Climate Finance : The ways in which money is saving the planet

Today’s blog post is about climate finance which is a very important aspect of the fight against climate change. Climate finance has been given due attention in both the Kyoto Protocol and Paris Agreement. But what is climate finance? Climate finance basically refers to the flow of finance from public, private, national and international entities to go towards the efforts to combat climate change.

This money goes towards efforts to lower greenhouse gas emissions, to fund transition to a low carbon pathway, aid in climate resilient development, aid in adaptation to the effects of climate change, and in recouping from loss and damage, that is, regrouping. While still growing and developing, climate finance is a very wide and diverse field but basically encompasses all money that is used in climate action.

Climate change is caused by greenhouse gas emissions, the majority of which are from developed countries. But the most vulnerable and affected by climate change are countries in the African continent and Asia, the least developed countries, island countries. These groups contribute the least in terms of amounts of climate warming emissions into the atmosphere.

Under the principle of common but differentiated responsibility and stemming from the polluter pays principle[1] developed countries have a huge responsibility to act on climate, and need to act to lower their huge percentages of emissions, something which because of their financial muscle and already developed economies they are significantly more capable of doing. But for developing countries which are also most affected, their economies cannot fully or effectively finance mitigation (lowering of emissions) as well as adaptation (grappling with the worst effects of climate change).

Because of these two reasons, there arises a need to help developing countries to lower their emissions as they develop, as well as adapt to climate change. This means finance is required. Finance is required to find alternative sources of clean energy, such as solar energy. Massive investments are needed to finance the upcoming renewable energy sector which can provide a clean source of energy to power the economy.

Investments would also be needed to help lower emissions from agriculture which is the biggest sector in Africa. In adaptation for example, money is needed to help communities and industries latch on to newer  climate resilient ways of earning livelihoods and in running their operations.

Green Finance - image courtesy of slideshare.net

Globally, money is needed to power the transition to a low carbon development pathway, that is, a way of development that releases the least greenhouse gas emissions (mainly carbon dioxide gas) into the air. For the last few years there has been massive commitments by multinational conglomerates like companies under the RE100  initiative such as Google and Apple to switch their energy needs from fossil fuels to renewable energy, with some going as far as financing energy projects .

Google has some investments in renewable energy farms in Africa and South America There is quite the shift by significant polluters to ‘green’ their operations worldwide. Sustainable business practices which are healthy for the planet are necessary and as we become more conscious of the effect of greenhouse gas emissions on the planet and the resultant costs, it makes sense to switch to low emissions pathway.

Tesla is making strides in the renewable energy pathway, such as the lithium ion battery switched on in Australia in December last. Such activities need massive investment, something Tesla’s billionaire founder Elon Musk has under control.

Internationally, there are several ways finance flows, that is, North to North (developed countries to developed countries); North to South (developed countries to developing countries) and South to South that is; from developing countries to developing countries. Internationally also, there are several entities that are involved in the disbursement of finance to most affected countries. The Global Environment Facility (GEF) working under the UNFCCC is an example of such. It has structures in place where developing countries can apply for funding. In particular, there is the Least Developed Countries Fund and Special Climate Change Fund which are run by GEF and are mechanisms through which climate finance is channeled.

The Global Climate Fund is also another example and is the most centrally recognized to receive and distribute finance to countries affected by climate change. It has the responsibility of raising about 100 billion dollars per year and disbursing this to countries hard hit by climate change. 100 billion dollars is the base set by the Paris Agreement but as according to the World Resources Institute, about 5 trillion dollars are needed for green investments annually by 2020. The Global Climate Finance Report  reports more comprehensively on the flows of finance in climate globally as well as trends that help identify investment opportunities.

These investments are not in vain though, - they pay off. According to IRENA, green energy jobs are growing and there is fast growth in the renewable energy sector, caused by some among others, the cost of clean tech going down.

The Adaptation Fund is another mechanism for climate finance. It is funded by a levy on carbon trading. Carbon trading in its simplest terms is whereby entities or countries unable to fully avoid emissions buy emission reduction units ( pay someone elsewhere for either absorbing the directly proportional amount of emissions released by the polluting entity). All this is of course regulated.

Finance can also be from public sources such as public funds run by governments (budgetary allocations) or it can be from private sources such as banks. An example of this would be the African Development Bank or the Asian Development Fund.

Green bonds are becoming popular in the financial sector because as financial tools, they are able to raise cash as well as the fact that proceeds are used to finance environmentally sustainable and safe projects. Green bonds have been issued by companies such as Apple and have overall been well subscribed to. Last year, Apple’s bond raised 1 billion dollars to finance climate projects. Green bonds are perhaps ideal because they offer a greater deal of transparency and reporting.

Insurance is another area where finance intersects with climate. Although still growing, insurance can be used to cover the costs of restructuring from loss and damage occasioned by climate related disasters / extreme weather events. Insurance money is used to rebuild lives and infrastructure, provide immediate health services for the affected as well as insure sensitive and vulnerable sectors like agriculture and coastal properties. The hitch here is that it can be difficult to fully estimate in advance, and therefore recompense the level of damage a climate disaster can cause. Several Caribbean countries got insurance payouts arising from the two hurricanes (Irma and Maria) that hit them last year.

There is need for money to be invested in clean tech in the energy sector or in carbon capture and storage technology. Also in developing cheaper methods of wind and solar power generation, access and storage.  

There is also divestment from fossil fuel companies. Divestment means moving away from particular sectors one had previously invested in a portfolio. The New York City Pensions Fund decided to divest from fossil fuels in the interests of securing the future of the city and its residents from climate change and its worst effects. This has been replicated in some parts of Europe like Ireland. If these funds were further to be invested in renewable energy,  that would be a major plus.

Another way to raise climate finance is by carbon taxes or carbon pricing. This is based on the polluter pays principle, whereby a company is taxed or pays for every ton of carbon dioxide they release into the air, or for every ton of carbon dioxide that is emitted in their operations. Canada had proposed a carbon price in their country.

Generally, climate finance is necessary if we are to shift the whole planet to a low carbon development pathway. It can be as simple as money that is needed to build climate proof infrastructure. This is infrastructure that can be able to withstand the vagaries of climate change.

It also intersects with development when money is invested in basic services such as health in case of climate aided disease outbreaks and creating resilient health institutions and research stations to help combat such outbreaks. However, climate finance must be money that is over and above any other type of aid given to developing countries - it is specifically because of climate action.

Climate finance is quite a complex and wide field but one which is absolutely necessary in the climate action.

Closing remarks? The fossil fuel era is coming to an end, however long or short, tortuous or pleasant the road is, and again for young people, we must be at the forefront. There is much to gain, both for ourselves and on the planet. 

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[1] In its most basic form, it means that whoever is responsible for any form of environmental damage is also responsible for cleaning it up , and that means also footing the cost.