Financing to meet adaptation and mitigation objectives
People of conscience need to break their ties with corporations financing the injustice of climate change———-Archbishop Desmond Tutu
Humanity is at crossroads, a moment of great risk and great opportunity. One path leads to unmatched growth and development; the other to great misery and destruction. The increasing impact of global warming reminds us of the urgency to choose the path to growth and development. From heat waves in Europe and forest fires in North America, droughts in Africa and floods in Asia: the previous year saw climate disasters occurred on all continents. The effects of climate change are all around us.
Mitigating this challenge requires a green transition; total departure from fossil fuels that are subject to supply disruptions and volatility, and towards renewables such as wind and solar energy. This however, requires huge financial investments to ensure we get close to the right path. Financing needed for adaptation and mitigation goals are estimated at trillions of US dollars until 2050 but currently, financing is only about 630 billion dollars a year, with just a fraction to developing countries (IMF, 2022). This is of particular concern as emerging and developing economies are in dire need of climate finance. And this underscores why it is so important that developed economies meet or exceed their pledge to provide $100 billion a year in climate finance to developing countries.
Climate finance refers to financial instruments deployed to finance actions that mitigate and adapt to the effects of climate change, including national commitments made by industrialized countries under the UN Framework Convention on Climate Change, private sector and local financing. In a broader scope, it refers to local, national and transnational financing which is drawn from public, private and alternative sources of financing seeking to support mitigation and adaptation action addressing climate change.
The Convention, the Kyoto Protocol and the Paris Agreement call for financial assistance from parties with more financial resources to those that are less endowed and more vulnerable.
The Convention`s financial mechanism
To facilitate financing of climate change, the Convention established a financial mechanism to provide financial resources to developing countries that have joined the Convention. The financial mechanism also serves the Kyoto Protocol and the Paris Agreement.
The Convention states that the operation of the financial mechanism can be entrusted to one or more existing international entities. The Global Environment Facility (GEF) has served as an operating entity of the financial mechanism since the Convention’s entry into force in 1994. At COP 16, in 2010, Parties established the Green Climate Fund (GCF) and in 2011 also designated it as an operating entity of the financial mechanism. The financial mechanism is accountable to the COP, which decides on its policies, programme priorities and eligibility criteria for funding. In addition to providing guidance to the GEF and the GCF, Parties have established two special funds the Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF), both managed by the GEF and the Adaptation Fund (AF) established under the Kyoto Protocol in 2001.
At the Paris Climate Change Conference in 2015, the Parties agreed that the operating entities of the financial mechanism GCD and GEF as well as the SCCF and the LDCF shall serve the Paris Agreement. Regarding the Adaptation Fund serving the Paris Agreement negotiations are underway in the Ad hoc Working Group on the Paris Agreement (APA).
Financing to meet adaptation and mitigation objectives
Climate change is a global challenge and therefore requires coordinated global financial solutions including:
Prioritizing financial investments
Focus on policies that can redirect investment flows away from carbon-intensive projects and towards climate-friendly options. These can crucially include regulation, price signals, and well-targeted subsidies that encourage low-carbon investment while paying attention to each country’s unique fiscal and macroeconomic characteristics.
Capacity building as a “non-negotiable”
Another crucial solution is capacity building. We must strengthen the country’s public financial management and public investments management related to climate projects so that decision-makers can implement the necessary reforms. Countries need the ability to identify, evaluate and select high-quality projects and manage significant financial risks. Lack of high-quality and reliable data, harmonized and consistent climate data standards and taxonomies that can be used to align investments with climate-related goals. This means that capacity building is necessary to strengthen the climate information architecture, which will help develop and deepen the capital market and improve the bankability of projects.
Innovative financing structures can catalyze technical assistance programs to support the creation of new markets for climate finance by developing guidelines, providing training programs for local stakeholders and facilitating the adoption of principles and international best practices in developing markets.
Capacity development can empower policymakers to better identify, appraise, and select good quality projects. And climate-friendly public financial management and public investment management promote accountability, transparency, and more effective spending. Such measures can not only help governments manage potential relevant fiscal risks from the various financing options – they can also give investors greater certainty that their funds are spent effectively and bring in new, interested donors through improved transparency and governance.
Innovative financing mechanisms
This includes a broader investor base and de-risking instruments. Specifically, investors seeking to invest capital in emerging and developing economies must overcome many limitations. These include the high upfront costs and long deadlines associated with climate investments, the lack of liquid markets, currency risk and the scarcity of well-planned and scalable projects. Overcoming these obstacles requires a change of thinking from the public sector, the private sector and multilateral institutions to reform the financial architecture to attract more private financing for climate projects. That mean flexibility, the readiness to supplement the national strategy with a regional strategy if necessary. or take a programmatic approach to implementation in addition to the traditional project-based approach, according to institutional mandates and needs.
Public-private synergies – Blended finance approach
Consider green fixed income funds, which can capture the vast resources of institutional investors using relatively limited public resources. Such funds have great potential. Blended financing can play an important role in attracting public and private investors. The public sector, including national governments and multilateral development bank, could make first-loss investments, raise equity or improve lending. By giving priority to equity debt, development partners and multilateral development banks would also avoid increasing the debt burden of the government sector of developing countries.
To achieve shared climate goals, we need to combine policy reforms, capacity building and financial arrangements. We need unprecedented cooperation and coordination today.
About the Writer
Ebenezer specializes in Development Communication, International Development, Innovative Finance for SMEs and Sustainability.