Climate finance

For broader coverage of this topic, see Economic analysis of climate change.
Investments in sustainable energy (clean energy) is an example of climate finance. As of 2023, it has increased due to high fossil fuel prices and growing policy support across various nations.[1]

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.[2]: 7 

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.[3] Globally, there is a much greater focus on mitigation, accounting for over 90% of spending on climate.[4][5]: 2590  Renewable energy is an important growth area for mitigation investment and has growing policy support.[6]: 5 

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.[7]: 16  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.

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.

  1. ^ "World Energy Investment 2023 / Overview and key findings". International Energy Agency (IEA). 25 May 2023. Archived from the original on 31 May 2023. Global energy investment in clean energy and in fossil fuels, 2015-2023 (chart) — From pages 8 and 12 of World Energy Investment 2023 (archive).
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