Climate Goals: The ultimate objective is to direct global financial flows toward low-emission, climate-resilient development pathways.
• Global Stocktake and Progress Assessment: Periodic assessments, as part of the Agreement’s global stocktake, will evaluate progress in providing and mobilizing financial support to ensure commitments are met.
• Transparency and Predictability: The Agreement underscores the importance of clear, transparent, and predictable financial support to build trust and accountability among all parties.

What Is The Financial Mechanism?

The financial mechanism was established under the UN Framework Convention on Climate Change (UNFCCC) to facilitate the flow of financial resources to developing countries.

It plays a critical role in implementing the Convention, the Kyoto Protocol, and the Paris Agreement.

The mechanism operates through one or more international entities. Since the Convention’s inception in 1994, the Global Environment Facility (GEF) has been an operating entity. In 2010, during COP 16, the Green Climate Fund (GCF) was established and designated as another operating entity in 2011.

The financial mechanism is directly accountable to the Conference of the Parties (COP), which oversees its policies, program priorities, and funding eligibility criteria.

Other Funds supporting climate action include Special Climate Change Fund (SCCF), Least Developed Countries Fund (LDCF), Adaptation Fund (AF).

Funds And Financial Entities

Global Environment Facility

The Global Environment Facility (GEF) was established just before the 1992 Rio Earth Summit to drive global action on environmental challenges.

Over the years, it has evolved into a key player, fostering strategic partnerships and investments to address some of the planet’s most pressing environmental issues.

The GEF operates as a collaborative network of 18 agencies, including United Nations bodies, multilateral development banks, national organizations, and international NGOs.

This partnership spans 183 countries and connects with an extensive network of civil society organizations.

In addition to governmental and non-governmental partners, the GEF works closely with the private sector worldwide.

Its activities are informed by inputs from an independent evaluation office and guidance from a highly regarded scientific panel.

A Financial Mechanism for Global Conventions

The GEF serves as the financial mechanism for five major international environmental conventions:

• Minamata Convention on Mercury
• Stockholm Convention on Persistent Organic Pollutants (POPs)
• United Nations Convention on Biological Diversity (UNCBD)
• United Nations Convention to Combat Desertification (UNCCD)
• United Nations Framework Convention on Climate Change (UNFCCC)

An Innovator and Catalyst: Beyond funding, the GEF acts as an innovator and catalyst for multi-stakeholder initiatives aimed at protecting ecosystems and promoting sustainable development. Its initiatives include:

• Preserving fragile ecosystems on land and in oceans.
• Supporting greener and more sustainable urban development.
• Enhancing food security through eco-friendly practices.
• Promoting clean energy solutions to foster resilience to climate change.

For every $1 invested by the GEF, it mobilizes an additional $5.2 in co-financing, amplifying its impact on global environmental goals.

Green Climate Fund

The Green Climate Fund (GCF) was created in 2010 by 194 countries under the UN Framework Convention on Climate Change (UNFCCC). As an operating entity of the Convention’s financial mechanism, it is headquartered in the Republic of Korea and governed by a 24-member Board representing nations. The Fund operates under the guidance of the Conference of the Parties (COP) to the UNFCCC.

Mission and Focus

The GCF seeks to drive a transformative shift in the global response to climate change by funding projects and programs that promote low-emission and climate-resilient development. Its primary focus is on supporting the most vulnerable societies, including:

• Least Developed Countries (LDCs)
• Small Island Developing States (SIDS)
• African Nations

Strategic Areas of Investment

To achieve its goals, the GCF invests across four critical transitions:

• Built Environment: Promoting sustainable urban and infrastructure development.
• Energy and Industry: Advancing clean and renewable energy solutions.
• Human Security, Livelihoods, and Wellbeing: Enhancing resilience and adaptive capacity for vulnerable populations.
• Land-Use, Forests, and Ecosystems: Preserving natural resources and promoting sustainable practices.

A Four-Pronged Approach to Climate Action

1. Transformational Planning and Programming: The GCF supports comprehensive and integrated strategies that align mitigation, adaptation, and sustainable development goals. This includes fostering policies and planning frameworks that maximize co-benefits.
2. Catalyzing Climate Innovation: The Fund invests in innovative technologies, business models, and practices to establish proof of concept. These investments aim to inspire scalable solutions for global climate challenges.
3. De-Risking Investment for Scaled Finance: By leveraging public resources, the GCF improves the risk-reward profile of climate-resilient investments. This approach attracts private sector funding, particularly for adaptation projects, nature-based solutions, and initiatives in LDCs and SIDS.
4. Mainstreaming Climate Risks and Opportunities: The GCF integrates climate considerations into financial decision-making by promoting new methodologies, standards, and practices. This alignment of finance with sustainable development fosters a shift in norms and values across industries.

The Special Climate Change Fund (SCCF)

The Special Climate Change Fund (SCCF) was created in 2001 under the UN Framework Convention on Climate Change (UNFCCC). Its primary aim is to finance projects in key areas, including:

• Adaptation
• Technology transfer and capacity building
• Energy, transport, industry, agriculture, forestry, and waste management
• Economic diversification

The SCCF is intended to complement other financial mechanisms, ensuring a more comprehensive approach to implementing the Convention’s objectives.

Operational Framework: The Global Environment Facility (GEF), as an operating entity of the Convention’s financial mechanism, is entrusted with managing the SCCF. In 2004, the GEF Council approved a programming document that serves as the operational guide for funding activities under the SCCF. This document ensures that projects align with the SCCF’s goals and priorities.

Least Developed Countries (LDC) Fund

The Least Developed Countries Fund (LDCF) was created to support a dedicated work program assisting Least Developed Country Parties (LDCs). Its primary focus includes the preparation and implementation of National Adaptation Programmes of Action (NAPAs).

• Management by the Global Environment Facility (GEF): The Global Environment Facility (GEF), an operating entity of the Financial Mechanism of the Convention, was entrusted with the management of the LDCF through decision 27/CP.7.
• Operationalization by the COP: During its eleventh session, the Conference of the Parties (COP) established provisions to operationalize the LDCF. These included guidance on priority areas, full-cost funding, and a co-financing scale to support the implementation of NAPAs.

Adaptation Fund

• Establishment of the Adaptation Fund: The Adaptation Fund was created in 2001 to support specific adaptation initiatives and programs in developing countries that are especially susceptible to the negative impacts of climate change. These efforts focus on countries that are Parties to the Kyoto Protocol.
• Transition to the Paris Agreement: In accordance with decisions 13/CMA.1 and 1/CMP.14, the Adaptation Fund began serving the Paris Agreement as of January 1, 2019. This shift included handling all matters related to the Paris Agreement. Furthermore, once proceeds under Article 6, paragraph 4 of the Paris Agreement are available, the Fund will cease its role under the Kyoto Protocol.
• Initial and Ongoing Funding Sources: The Fund was originally financed through a two percent share of certified emission reductions (CERs) generated by the clean development mechanism (CDM) under the Kyoto Protocol. Additional funding sources also contributed to its resources.

Over time, voluntary contributions have played an increasingly significant role in the Fund’s financing. As of June 30, 2024, the Adaptation Fund Trust Fund had received USD 215.83 million from CER monetization, USD 1,489.88 million from voluntary contributions, and USD 121.43 million from investment income earned on the Fund’s balance.

Fund For Responding To Loss And Damage (FRLD)

Through decisions 2/CP.27 and 2/CMA.4, the Conference of the Parties (COP) and the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement (CMA) introduced new funding arrangements.

These measures aim to support developing countries that are particularly vulnerable to the impacts of climate change in addressing loss and damage.

A key outcome of these decisions was the creation of a dedicated fund to help these nations manage both economic and non-economic loss and damage caused by adverse climate effects, including extreme weather and slow-onset events.

At their twenty-eighth and fifth sessions, the COP and CMA operationalized the Fund for Responding to Loss and Damage (FRLD). This entity was established as part of the Financial Mechanism of the Convention and will also serve the Paris Agreement. The FRLD will operate under the guidance of, and remain accountable to, the COP and CMA.

The Funding Gap

Wealthy nations have consistently failed to meet their financial commitments for climate adaptation. The funds pledged remain significantly lower than the actual needs, and even these commitments are frequently underdelivered.

In 2009, a goal of $100 billion per year was set as an initial target, with the aim of increasing it by 2025. At COP29, this target was revised upward to $300 billion annually. However, the estimated need ranges from $300 billion to a staggering $2 trillion each year.

Current funding levels fall drastically short of these requirements and are often provided as loans rather than grants, exacerbating the debt burden on developing countries.

This stark shortfall highlights that the financial resources delivered so far amount to only a fraction—less than one-tenth—of what is urgently required to address the escalating climate crisis.

Who Is Liable To Pay?

The debate over who should bear the financial burden of climate change—referred to as the “fair share” of contributions—remains contentious. Under current UN classifications, only 43 nations are designated as “developed,” excluding major economies like China, India, and the UAE.

While these nations actively invest in climate-related projects—China, for instance, spends billions in developing countries—they seek to retain their “developing” status under UN definitions.

This status allows their contributions to remain voluntary while ensuring their eligibility for climate investments.

Developed nations, however, argue that the significant carbon footprints of these countries necessitate a greater share of emissions reductions and climate finance contributions.

What Developing Countries Demand from Climate Finance

Key Stakeholders and Coalitions

Developing countries, including China, India, and the Group of 77 (G77), align with various coalitions such as:

• Like-Minded Developing Countries (LMDC)
• Least Developed Countries (LDC)
• Small Island Developing States (SIDS)

Despite differences, these groups broadly agree that developed nations should shoulder most of the climate finance burden.

Financial Expectations: Developing nations seek comprehensive funding for:

• Meeting NDCs: Support to achieve Nationally Determined Contributions (NDCs), which outline voluntary emission reduction targets.
• Adaptation and Resilience: Building defenses against current and future climate threats.
• Loss and Damage Compensation: Addressing climate-related harm already experienced.
• Guiding Principles: Contributions should reflect the role of developed nations in historical emissions.
• Economic Capacity: Payments should consider the wealth disparity between nations, measured by per capita GDP.

Developed Countries’ Position On Climate Finance

Criticism of Demands

Developed nations, led by the EU, view the financial expectations of developing countries as overly ambitious and unrealistic. They advocate for a shared responsibility, urging all nations to contribute to raising $1.3 trillion annually by 2035.

Funding Commitments at COP29

In COP29’s final hours, negotiators set a target of $300 billion per year by 2035, exclusively from wealthy nations like the U.S., EU, and Japan. This figure reflects a $200 billion increase from previous commitments.

Despite this, achieving the target will be challenging, particularly with potential reductions in U.S. funding. A broader “all actors” approach, involving private finance, NGOs, and other nations, was proposed to help meet the $1.3 trillion annual goal.

Outcomes At COP29

The outcomes of COP29 highlighted the disconnect between the financial needs of developing nations and the commitments made by developed countries:

• $300 Billion Goal: While an increase, it remains far short of the estimated $1.3 trillion annual requirement demanded by developing nations.
• “Baku to Belém Roadmap”: A framework for continued negotiations leading to COP30 in Belém, Brazil.

For the Global North, COP29 was an opportunity to rebuild trust and lead the fight against climate change. Instead, it delivered inadequate and delayed commitments, leaving developing nations with insufficient resources to combat escalating challenges.

The $300 billion target underscores a missed chance for developed nations to take meaningful responsibility for their historical emissions, further deepening the divide between the Global North and South.