Although no unique definition of climate finance is internationally adopted so far, it is agreed that climate finance refers to local, national or transnational financing, which may be drawn from public, private and alternative sources of financing. These financial resources are intended for covering the costs of transitioning to a low-carbon global economy and to adapt to, or build resilience against, current and future climate change impacts.
The fifth report of the Intergovernmental Panel on Climate Change (IPCC AR5) states that without ambitious and immediate actions intended for controlling global warming less than 2°C and to strengthen adaptation strategies, costs will increase massively in the future.
Indeed, climate finance is critical to addressing climate change in both mitigation and adaptation aspects. For mitigation, large-scale investments are required to significantly reduce emissions, notably in sectors that emit large quantities of greenhouse gases. Significant financial resources are similarly required to allow countries to adapt to the adverse effects and reduce the impacts of climate change.
The United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, the agreements and follow-up decisions adopted by the Conference of the Parties (COP) have developed some of the key principles governing the financial interactions between developing countries and developed countries.
Thereby, climate finance is particularly based on the principles of transparency and accountability, especially during the administration and governance phase, which comes after the mobilization phase and before the disbursement. Those principles will help to set-up a trust relationships between partners in developed countries and those ones in developing countries, and improve the effectiveness of funding.
The responsibility is commonly shared to the extent that developing countries need to know that financial resources are predictable, sustainable, and that the channels used allow them to utilize the resources directly without difficulty, wheras for developed countries, it is important that developing countries demonstrate their ability to effectively receive and utilize the resources. In addition, there needs to be full transparency in the way the resources are used for mitigation and adaptation activities. The effective Measurement, Reporting and Verification (MRV) of climate finance is key to building trust between the involved actors.
Climate finance involves the cooperation of multiple actors, starting by developed countries via public and private actors, to developing countries.. This concept is also in accordance with the principle of common but differentiated responsibility and respective capabilities set out in the UNFCCC, which states that developed country Parties (Annex II Parties) have to provide financial resources to assist developing country Parties in implementing the objectives of the UNFCCC.
Public actors drive the global climate finance system by reducing the costs and risks of climate investments, strengthening knowledge and technical capacity, and building the track record needed to enhance confidence in such investments.
Private actors, who range from single households to multinational corporations and their intermediaries, hold the resources to drive the shift towards low-carbon and climate-resilient growth.
Simplified landscape of International Climate Finance and relevant actors (Source: WRI)
The current challenge is to increase financial contributions with the objective of mobilizing $ 100 billion per year by 2020, which is a very challenging target. This challenge is the culmination of several decisions. The mobilization of $ 100 billion per year by 2020 was first integrated in the Copenhagen Accord of 2009 (COP15), which was confirmed by the Cancun Agreements (COP16, 2010). Thereby, developed countries have pledged US $ 30 billion between 2010 and 2012 (considered as Fast Start Finance). Since the end of this period, contributor’s countries announced that they have exceeded this target. Even if the medium-term financing volumes remain uncertain, developed countries have nevertheless reiterated their commitment to mobilize US $ 100 billion of public and private financing per year by 2020, and thanks to the Paris Agreements, they agreed to continue mobilizing finance at this level until 2025.