The trouble with climate finance in 5 charts

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1. Falling short

Let’s start with the overall numbers. Data on climate finance is contentious (more on that later), but within what exists, total global climate finance flows amounted to $665 billion in 2020, according to calculations by Climate Policy Initiative (CPI). The bright side: the figure has doubled since the early 2010s, growing at a compound annual growth rate of 7%. Early figures indicate that climate finance rose 28% to an all-time high of at least $850 billion in 2021. But to avoid the worst effects of climate change—such as to meet the 2015 Paris conference goals—this money flow needs to grow to a massive $4.3 trillion by 2030, said the CPI.

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As of now, this climate finance goes towards two goals: adaptation and mitigation. The numbers include both domestic and cross-country funding, through grants or otherwise, by public and private entities. If the negotiations go the way of countries vulnerable to climate change, “loss and damage” could become an additional category.

2. Pressing priority

Countries have realized a more pressing need for funding as extreme weather events have become commonplace in the last decade. This year has seen devastating floods, cyclones and heatwaves across the world. Adaptation to such climate risks has been a focus point of previous talks, but the UNEP Adaptation Gap Report released last week said risks could be growing faster than global efforts in adaptation planning, financing, and implementation.

While 84% of the 198 parties to the climate conference now have adaptation plans and policies, around two-thirds still lack quantified and time-bound targets. Most that have aren’t driven by ground-level outcomes, the report suggests. The money needs to flow for any success, but the first projects worth over $25 million only appeared in 2017, shows data on financing of adaptation projects.

The number and scale of adaptation efforts are going up, but they need to grow much more to keep pace with the effects of the changing climate.

3. Debt trap

New energy transition technologies are heavily dependent on climate finance. So is the ability of developing and most vulnerable countries to cope with the economic losses caused by climate change. However, the vast majority of climate aid going to the most needy countries has been issued as debt, not as grants, experts say.

This means the aid money will need to be repaid, typically at high interest rates, and their use can have a negative impact on economically vulnerable countries that are already grappling with heavy debt loads.

While the flow of aid has increased in recent years, so has the portion of finance that is non-grant. According to a new report by Oxfam International, an analysis of climate aid flows to 18 Asian countries shows that non-grants accounted for nearly 70% of the total climate finance flows they received in 2019, and 60% in 2020. This is counter-productive to the original purpose of climate finance, the report said.

4. Fund flows

Let’s look more into where and how the funding is going. The money is mainly going to more developed countries, especially Western Europe, the US and Canada, the CPI report said. The East Asia and Pacific region accounts for the biggest share, mostly led by China’s domestic initiatives. These countries primarily derive their money from domestic funding. Poorer countries in Africa and South Asia rely more on international finance for mitigation and adaptation needs.

High-income countries that have made commitments to reach net zero emissions naturally prioritize climate spending within their own territory. About 76% of all climate finance flows during 2011-2020 were raised and spent domestically, according to the report.

In 2020, public and private sources contributed an equal share of the funds raised. Funding from public sources has risen faster than from private sources. Countries would do well to have welcoming national policies and a strong domestic regulatory framework to encourage green investments.

5. Inflated data

Finally, the data itself appears to be sketchy, a potential body blow to bringing transparency in climate funding. Climate negotiators and policymakers have long had disagreements over the methodologies used to compute climate financing. While much focus has been on advanced countries hitting the $100-billion-a-year mark in funding poor countries’ climate action, not enough attention has been paid to ensuring that it reaches the right way.

Rich countries together contributed $63.4 billion in 2019 and $68.3 billion in 2020, respectively, according to a report by the Organization for Economic Co-operation and Development (OECD). But an analysis of climate finance by the international charity Oxfam reveals that the actual funding received by developing countries could only be around one-third of the reported OECD figures. This is because loans and other non-grant instruments are counted in ways that overcredit the donor nation, and the reported climate finance overestimates the relevance of funds for climate-related outcomes. Climate finance will need more transparency to make headway.

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