International public finance refers here to funding made available to developing countries by developed nations, especially through international climate funds.
What Is International Public Climate Finance?
International public climate finance refers to multilateral and bilateral finance that is channeled to developing countries to pay for climate-related initiatives. This funding is funneled from developed to developing countries through a variety of mechanisms. The finance often flows through bilateral or multilateral development finance institutions, and can come in the form of loans, grants, guarantees or other modalities.
International public finance for climate change is closely tied to the UNFCCC negotiations. Under these negotiations, developed countries have committed to providing funds to their developing counterparts to enable their action on climate change.
What Are the Main Sources of International Public Finance?
International public finance for climate action is channeled through a range of institutions. These include development banks like the World Bank or Asian Development Bank, climate funds like the Green Climate Fund or Adaptation Fund, and bilateral development finance institutions like the U.S. Agency for International Development or Germany’s International Climate Initiative.
How Do Countries Access International Climate Finance?
Each institution has a different approach to determining which countries and initiatives should receive funding. The World Bank, for example, develops country programs with its partner governments. These programs then guide the process of developing specific projects and channeling funding to recipient countries. Bilateral aid agencies provide funding based on direct relationships with their partner countries. Their process for doing so varies widely.
Climate funds like the Green Climate Fund and Adaptation Fund accept proposals from institutions that have been accredited to the relevant fund. Accredited entities can include public, private, or non-governmental institutions that have shown that they can meet the funds’ requirements for fiduciary and project management, environmental and social safeguards, etc. The funding proposal must also meet a variety of requirements for example, its connection to climate impact and plans for stakeholder engagement (see Figure 1).
What Are the Benefits of Public Climate Finance?
International climate finance is a key source of concessional funding for developing countries. This funding allows countries to pay for climate activities that they would otherwise not have been able to undertake. Public international finance can also help countries mobilize additional public and private investments by reducing risk to other investors.
For least-developed countries in particular, international climate finance will play a vital role. These countries are often unable to access resources from other sources of finance, and so will need to rely on grants and highly concessional loans from public sources. For countries that have less access to concessional finance due to their level of economic development, such as middle-income countries, sources of finance like the climate funds can fill an important gap.
Public climate finance can also pay for a variety of activities, including institutional strengthening and policy development, that other finance is not able to fund. This is helpful to governments seeking to define their climate strategies, develop new institutional capacities and install monitoring systems.
What Are the Challenges of Public Climate Finance?
For developing countries seeking to access public climate finance from international sources, capacity can be an issue. International sources can require high standards for project design, placing a strain on limited budgets and personnel. While some money is available for project preparation, accessing it requires time, money and expertise—as well as freedom from competing demands—that can be hard for any country to obtain.
Finally, there is simply not enough public climate finance to keep up with demand. Developed countries have not yet met the US$ 100 billion funding goal they have committed to, and it is widely accepted that more public finance will be needed, especially of a concessional nature. This concessional finance will be crucial for action in sectors unlikely to produce revenue—such as loss and damage, and some aspects of adaptation—and can also be used to scale private finance via de-risking (see Issue Brief on Blended Finance and Catalytic Capital).
International public climate finance is currently channeled through diverse multilateral and bilateral funds. Given the complexities of climate finance architecture, developing countries must navigate a process that is both time- and resource-intensive. Nevertheless, this type of funding is vital to the success of climate action in developing countries, and to international climate negotiations.
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Climate bonds are debt instruments that allow countries to leverage finance and fund large climate projects.
What Are Climate Bonds?
A bond is a fixed-income debt instrument that governments and corporations issue to raise money. Bonds are one of the primary ways that many governments take on debt and Climate Bonds provide an opportunity for countries to “green” their debt and ensure new debt is in line with their climate goals.
Climate bonds require the issuers (governments and corporations) to show that the bond is linked to a positive environmental or social impact (see Table 1 for examples). They provide an opportunity for countries to structure their debt and align it with their climate goals. Climate bonds come in many forms, and are also referred to as green, blue, or sustainability bonds, among others. Various international and domestic guidelines have been developed to help determine which bonds qualify as green, so that investors can choose assets with standards in place.
The global bond market was valued at $128.3 trillion in 2020. As of 2022, green, social and sustainability bonds accounted for US$ 858.5 billion of the total, with green bonds in the lead at US$ 487.1billion.
How Do Climate Bonds Work?
While there is no universal standard for what qualifies as a green bond, there are several standard important benchmarks that an issuer can reference. These include the Green Bonds Principles from the International Capital Market Association and the Climate Bonds Standards from the Climate Bonds Initiative. In addition, countries have begun to develop their own national guidelines and standards (see Box 1). Most issuers of climate bonds will need a third party to evaluate the bond against the relevant framework. Climate Bonds Standards from the Climate Bonds Initiative. In addition, countries have begun to develop their own national guidelines and standards (see Box 1).
What Are the Benefits of Climate Bonds?
High level of investor interest: Increasingly, investors are seeking opportunities to meet their own climate commitments and thus are keen to support climate bonds that meet relevant standards. For both mitigation and resilience projects, climate bonds can represent solid, transparent and profitable instruments that can be sold to generate market interest.
Potential interest rate premium: To date, many issuers have been able to pay a lower interest rate on climate bonds compared to regular bonds, a phenomenon that has come to be known as a “greenium.”
Climate bonds allow governments to issue transparent instruments: This means they are standardized investment instruments with methodologies and comparable monitoring schemes.
Climate bonds allow countries access to dedicated climate investments: Governments can use these instruments to raise capital for climate projects that need urgent attention.
Box 1 | Indonesia’s Green Bond Framework
In 2018, Indonesia issued a bond of $1.25 billion, the proceeds of which have gone to “eligible green projects” based on Indonesia’s Green Bond Framework. This Framework was reviewed by an independent reviewer and awarded a medium green shade, which indicates that the framework is making ‘significant steps towards the long-term vision. The framework was developed taking into account Islamic law, and therefore attracted 32% of its investors from the Islamic market. Nine sectors were eligible to receive proceeds:
- Renewable energy
- Sustainable management of natural resources
- Energy efficiency
- Green tourism
- Resilience to climate change for highly vulnerable areas and sectors/disaster risk reduction
- Green buildings
- Sustainable transport
Source: UNDP 2018
Table 1 | Types of Climate Bonds
|Types of Bonds
|Proceeds used for climate or environmental projects.
|The Republic of Cabo Verde issued a green bond in 2021 to increase renewable energy generation, which includes a small-scale variable renewable energy integration and resilient and efficient electricity service for public health facilities.
|Proceeds used for activities that specifically support climate resilience.
|In Tajikistan, European Bank for Reconstruction and Development (EBRD) launched the first dedicated resilience bond in 2019, which is funding climate-resilient rehabilitation and modernization of a hydropower plant.
|Proceeds used for sustainable marine and fisheries projects.
|The Republic of Seychelles launched the world’s first sovereign blue bond in 2018, which raised US$15 million to support sustainable marine and fisheries projects.
|Proceeds used exclusively for activities related to social projects, e.g., health, employment, gender, affordable housing, etc.
|The Spanish Instituto de Crédito delivered the first formal “Social Bond” offering in January 2015 to help finance Small and Medium Enterprises in economically depressed regions of Spain and stimulate employment.
|Instead of monitoring use of proceeds, links to broader sustainability commitments, e.g. national GHG emissions.
|Uruguay issued a sustainability-linked bond for $3.96 million in 2022 to align its national finance policy with the climate commitments, including NDCs.
What Are the Steps to Developing a Climate Bond?
What Are the Challenges of Climate Bonds?
Like any bonds, climate bonds are most immediately available to governments with a high enough credit rating to attract bond investors. These ratings are calculated by agencies such as S&P Global, Fitch’s Ratings and Moody’s. Sufficiently high ratings are generally only held by upper- or middle-income countries.
Since bonds are debt instruments, they are not always an attractive option for countries with high debt levels. Countries not wishing to add to their debt may need to choose another financing option.
Institutional transparency is necessary for climate bonds to be issued. Many countries still lack the necessary financial transparency and mechanisms to access the climate bonds market at an international level.
Debt-for-climate swaps can allow countries to simultaneously reduce their debt and invest in climate-related actions.
What Are Debt-for-Climate Swaps?
Debt-for-climate swaps are financial instruments that allow countries to reduce part of their debt in exchange for a commitment to invest in climate initiatives. Debtor governments agree to implement climate change mitigation and adaptation measures in exchange for an alteration of their debt, either through debt cancellation or through the improvement of loan terms (e.g., interest rate). Debt-for-climate swaps have evolved from debt-for-nature swaps, which have been used by governments since the 1980s. While debt-for-nature swaps focused primarily on protecting natural areas, debt-for-climate swaps broaden the focus by encompassing climate actions.
While debt-for climate swaps are still relatively rare, the idea is growing in popularity as an option for simultaneously tackling the debt and climate crises. Although there are still relatively few actual climate-focused swaps, increasing debt levels faced by many countries, coupled with the global interest in funding climate action, have given rise to increased interest in the instrument as a potential solution.
How Do Debt-for-Climate Swaps Work?
There are several approaches to debt-for-climate swaps. One approach is a bilateral swap. This is a direct agreement between the debtor country and a creditor, which is typically another government. For instance, a creditor government or institution agrees to restructure or cancel all or part of the debt of the debtor country. In exchange, the debtor country commits to investing in specific climate-related projects at the national level.
The second approach relies on support from third parties to arrange the swap. In these cases, an NGO may, for example, facilitate a process whereby a country repurchases its debt at a lower rate, on the condition that the debtor country uses the resulting savings to invest in climate-related initiatives. In 2021, the Nature Conservancy (TNC) partnered with the Belize government to implement such a swap. TNC enabled the Belizean government to buy back $553 million in bonds at a discounted rate of 55 cents per dollar. The purchase was financed by the issuance of $364 million in blue bonds. A blue bond is similar to a green bond or a bond which the government would issue to investors for long-term debt, and the proceeds are used for marine focused conservation or resilience. From the overall savings, Belize will spend $4 million per year on marine protection and climate resilience (see Figure 1).
What Are the Benefits of Debt-for-Climate Swaps?
Debt-for-climate swaps help governments increase fiscal space. Unlike the large percentage of climate finance that is provided in the form of loans, debt swaps do not increase a country’s debt burden. Rather, the burden decreases while new investments are made in climate-related initiatives. The more limited nature of such swaps can be beneficial to countries who are not seeking comprehensive debt relief.
Debt-for-climate swaps result in dedicated climate funding. Unlike regular debt relief, the government commits to channeling funds saved to climate initiatives. This allows the government and other stakeholders to develop and invest in ambitious climate programs.
What Are the Challenges of Debt-for-Climate Swaps?
The negotiation and implementation of debt-for-climate swaps can be time-consuming and complex. A diverse set of actors are often needed to put these instruments in place, and the environmental commitments can be multi-layered, requiring agreement between multiple government and non-governmental stakeholders. In the past, debt-for-nature swaps were often small, giving rise to questions as to whether the benefits were worth the effort.
Market conditions are not always right for debt-for-climate swaps. It is not always possible, for example, to repurchase government debt at significantly discounted rates. Market dynamics influence the type of debt swap options available to the government.
Debt-for-climate swaps may not work for countries in serious debt distress. Countries need to be able to shift funds from debt servicing to payment for climate action. If the country is in serious debt distress, it may need to undergo a comprehensive debt restructuring not linked to climate ambitions.
Countries facing concerning levels of debt might benefit from climate swaps. Countries confronted with high debt levels still need to pay for climate adaptation and mitigation. Debt-for-climate swaps are becoming potentially impactful financial instruments that can help tackle both of these challenges.
Debt-for swaps are not without difficulties, however. Larger deals, more streamlined processes for determining what qualifies as an appropriate climate investment, and improved coordination between environmental and financial government agencies may help to alleviate some of the challenges.
Countries can use national climate funds to accelerate climate investments and meet specific programmatic needs.
What Are National Climate Funds?
National climate funds are specialized national funding vehicles that help countries direct finance towards climate and environment priorities. Because governments need significant resources to achieve their national climate goals, national climate funds can facilitate the implementation of national and subnational climate projects.
How Do National Climate Funds Operate?
National climate funds operate with different institutional arrangements, depending on their financing objectives. For instance, some funds are specifically created and structured to channel funding from international cooperation, including the multilateral climate funds.
Other national climate funds are tied to environmental or finance ministries. These funds provide a way to accelerate funding activities within specific sectors or priority areas.
Many funds are structured as a means to pool and distribute resources from a range of sources. A number of funds combine monies collected through environmental fines and fees, tourism charges, etc.
What Are the Benefits of National Climate Funds?
National climate funds can help mobilize funds from domestic and international sources. The funds provide a mechanism through which countries can pool funding from different sources. This can allow for greater coordination of funding initiatives.
National climate funds provide an opportunity for governments to integrate climate projects across ministries. They can also incentivize the creation of domestic climate programs that allow diverse ministries to strengthen their synergy.
National climate funds can also support climate finance transparency. They allow greater transparency on public climate expenditures and needs, which is important for international cooperation and for domestic governance. Table 1 highlights examples of recent national climate funds and their funding arrangements.
What Are the Challenges of National Climate Funds?
Creating a successful fund requires the development and implementation of sound institutional arrangements. This includes ensuring that funds have the appropriate legal status, that effective decision-making processes have been put in place, and that the fund has access to sufficient technical expertise to ensure that funds are spent effectively.
A national climate fund is only useful if it has sufficient resources. Establishing a fund will not necessarily mean that funding will flow into it. More than one national fund has either never become operational, or stalled due to a lack of funding. Governments therefore need to determine how to establish credible, long-term funding sources to ensure that any fund established can serve its intended function.
Table 1 | Examples of National Climate Funds
|Examples of Funded Projects
Fondo Naturaleza Chile
Government budget; private donations
Marine Protected Areas program and water basins resilience projects
National Environment Fund
Monies appropriated by the National Assembly; revenues from the sale of hunting quotas; monies collected as payments for environmental pollution and management; contributions from other sources
Integrating livelihoods and conservation in rural communities, greening the Mathathane Village and providing environmental education
Sustainable Island Resource Fund
Antigua and Barbuda
Park visitation fees, pollution charges, taxes, levies, and other fees; international bilateral and multilateral funding
Concessional loans to help vulnerable communities that cannot access climate finance from traditional banks
Taxes, national budget private, and international sources
Emissions Reduction Program (PRE) with distribution of monetary benefits to the owners of forest lands
Resources from public and private sources, international foundations, international climate funds
Payment for ecosystem services: Water Fund “Green Watershed”
Sources: Fondo Naturaleza 2023, Sustainable Island Resource Fund 2023, FONAFIFO 2023, PROFONANPE 2023
How Can Countries Set Up National Climate Funds?
Governments can take the following steps to establish national climate funds:
Define the objective of the national climate fund: Funds can prioritize mitigation, adaptation, or other climate objectives. They can also focus on specific sectoral agendas, such as energy or agriculture or on national strategies such as mitigation or adaptation plans.
Identify funding sources: Countries should define the type of donors needed (international, national, public, private) and the size of the capitalization of the national climate fund.
Define the governance structure: Funds can be part of previous cross-ministerial climate programs, committees, independent or technical bodies, or they can be newly created. They can include public, private, civil society and other stakeholders depending on the objectives of the fund.
Integrate the fund into programs and policies: Funds can be integrated into national climate programs, which could have specific mitigation or adaptation goals, depending on the domestic needs.
Monitor, Report and Verify (MRV): An MRV system is essential for national climate funds. Governments will need to collect and analyze financial and programmatic information and make it transparent, providing international donors with a clear picture of the fund’s MRV system and the institution overseeing the process.