Climate finance

Climate finance is an umbrella term for financial resources such as loans, grants, or domestic budget allocations for climate change mitigation, adaptation or resiliency. Finance can come from private and public sources. It can be channeled by various intermediaries such as multilateral development banks or other development agencies. Those agencies are particularly important for the transfer of public resources from developed to developing countries in light of UN Climate Convention obligations that developed countries have.

There are two main sub-categories of climate finance based on different aims. Mitigation finance is investment that aims to reduce global carbon emissions. Adaptation finance aims to respond to the consequences of climate change. Globally, there is a much greater focus on mitigation, accounting for over 90% of spending on climate. Renewable energy is an important growth area for mitigation investment and has growing policy support.

Finance can come from private and public sources, and sometimes the two can intersect to create financial solutions. It is widely recognized that public budgets will be insufficient to meet the total needs for climate finance, and that private finance will be important to close the finance gap. Many different financial models or instruments have been used for financing climate actions. For example green bonds, carbon offsetting, and payment for ecosystem services are some promoted solutions. There is considerable innovation in this area. Transfer of solutions that were not developed specifically for climate finance is also taking place, such as public–private partnerships and blended finance.

While public funding plays an important role in U.S. climate finance, the majority of climate-related investment in the United States is provided by private sources. According to the International Energy Agency, most clean energy and low-carbon investment in advanced economies is financed through private capital, including corporate balance sheets, project finance, bank lending, and capital markets, with public policy primarily serving to reduce risk and improve investment incentives. Public climate policies such as tax credits, loan guarantees, and regulatory standards are therefore designed not only to fund projects directly but also to mobilize significantly larger volumes of private investment toward mitigation and resilience objectives.

There are many challenges with climate finance. Firstly, there are difficulties with measuring and tracking financial flows. Secondly, there are also questions around equitable financial support to developing countries for cutting emissions and adapting to impacts. It is also difficult to provide suitable incentives for investments from the private sector.