As the world grapples with the devastating impacts of climate change, an important aspect is climate finance, which entails supporting developing countries grapple with the impacts of extreme climatic events, such as floods, droughts, desertification, etc. What is currently happening in the climate finance ecosystem can best be described by the following analogy: Imagine your neighbour polluting your garden with toxic waste, killing all your plants and contaminating your water source. Instead of helping to clean it up, they offer to sell you expensive bottled water and costly, special seeds that can grow in poor soil. Now, not only are you paying to survive in the environment they ruined, but you’re also contributing to their profits as you buy more and more of what they sell to make up for the damage they caused.
About half of global climate finance comes from multilateral institutions and governments such as the Green Climate Fund. The other 50% comes from private enterprises like Alterra, launched by the United Arab Emirates. Climate finance can be described by three traits: quantity, purpose, and quality. At present, the amount of climate finance directed towards developing countries is not what these countries require. According to the Climate Policy Institute, climate financing flows need to be scaled up six-fold to reach $8.5 trillion between now and 2030, to meet the Paris Agreement goal of 1.5°C. Two broad purposes under climate finance have been historically touched on: mitigation and adaptation.
Historically, most climate finance has been directed towards climate mitigation, targeting sectors such as transport and energy, which are essential to decarbonise and cut down on greenhouse gas emissions. Secondly, energy, over the years, is becoming cost-effective so mitigation activities have increased. The executive director of the International Energy Agency stated at an event in 2024 that most of the mitigation investments were not necessarily propelled by concerns for climate change but rather a nexus of economics, energy security, and industrial policy.
Most of the climate finance is provided in the form of loans rather than grants. With developing countries stuck in a climate debt trap, they already face high borrowing costs under the current multilateral banking system and with the climate risk, the borrowing rates go further up
However, looking at it from the perspective of developing countries, adaptation is extremely necessary to fund. With rising sea levels, increasing droughts, glacial lake outburst floods (GLOFs), and sporadic intense precipitation, developing countries face a double crisis. Already politically and economically fragmented, developing countries face myriad of challenges from alleviating poverty to providing basic necessities of life. As climate disaster strikes, these countries are forced to rebuild schools, houses, and hospitals. As a result, funds that might otherwise have been allocated to enhancing human capital or technology introduction in the country are diverted to helping the communities overcome climate-induced challenges. Moreover, the cost of adaptation is also challenging to estimate, especially if both economic and non-economic losses are considered. A UN report in 2023 mentioned that the adaptation cost in developing countries is around $215 billion per year but some private banking institutions have predicted it was close to $2 trillion a year by 2026.
For developing countries, the main feature in climate finance is also the quality. Most of the climate finance is provided in the form of loans rather than grants. With developing countries stuck in a climate debt trap, they already face high borrowing costs under the current multilateral banking system and with the climate risk, the borrowing rates go further up. Not to mention that several developing countries in the Global South also lack the financial infrastructure to direct foreign investments into productive projects which increases the risk for investors.
US has mentioned that the NCQGF needs to be realistic and that just the public international finance alone is not enough to touch trillions of dollars of funding into climate finance. There is still some ambiguity as to how to determine which countries should be responsible for paying
While these problems exist from the side of developing countries, there is also a lack of robust accountability mechanisms when it comes to climate finance. At times, wealthier nations have reported inflated climate investments. This also sets bad examples for the private sector that can facilitate greenwashing. On the other hand, blended finance has been on the rise in recent years which is basically a combination of public concessional finance and private/public finance. A report by Canada-based blended finance network, Convergence, found that climate blended finance deals increased two times to a high of $18.3 billion in 2023. However, even within this record high financing, climate adaptation is severely underfunded. For instance, between 2021 and 2023, a total of 32 adaptation blended finance transactions amounting to $3.5 billion occurred, which is less than a fourth of the 132 deals on climate mitigation in the same period.
With the above issues in climate finance, the New Collective Quantified Goal on Climate Finance (NCQGF) offers a sliver of hope. The NCQGF seeks to bring changes to the quality, quantity, and purpose of climate finance. While the previous goal of $100 billion per year was an arbitrary number put forward, developing countries are now demanding a more concrete number where the priorities and needs are properly understood. Developing country groups have put forward some numbers with Pakistan having put the largest number at a minimum of $2 trillion. Developing countries, for this new goal, are stressing more on public funds whereas developed countries have proposed much larger sources of funding. For instance, the US has mentioned that the NCQGF needs to be realistic and that just the public international finance alone is not enough to touch trillions of dollars of funding into climate finance. There is still some ambiguity as to how to determine which countries should be responsible for paying.
But how would you determine the right indicator to classify countries in Annex II? Whether cumulative per capita emissions per capita emissions absolute capita emissions, or average emissions. Based on these indicators, the placement of the countries would change. For instance, Qatar, in 2023, had the highest carbon dioxide emissions per capita but is not considered an Annex II country. Some assessments have highlighted how China should be considered a candidate for contributions as well since China can contribute close to 7% of climate finance. Most importantly, developing countries are also pressurising to add loss and damage as a third pillar to be funded under the New Collective Quantified Goal on Climate Finance.
The NCQGF presents a pivotal opportunity to recalibrate priorities, ensure accountability, and balance the scales between mitigation and adaptation funding. As the world gathers for COP29, nations must agree on equitable responsibility-sharing mechanisms and innovative funding strategies. Only through collective action and meaningful commitments can the climate finance ecosystem evolve to support the resilience of vulnerable nations and ensure the shared goal of a sustainable future.