Climate Finance: The Challenge of ‘Shifting the Trillions’

November 15, 2016

NOTE: Images in this archived article have been removed.

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Farmers receive updates on climate smart practices on their phones, as part of an adaptation project in Karnal, India. Credit: CCAFS/Prashanth Vishwanathan.

The money used to tackle climate change — “climate finance” — comes in many guises, which means that measuring it is a mammoth and complex task.

Yet many argue that “mobilising” finance is the key to unlocking action on climate change across the world. Renewable energy infrastructure, energy efficiency and adaptation projects require investment. Without it, some nations say they either can’t or won’t build them. It is also a vital tool for unlocking political will and trust, as the UN negotiations currently taking place in Marrakech demonstrate.

Money is already flowing between various countries, from an assortment of sources to numerous causes. How this happens can be less than transparent — but there has recently been a rash of reports on climate finance that attempt to lay out the current state of play.

Last week, the United Nation Framework Convention on Climate Change’s (UNFCCC) launched its 2016 Biennial Assessment and Overview of Climate Finance Flows. It is based heavily on the work of the Climate Policy Initiative‘s (CPI) Global Landscape of Climate Finance report, which was recently updated.

A group of developed nations, led by the UK and Australia, have also provided a “roadmap” for how they intend to meet their promise to provide $100bn a year in climate finance by 2020, although their approach has been criticised by Oxfam.

Carbon Brief has five takeaways from these reports, which, together, give an overview of the current state of climate finance.

‘Climate finance’ means different things to different people

Definitions do not come easy in the world of climate finance and what countries decide to count as such can often be a political decision.

Discussions often centre around the need to “shift the trillions” that will enable a transition to a low-carbon global economy. This embodies everything from, hypothetically, the money that a private investor in the US spends on a solar farm in California, to the money that the Canadian government might spend on a sea wall in Bangladesh. Every penny spent on reducing emissions and preparing the world for climate impacts is considered.

Then there is the narrower definition, where climate finance is equated to only the public money provided by developed to developing countries. Developed nations promised at the Copenhagen climate talks in 2009 that this public money – and the private funds that it leverages – would amount to $100bn a year by 2020.

It has long been argued that this money carries a political significance beyond its face value. It proves to developing nations that they will get the help they require to tackle climate change.

It is notoriously difficult to measure climate finance accurately. The UNFCCC report points to the lack of systematic data collection on private finance flows, confidentiality restrictions and accounting issues, for example.

It can also be challenging to decide exactly what counts as climate finance in the first place, as one pot of money can serve several different causes.

The Oxfam report says that “only climate finance labelled as ‘principal’ under OECD-DAC rules should be counted against UNFCCC climate finance commitments”.

Counting only the overseas development aid where climate change was the “principal” objective reduces bilateral flows in 2013 to $12.4bn, says Oxfam. This compares to the $53bn estimated by the UNFCCC report, for example.

$100bn target is difficult, but not impossible

By all accounts, meeting the $100bn target remains some way off. According to OECD analysis contained within the $100bn roadmap report, public finance in 2013-14 amounted to $41bn.

It adds that, by 2020, this could rise to $67bn. This is a projection based upon pledges from developed countries and multilateral development banks, alongside assumptions about the trends in climate finance from other countries. It says that this could be a conservative estimate.

Accompanied by “modest assumptions” about the private money this could leverage, this would lead to overall levels of climate finance of more than $100bn by 2020, says the report. Including leveraged private finance and export credits in 2014 takes the total to $62bn, for instance.

Finance raised towards $100bn goal. Source: Climate Finance in 2013-14 and the USD 100 billion goal, OECD and CPI. Graph by Carbon Brief, using Highcharts

Oxfam’s report holds the position that the majority of the $100bn promise should come from public purses. It is, therefore, less optimistic about the prospect for reaching this sum by 2020.

Any credible roadmap towards meeting this goal must “start with the recognition that there is a major gap in public finance to be closed between 2015 and 2020”, it says, and cannot be “a simple accounting exercise to show that the target has already been met”.

The outcome of the US election also demonstrates the fragility of climate finance pledges. While the US has pledged $3bn, most of this has yet to be disbursed, and president-elect Donald Trump has said that he will stop US contributions to tackling climate change.

Climate finance is increasing

Nonetheless, overall, climate finance is increasing. After a dip in 2013, where climate finance decreased, more money was spent in 2014 to reduce emissions and adapt to the impacts of climate change.

The UNFCCC report estimates that total climate finance from all sources amounted to $741bn for 2014. This includes both public and private money, development banks, money spent domestically and money flowing between countries. CPI, which takes a different approach to accounting, puts it at $392bn.

The numbers obviously differ significantly. This is due to the two institutions taking various approaches to what they count as climate finance, with, for example, the UNFCCC using CPI’s data as a baseline and then building on it with a more generous approach to spending on energy efficiency.

“What we count is the best of the best available data,” CPI’s executive director of climate finance Barbara Buchner tells Carbon Brief. “The basic figures [in the UNFCCC report] are from us, but they are trying to look at all the possible estimates that are out there.”

What the figures have in common is that they both show an increase in finance over time — by 15% compared to the 2011-12 average, according to the UNFCCC, and by 15% compared to 2013, according to CPI.

Outi Honkatukia, co-chair of the Standing Committee on Finance, the UNFCCC body responsible for the report, tells Carbon Brief:

“I’m encouraged by the fact our report shows the figures are going up. This presents a snapshot, so it’s only over time that we’re starting to get the trend. And, at least at the moment, it’s a trend that’s encouraging.”

Global climate finance totals, 2012-2014. Source: Climate Policy Initiative. Graph by Carbon Brief, using Highcharts

Adaptation is still losing out to mitigation

Funding for adaptation and mitigation is supposed to have a 50/50 balance, according to the Paris Agreement, but this has not been the case so far.

From the public funds flowing from developed to developing countries, only around 25% was dedicated to adaptation, according to the UNFCCC report. Investment from multilateral development banks focused less than 20% of finance on adaptation, compared to more than 80% on mitigation.

Of the $392bn that CPI said flowed in global climate finance in 2014, it estimates that $27bn went to adaptation, compared to $360bn for mitigation and $4bn for dual purposes.

According to the $100bn roadmap, developed countries are committed to significantly increasing their funds for adaptation and many have included an adaptation-specific component in their climate finance pledge. For instance, France has pledged to triple its adaptation finance by 2020.

Private and domestic investments dominate

The majority of the money flowing towards climate change comes from private rather than public sources – and domestic rather than international sources – the UNFCCC and CPI reports both show.

This sort of funding is expected to cover a large proportion of the $3.5tn that Carbon Brief calculated last year it would cost to implement the climate action pledges submitted to the UN (“Nationally Determined Contributions“). The majority of this figure is money that India projects it will need to transition to a low-carbon economy.

Across 2013 and 2014, public finance averaged 40% of total funds, compared to 60% for private. It is worth noting that when climate finance dipped in 2013 it was because private, rather than public, funding dried up.

“Public finance is the engine behind private finance. Private finance is dominating and it should be dominating,” CPI’s Buchner tells Carbon Brief.

While data is scarce, the UNFCCC report says that the numbers that do exist suggest that domestic public finance exceeds the amount of public money flowing in from international sources.

CPI looked at the total picture for climate finance including private investment. They suggest that $290bn came from domestic sources in 2014, compared to $102bn from international.

“It shows investors are looking for policy environments that are perceived to be less risky…where they know the field, know the policy, know the circumstances,” adds Buchner.

Tags: climate change, international climate change agreements