Climate change is possibly the single-most urgent challenge facing humanity today. Its impacts—such as extreme weather, rising sea levels, and disruptions to agriculture—are already affecting millions of people, especially in poorer countries.
To fight this crisis, countries need to invest heavily in reducing emissions (greenhouse gases that cause climate change) and adapting to the impacts of climate change that are already underway.
This is where climate finance becomes critical.
The United Nations Framework Convention on Climate Change (UNFCCC) defines climate finance as the financial assistance provided to help developing countries reduce emissions and adapt to climate change.
The money for climate finance comes from a variety of sources: governments, private investors, and international organizations. Its goal is to assist countries that are most affected by climate change, particularly those with limited resources, to both fight and adapt to climate change.
Climate finance is crucial for developing countries and, in today’s world of being interconnected through deep supply chains, the rest of the world. Developing nations may contribute very little to global emissions, but stand to suffer most from the effects of climate change.
For example, many small island nations and countries in Africa and Asia are already facing rising sea levels, droughts, and severe storms. These countries need money to build resilient economies, adapt to climate change, and ensure the safety and livelihoods of their people. Without adequate climate finance, they will struggle to meet these challenges.
Moreover, the idea of common but differentiated responsibilities (CBDR) comes into play here. This means that while all countries should work to combat climate change, wealthier countries have a greater responsibility to provide financial assistance to those who are most vulnerable since they are historically responsible for a larger share of global emissions.
Climate finance has been evolving through important global agreements. For instance, at the Copenhagen Summit in 2009, developed countries committed to providing $30 billion in climate finance between 2010 and 2012.
Later, at the Paris Agreement (2015), countries agreed to mobilize $100 billion annually by 2020, to help developing countries fight climate change and adapt to its impacts. However, this goal was not reached even until 2022.
The Paris Agreement also emphasized the importance of climate finance, since it plays a crucial role in achieving global climate targets, such as limiting global temperature rise to below 1.5°C.
Climate finance flows from various sources, primarily through public finance and private finance:
As per the Delhi-based Centre for Science and Environment, nearly 70% of such financial support so far has come in the form of debt or loans further burdening the poor countries, running counter to the idea of climate finance.
Several major global climate finance funds support countries that are most vulnerable to climate change:
These funds have been crucial for vulnerable countries, although challenges remain in ensuring that funds are distributed efficiently and reach areas of greatest need.
At the global level, climate finance is growing but remains insufficient. In 2021, climate finance flows reached approximately $630 billion, but this is still far below the estimated amount of $1.5 trillion needed to meet climate goals on an annual basis.
This shortfall emphasizes the urgent need for more investment in climate action. The financial pledges made by developed countries have not been met in full, with the $100 billion target only being reached in 2022.
Additionally, a significant portion of the funds has been in the form of loans, which can create financial burdens for developing countries that are already dealing with debt and economic challenges. Grants, which do not need to be repaid, are preferred because they provide developing countries with more flexibility in how they use the funds.
In addition, much of the climate finance has come from public funds, but there is increasing emphasis on attracting private sector investment to fill the gap.
India, as a rapidly developing country, faces its unique challenges in addressing climate change. India’s Nationally Determined Contributions (NDCs), which outline the country’s commitments to reducing emissions, include ambitious goals such as increasing the share of renewable energy and improving energy efficiency. To meet these goals, India will need an estimated $2.5 trillion in climate finance between 2021 and 2030.
India has also called for greater international support to meet these targets, especially from wealthier countries, which are expected to provide financial assistance based on the principles of fairness and equity.
In the ongoing COP29, India has said that climate finance should not be seen as “investment goals” by developed countries, stressing the need to create debt-free climate finance support for the developing and poor countries affected by the climate crisis.
Diya is a research associate at TA. She is a recent graduate in economics.
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