Role of Climate Finance to address Climate Change

Climate change presents the single biggest threat to sustainable development and its widespread, unprecedented impacts disproportionately burden the poorest and most vulnerable communities. As the climate emergency intensifies, the public and private sectors need to unite to address the increasing threat of climate change to limit a global temperature rise to no more than a 1.5-degree Celsius increase, a target which the world is currently nowhere near on track to meet. Stakeholders around the world urgently need to take action and fund solutions to mitigate climate change impacts, pave the way to a low-carbon economy by lowering greenhouse gas emissions, provide greater access to clean energy solutions, and more. Several of the United Nations Sustainable Development Goals (SDGs) aim to address various environmental challenges; however, the UN estimates that we need $3-5 trillion dollars annually to make the SDGs a reality.
Climate finance refers to financial resources and instruments that are used to support action on climate change. Climate finance is critical to addressing climate change because of the large-scale investments that are needed to transition to a low-carbon global economy and to help societies build resilience and adapt to the impacts of climate change. Climate finance can come from different sources: public or private, national or international, bilateral or multilateral. It can employ different instruments such as grants and donations, green bonds, equities, debt swaps, guarantees, and concessional loans. And it can be used for different activities, including mitigation, adaptation, and resilience-building. Some multilateral funds that developing countries can access include the Green Climate Fund (GCF), the Global Environment Facility (GEF), and the Adaptation Fund (AF). These funds were established throughout the years as financial instruments of the United Nations Framework Conventions on Climate Change (UNFCCC) to provide resources to developing countries.
As the effects of climate change are increasingly being felt in all sectors of the economy, public budgets and other financing vehicles are starting to consider climate risk in their investment decisions, further expanding the definition of climate finance. Countries like the Maldives, for example, consider all finance to be climate finance since their entire economy and survival is so dependent on climate resilience. As such, efforts to pivot traditional development budgets to finance climate action are increasing, especially when it comes to climate change adaptation.
Developing countries can access some of their climate finance in the form of grants from the GEF, the GCF, and the AF. Governments and the private sector can also access market-based and concessional loans from financial institutions such as the World Bank, the African Development Bank, and the Inter-American Development Bank, among others. These grants and loans can be used to invest in projects that reduce, absorb, or prevent greenhouse gas (GHG) emissions, such as renewable energy power plants, electric buses, and forest conservation, or projects that build resilience to climate change such as establishing early warning systems, increasing coastal protection, enhancing the resilience of agriculture and food systems, and building infrastructure that can withstand storms and flooding. Moreover, governments, through their budgeting processes, can allocate funding to priority climate actions, such as those set out in their national climate pledges (referred to as Nationality Determined Contribution under the Paris Agreement), or issue sovereign green bonds to fund those projects. Sovereign bonds are loans that governments take from a pool of investors in exchange for regular interest payments over a certain number of years. At the end of this period, when the bond reaches maturity, the government returns the initial investment to the investors.
Governments can also mobilize climate finance from carbon trading and carbon taxes. Through carbon trading, GHG emissions are quantified into carbon credits that can be bought and sold. One tradable carbon credit equals one tonne of carbon dioxide, or the equivalent amount of a different GHG reduced, sequestered, or avoided. Carbon credits can be bought by countries or private companies that want to enhance their GHG emissions reduction efforts. Carbon taxes are typically applied to discourage the use of products and services with big carbon footprints. For instance, a tax can be applied on gasoline at the pump or on electricity generated from fossil fuels. Proceeds from these taxes can be used to invest in renewable energy, forest conservation, and other forms of climate action.
Through their Nationality Determined Contributions (NDC), Long–Term Climate Strategies (LTS), and National Adaptation Plans (NAP), countries have put forward ambitious targets to reduce GHG emissions and increase their resilience to climate change impacts. However, a recent analysis by UNDP shows that finance remains a fundamental barrier to the acceleration of climate action in developing countries. Climate action requires a large amount of investment and many lower- and middle-income nations are simultaneously managing debt distress and multi-dimensional crises. High-income countries with a significant historical contribution to climate change had committed to raising US$100 billion every year by 2020 to fund climate action in lower-income countries. However, this target has not yet been reached and even more funding is required to advance the green transition and enhance resilience in developing countries. But recent studies show that investments in climate action can yield results that dramatically outweigh the upfront costs. A study by the Global Commission on Adaptation found that every $1 invested in five key adaptation areas could yield2-10 dollar in total net benefits.  At the same time, there are significant opportunities for the private sector, with an estimated potential adaptation market of 2 trillion dollars by 2026, according to the World Economic Forum.
Finance will continue to be at the heart of the climate change debate for the foreseeable future. It is dominating all the forums where heads of states meet, including the G7 and G20, as well as through important efforts like the Bridgetown Initiative. The call for major economies to shoulder their fair share of responsibility, particularly in the areas of loss and damage financing, debt restructuring and relief, and adaptation financing is getting louder. As catastrophic climate events are becoming more frequent, the need for substantial financial commitments to support vulnerable nations in their fight against climate change has reached a critical juncture. UNDP remains committed to assisting countries in accessing and effectively using climate finance. By helping nations identify their financial requirements and mobilize resources through innovative mechanisms such as green bonds, carbon markets, climate risk insurance, and debt swaps, UNDP will continue playing a pivotal role in the global effort to combat climate change.
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