This is the first installment of our blog series, Climate Finance FAQs. The series explores the often nebulous world of climate finance, providing clarity on some of the key terms and current issues. Read more posts in this series.
Surprising as it may sound, there is no standard definition of climate finance. In fact, there are many differing views on what type of funding constitutes climate finance, how it should be delivered, and how much money developing nations will need to mitigate climate change and adapt to its impacts. This vortex of information can be confusing to navigate. Here, we'll do our best to break down all of the components that define “climate finance.”
Defining Climate Finance: Broadly to Narrowly
In its broadest interpretation, climate finance refers to the flow of funds toward activities that reduce greenhouse gas emissions or help society adapt to climate change’s impacts. It is the totality of flows directed to climate change projects—the same way that “infrastructure finance” refers to the financing of infrastructure, or “consumer finance” refers to providing credit for purchases of big-ticket household items.
The term is most frequently used in the context of international political negotiations on climate change. In this context, climate finance—or international climate finance—is used to describe financial flows from developed to developing countries for climate change mitigation/adaptation activities, like building solar power plants or walls to protect from sea level rise. This interpretation builds off the premise that developed countries have an obligation to help developing countries transform their economies to become less carbon-intensive and more resilient to climate change.
The private sector is a crucial partner in advancing sustainable development, and bilateral aid agencies are grappling with ways to learn from and leverage the activities of companies and markets. As the worlds of business and of aid increasingly intersect—and as development budgets are reined in even as demands on them grow—the pressure is to do more in partnership with the private sector. The real challenge, though, is to do better.
This was the headline message from a recent roundtable discussion with representatives from nine bilateral donor agencies and invitees from the private sector, co-organized by WRI and the International Institute for Environment and Development (IIED) in London (see notes from the roundtable).
Both sides desire a strengthened relationship. Donor agencies see the private sector as an indispensable partner for improving the effectiveness and efficiency of aid. Agencies are looking for important sources of ideas, technology, and financing to scale up development solutions.
One example is the Africa Enterprise Challenge Fund (AECF), which is funded by the Australian, British, Danish, Dutch, and Swedish aid agencies. AECF is improving livelihoods of poor people in rural Africa by supporting innovation and new business models to help small-scale farmers adapt to climate change and promote investment in the generation of low-cost, clean, renewable energy.
Private sector actors seek clearer policy signals and more consistent support from donor agencies, particularly in understanding and navigating local politics. They also seek opportunities to develop new products and new markets, benefiting from the “de-risking” role that the public sector can play.
Now is a critically important time for the world to focus on climate finance. Developing nations—those least responsible for causing global warming but most vulnerable to its impacts—need funding to adopt clean energy, protect infrastructure from sea level rise, and engage in other adaptation and mitigation strategies. But these activities are costly—the world will need to figure out how to fund them now in order to protect countries from future climate change.
The problem is that it’s hard to draw attention to a topic that’s difficult to understand. The issue of climate finance is decidedly complex. Several entities--think-tanks, banks and other financial institutions, international institutions, governments, and public sector agencies--are involved in myriad activities related to climate finance. Understanding how they operate, interact, and contribute can be confusing. Even the vocabulary that defines climate finance can be inconsistent, abstract, and nebulous at times. These complexities make climate finance an issue that’s hard for people--even experts, sometimes --to wrap their heads around.
Introducing the Climate Finance FAQs Series
That’s where WRI’s new blog series, Climate Finance FAQs, comes in. Our experts will attempt to shed light on basic climate finance issues through a series of blog posts. By explaining these topics in plain language, we can make climate finance more accessible--and hopefully, draw broader attention to the pressing issue of how to pay for climate change mitigation and adaptation.
UPDATE 4/11/13: After this blog post was published, the OECD released updated figures for 2010 and 2011. The data still shows a decrease in commitments for adaptation, mitigation, and climate finance, as this blog post states. However, adaptation expenditures were 3 percent higher in 2011 than in 2010, as opposed to unchanged. (View updated figures.) The changes in the numbers are a result of donors entering new data for previous years or updating their old data. Preliminary data for 2012 shows that aid to developing countries continued to fall. Detailed figures for 2012 will be released in June 2013.
At the 2009 U.N. climate change conference in Copenhagen, developed nations committed to provide a collective $100 billion per year by 2020 to help developing countries mitigate greenhouse gas emissions and adapt to climate change’s impacts. Recently, the Organization for Economic Co-Operation and Development (OECD) released some surprising new data on this pledge. The figures indicate that developed nations’ recent climate finance contributions have fallen rather than risen toward the level of their 2020 commitment.
A Look at the New OECD Data
The OECD is a consortium of 34 wealthy countries. Among other joint initiatives, it provides a platform to monitor and share statistics on aid flows and climate finance contributed by its members. Most OECD members report both their climate finance expenditures and commitments using the “Rio Markers” (see text box), and the OECD secretariat periodically makes these numbers public. OECD members’ climate finance contributions represent a significant portion of the collective $100 billion commitment, so the numbers reported by the OECD give a good indication of developments in the climate finance field.
Surprisingly, new OECD numbers show that while adaptation expenditures in 2011 remained the same as in 2010, expenditures for mitigation activities decreased. Plus, the total commitment for climate finance decreased from $23 billion in 2010 to $17 billion in 2011.
While a “commitment” refers to the total amount of money a country will spend on an adaptation/mitigation project over a multi-year period—which is reported at the beginning of a project—an “expenditure” refers to the amount a country spends in a particular year on adaptation/mitigation activities. In January 2013, the OECD updated its data for 2011. It is difficult, of course, to predict or analyze trends based on only two years of data (the only data that’s currently available on OECD climate finance commitments). But given developed nations’ agreement to scale up climate finance significantly by 2020, this decrease is surprising—and could be concerning.
Research shows that developing countries will need about $531 billion of additional investments in clean energy technologies each year in order to limit global temperature rise to 2° C above pre-industrial levels, thus preventing climate change’s worst impacts. While developed countries have pledged to provide $100 billion of climate finance per year, this amount is well below what’s needed to help developing nations mitigate and adapt to climate change.
So how can countries bridge this funding gap? The answer lies in part on how well developing countries implement “readiness” activities, as well how effectively developed nations and international institutions like the Green Climate Fund (GCF) can mobilize finance to support them.
The Need for Readiness
To attract investments on the scale required, developing country governments must provide an attractive investment climate—one that encourages public and private sector investors to put their money into climate-friendly projects like solar and wind energy. On their end, developed countries need to offer financial and technical support for “readiness” activities that create the right conditions for said investments. Readiness includes any activity that makes a country better positioned to attract investments in climate-friendly projects or technologies. A few examples include: developing a policy to promote energy efficiency in industry; passing a law that gives a new or existing institution the mandate to promote renewable energy; conducting an assessment of a country’s wind energy resources; or strengthening a bank’s capacity to lend to small businesses in low-carbon sectors. International institutions such as the GCF can play a big role in supporting readiness activities, thereby helping developing nations attract the investments that will help them transition onto a low-carbon, climate-resilient development path.
In a little more than one generation—by the time your grade-schoolers will be seeing their own kids off to school—our planet will be home to 9 billion people. This will create an unprecedented demand for water, food, and energy--and stress the supporting infrastructure required for life in the 21st century. How are we to meet this demand while respecting planetary boundaries? And importantly, how will we pay for it?
A recent publication by the Green Growth Action Alliance (G2A2), aims to provide some answers. WRI and others provided guidance, case studies, research, and data to the publication, The Green Investment Report: The ways and means to unlock private finance for green growth. The findings were discussed widely at the recent World Economic Forum meeting in Davos.
Under current OECD growth projections, the world will need to invest $5 trillion annually until 2020 in the water, agriculture, telecommunications, power, transport, buildings, industrial, and forestry sectors. However, solely delivering this investment to maintain “business-as-usual” economic growth will not lead the world onto a sustainable growth path. We need to find ways to “green” our growth to cope with resource scarcity and alleviate risks from climate change and environmental degradation. Greening this investment will require a mix of appropriate policies and capital. The lion’s share will need to come from the private sector, given the scale required.
The “Green Investment Report” estimates that an additional $700 billion will be needed annually to green the business-as-usual investment in the global economy. This is a large sum, but relatively insignificant compared to the cost of inaction as negative environmental impacts increasingly take their economic toll.
Experts say that developing nations could require more than $100 billion for adaptation each year. Developed countries say that they have already delivered more than $33 billion so far towards this climate adaptation funding.
However, some question whether these funds are going to the right places and meeting real needs. Is adaptation finance being directed towards the nations that need it the most? Is it being used to support projects that will allow people to adapt to climate change’s impacts?
We currently don’t have adequate answers to these questions—but we hope to soon. At the recent UN climate change negotiations in Doha, Qatar, Oxfam, the Overseas Development Institute (ODI), and WRI launched the Adaptation Finance Accountability Initiative to help civil society organizations find out where adaptation finance is really going.
The Question Is: Where Should Adaptation Finance Go?
The easy answer is that adaptation finance should go to activities that strengthen the resilience and reduce the vulnerability of countries most susceptible to climate change’s impacts. People in developing countries will likely be hit hardest by global warming.
This is the fifth installment of a five-part blog series on scaling environmental entrepreneurship in emerging markets. In this series, experts in the field provide insights on how business accelerators, technical assistance providers, investors, and the philanthropic community can work with developing market entrepreneurs to increase their economic, environmental, and social impacts. Read the rest of the series.
Here at WRI, our mantra is “making big ideas happen.” But these “big ideas” don’t need to come exclusively from “big” players like corporations and development banks. In 1999, we set out to prove a new concept—that entrepreneurs and the small and medium-sized businesses they create could make a profound impact on the health of the planet.
Thirteen years on, the proof of our concept is demonstrated daily around the world. As engines of economic growth and laboratories for environmental and social innovation, small and medium-sized enterprises (SMEs) are helping to build modern economies that improve people’s lives while conserving natural resources.
This is especially true in developing countries, where such businesses can account for as many as four in five jobs and almost one-third of GDP. Which is why, back in 1999, WRI chose Latin America and Asia as the focus of its pioneering New Ventures project to nurture environmental entrepreneurs.
BNDES is Brazil’s key financial institution for domestic long-term financing, and it’s one of the main financial engines behind Brazil’s take-off as a leading Latin American economy. Its lending and equity investments are becoming increasingly important internationally.
But what’s driving all of this growth? And what standards exist to ensure that Brazil’s overseas investments aren’t coming at the expense of the environment and human well-being? WRI seeks to address these questions and more in its new slide deck, “Emerging Actors in Development Finance: A closer look at Brazil’s Growth, Influence and the Role of BNDES.”Emerging Actors in Development Finance: A Closer Look at Brazil's Growth, Influence and the Role of BNDES from World Resources Institute (WRI)
This is a two-part series on expanding access to clean energy in developing countries. Tune in tomorrow for the second installment, which will highlight specific ways institutions can implement successful clean energy projects.
This week, key leaders from the policy, industry, government, NGO, banking, and civil society sectors are gathering in the Philippines for the 7th annual Asian Clean Energy Forum (ACEF). The event, organized by the Asian Development Bank and USAID, aims to foster discussions about how to scale up clean energy initiatives and curb climate change in Asian nations.
One the forum’s key themes is access to clean energy. In March 2012, the World Resources Institute and the DOEN Foundation also organized a workshop focused on innovative practices in providing access to clean energy in developing countries (check out the new video about this forward-thinking event). The workshop brought together an inspiring group of practitioners, project developers, and financiers who are all successfully implementing clean energy access projects in communities across the world. These practitioners are bringing efficient cook stoves to Africa, solar home systems to India, and small-scale hydro to Indonesia – reaching poor rural communities who are in great need of clean energy solutions.
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