- Where are we currently on climate finance?
There has been a steady increase in climate finance flows, which hit the $ 1 trillion mark for the first time, reaching $1.3 trillion dollars in 2021/2022. However, current investment levels are nowhere near enough to limit global warming to 1.5 degrees. There is a significant gap between the current flows and what is needed. We need at least $5.9 trillion annually by 2030 – and this is a conservative estimate. In the future, the estimated needs are over $10 trillion each year from 2031 to 2050.
- Where to get the funds to close the climate finance gaps?
The current climate finance flows ($1.3 trillion) form just one per cent of the global gross domestic product. For comparison, the public sector alone spent $2.2 trillion on military expenditures in 2022. In the same year, implicit and explicit fossil fuel subsidies totaled $7 trillion. Therefore, the question about climate finance is not only about how to get new investments, but also how to shift the existing investments away from high-carbon uses.
Furthermore, the more we delay the action, the higher the costs of addressing climate change will be. If we act right now and reach the 1.5-degree scenario, we could avoid losses of up to $1 266 trillion. In addition, adopting more sustainable pathways creates significant financial opportunities for businesses.
- How are private and public actors responding to the funding needs?
Currently, the public actors are slightly ahead of private actors. In 2021/22, public actors provided approximately $640 billion (51 %) of climate finance and private actors $625 billion (49 %).
Public climate finance has grown significantly in recent years, but some challenges prevail. For example, less than 15% of public climate finance was targeted to agriculture, forestry and other land use, water and wastewater, and industry, collectively. These sectors are critical to reducing greenhouse gas emissions and climate vulnerability.
Private finance is also growing, but not at the rate and scale that is required. Private finance is still largely concentrated in developed countries, and mainly targets mitigation efforts. Increasing private finance is truly necessary, as the budgets of governments are squeezing in.
- Have we achieved the balance between mitigation and adaptation finance?
Mitigation continues to receive most of the climate finance, accounting for 91 % of the flows in 2021/22 and leaving adaptation and dual benefits far behind. Despite this, the mitigation potential in many sectors, such as agriculture, forestry, and other land use, is still untapped, as most of the mitigation flows are directed to energy and transport.
Even though adaptation finance reached an all-time high in 2021/2022, adding up to $63 billion, it is far from meeting the actual adaptation needs. Currently, adaptation covers only 5 % of global climate finance, and the gap is widening. It is estimated that developing countries alone would need nearly $212 billion annually by 2030 – over three times more than the tracked global total.
- What should be done to improve the quantity and quality of climate finance?
There are four crucial priorities to accelerate climate finance. The first one is transforming financial systems. This includes, among others, leveraging concessional finance (i.e., below market rate funding) to increase private climate finance flows and reforming international financial institutions, such as multinational development banks. The second one is bridging climate and development needs, as there are many co-benefits. Relating to this, the narrative of cost of inaction needs to be pushed more, and the effects of climate change must be integrated better to financial and fiscal plans.
The third priority is domestic capital mobilization. Countries are required to submit their updated Nationally Determined Contributions by this year, which is a chance to further align finance flows with Paris Agreement goals and create stronger investment signals. Other action points besides updating NDCs are strengthening risk-sharing instruments and supporting country sector platforms to create enabling environments and linking investors with funding opportunities. The last priority is acting to improve the data on climate finance. The data should be of high quality, available, and accessible to achieve better transparency and a clear overall picture of climate finance. Furthermore, the reporting should be simplified and standardized to minimize the reporting burdens.