The Role of International Climate Finance

What Congress Needs to Know in the Lead Up to COP26: Briefing Series on the U.N. Climate Change Conference in Glasgow
Find out more about the briefings in this series below:
Part 1	Creating Policies, Coalitions, and Actions for Global Sustainable Development
Part 2	Momentum on Climate Adaptation
Part 3	The Role of International Climate Finance
Part 4	The Negotiations: What’s on the Table
Conclusion	Recap of COP26: Key Outcomes and What Comes Next

The Environmental and Energy Study Institute (EESI) held a briefing series on what Congress needs to know in the lead-up to the 26th Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change.

International climate finance is a critical tool to increase access to climate mitigation and adaptation resources to address the growing threat of climate change. This briefing discussed the current state of international climate finance, the role and status of the Green Climate Fund and other funding mechanisms, and Congress’s role in meeting U.S. climate finance commitments. Panelists described how international climate finance dovetails with ongoing efforts of the State Department, Department of Defense, and the U.S. Agency for International Development to address the impacts of climate change abroad.

This briefing series was co-sponsored by the British Embassy Washington.

We are grateful for the partnership with the Henry M. Jackson Foundation that helped make this briefing possible.

Highlights

 

Kate Hughes, Director for International Climate Change, Department for Business, Energy and Industrial Strategy, United Kingdom Government

• Public international climate finance has an important role in reducing global greenhouse gas emissions and supporting countries to adapt and become resilient to climate change. Also, climate finance influences the negotiating dynamics at the annual United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP); this will be particularly true for COP26.
• The U.K. COP26 Presidency welcomes President Biden’s commitment to work with Congress to double U.S. climate finance, aiming to reach $11.4 billion annually by fiscal year (FY) 2024. The Presidency recognizes the important role that Congress plays in supporting this ambition and appropriating climate finance. The COP26 Presidency calls on Congress to work with the Administration to scale up climate finance over the next three years in a way that maximizes its impact in meeting global emission reduction goals and supporting vulnerable countries to adapt to the impacts of climate change.
• Climate finance is one of three key pillars of the Paris Agreement. Countries agreed at COP15 in 2009 to collectively mobilize at least $100 billion of climate finance per year by 2020 to support developing and emerging economies to meet their climate goals. This goal was reaffirmed in Paris and countries agreed that the goal would run through 2025.
• The United Kingdom has committed to doubling its own climate finance to £11.6 billion [$16 billion] between 2021 and 2025, with a balance between mitigation and adaptation. Meeting the United Kingdom’s international climate finance commitments will only require a fraction of what it is already spending domestically on the transition.
• Climate finance is integral for safeguarding the development progress that has been made globally in the past decades.
• It is great that there are a variety of vehicles for climate finance in the Senate and House draft appropriations bills, including technical assistance through the U.S. Agency for International Development (USAID) and the State Department as well as contributions to multilateral funds, including the Green Climate Fund (GCF), the Global Environment Facility, and the Climate Investment Funds (CIF).
• The GCF, given its demand-driven approach, is a key part of supporting developing countries to access funds for impactful projects and mobilizing funds at scale to implement nationally determined contributions [greenhouse gas emissions reduction commitments under the Paris Agreement], national adaptation plans, and other nationally-driven sustainable development strategies. The GCF has programmed more than $3 billion in climate projects since the beginning of the COVID-19 pandemic. The U.K. government recognizes the need to keep improving the GCF’s efficiency and increasing its impact.
• The Climate Investment Funds’ (CIF) sector-specific programmatic approach plays an important and complementary role to the GCF. The CIF disperses funding relatively quickly, works in a streamlined fashion, and has a strong track record on blended public-private finance.
• The U.K. government is excited for the joint United Kingdom-United States leadership in supporting the Accelerating Coal Transitions Program under the CIF, which can play a key role in supporting a just and rapid transition for emerging economies dependent on coal.
• We need a variety of solutions and interventions to address climate change. There is no one-size-fits-all approach, but public finance plays a catalytic role. Donors must work together to maximize impact, and we need to understand the needs of developing countries. We also need to provide predictability and transparency in climate finance so that we can ensure that countries have the certainty to act in the transformative way that is needed.

 

Bella Tonkonogy, Associate Director, Climate Policy Initiative (CPI)

• The Climate Policy Initiative (CPI) is an analysis and advisory organization. CPI works with governments, businesses, and financial institutions to drive economic growth while addressing climate change, and CPI’s main expertise is in climate finance and policy.
• What is climate finance? Climate finance is about making investments to enable activities that reduce greenhouse gas emissions or support adaptation to climate change. This can include investments in clean energy, land use, disaster risk management, and resilient infrastructure.
• There are a few ways CPI has further defined climate finance:
  • International public climate finance: financial flows that go from developed countries to developing countries to support climate action.        
  • Public climate finance: domestic climate finance, which is national or local governments investing in projects in their own country.
  • Private climate finance: investments that commercial banks, institutional investors, corporations, and the public are making.
• CPI found that, overall and globally, climate finance reached an average annual investment of $632 billion for 2019 and 2020. CPI also examined the sources and instruments of climate finance, the uses of it between mitigation and adaptation, and the destinations in terms of sectors (energy generation, transportation, etc.).
• CPI found that mitigation finance continues to dominate globally, with over a 90 percent share of total climate finance. Of that, renewable energy around the world receives the highest share of mitigation finance, and a majority of that is privately financed.
• Transportation finance is growing faster than renewable energy finance.
• Adaptation finance is a small share of total climate finance, at about seven percent. Adaptation finance is mostly made up of public actors. While adaptation finance increased 50 percent from CPI’s last study in 2017–2018, it is still a small overall share.
• Globally, climate finance is growing, but the growth is slowing. Climate finance only increased 10 percent from CPI’s last study, compared to previous years that had growth rates closer to 25 percent. This is worrying because we have not yet seen COVID-19’s impact on climate finance.
• Why does international climate finance matter?
  • Climate change stands to reverse many of the development gains that have been made. From a U.S. perspective, that can contribute to global instability, which can directly affect U.S. national security.
  • To meet global climate change goals, we need action from developing countries. Thirty-nine percent of the effort needs to come from developing countries, and another 30 percent needs to come from China. The United States will be impacted if developing countries cannot reduce their emissions.
  • The vast majority of climate finance flows are concentrated in East Asia and the Pacific, Western Europe, and the United States and Canada. The vast majority of the finance flows for these regions are domestic. Sub-Saharan Africa, South Asia, Latin America and the Caribbean, and Central Asia are far more dependent on international finance flows, with about half of their climate finance coming from abroad. Without international climate finance, these regions are going to have a challenging time reaching their climate targets.
• Public sources of climate finance need to increase. There is a massive investment gap, especially for developing countries.
• The areas where international climate finance is most needed are the following:
  • Enabling environment (policy reform, market environment);
  • Project pipelines (helping countries, cities, and project developers develop adequate pipelines for investment); and
  • Financing vehicles (using public sources of finance to de-risk investment for the private sector).
• From multilateral development banks to bilateral aid agencies, public finance is delivered by diverse sources and instruments, and it is important that they work together.
• One example of an international climate finance story: A company called Komaza is working with smallholder farmers in Kenya to plant trees. The trees can be used for wood and paper products, and they can restore degraded land and diversify farmers’ income. The company is trying to scale up. The company has come up with a new way to finance their business model by refinancing their trees. They are planning to submit a project to the Green Climate Fund (GCF). The company has a huge impact in the number of farmers it reaches and the advanced technologies it brings to Kenya.

 

Ricardo Nogueira, Member, Independent Technical Advisory Panel, Green Climate Fund (GCF)

• The concept of the GCF came out of COP15 in Copenhagen in 2010. There were a few financial pillars that were established during COP15 that paved the diplomatic path to the Paris Agreement.
• The GCF was established to help developing countries meet their climate ambitions. The basic premise was to ensure that development around the world was compatible with climate change. Developing countries wanted a finance vehicle that was demand driven, meaning that projects and activities would be identified by developing countries based on their needs.
• Once it became robust enough, the GCF received its first pledges of funding, totaling over $10.4 billion. Part of that was $3 billion pledged by the United States under the Obama Administration.
• Once the pledges were in place, the GCF immediately began approving projects. The GCF went back for its first replenishment of funding in 2019 and raised an additional $9.4 billion.
• The GCF has approved projects for 127 developing countries, and 139 projects are under implementation. GCF funding of $10 billion has been provided for projects, and co-financing has provided an additional $27 billion.
• What makes the GCF unique?
  • The GCF is country-owned, meaning that in its governance and operation design, the onus is on developing countries to determine their needs. Decision-making is shared between developing and developed countries.
  • Adaptation is a relatively small part of total international climate finance, but it is a critical part. The GCF aims to finance mitigation and adaptation equally, with 25 percent of the total amount focused on the least developed countries and small island developing states.
  • The GCF recognizes that filling the finance gap is going to require mobilizing private sector finance. The GCF has a team that works with the private sector.
• The GCF does not provide direct funding for projects. Instead, it works through intermediaries, called accredited entities, that act as fiduciaries for the GCF. The accredited entities themselves, acting on behalf of the GCF, manage the investments in collaboration with the developing country. Today, there are over 110 accredited entities.
• How does the GCF operate? Countries, often working with an accredited entity, will evaluate their needs and then will generate a proposal. The proposal is submitted through an accredited entity and goes through an independent review. Ultimately, if the proposal gets through the entire process, it will go to the GCF board for final approval, and with board approval, the proposals can be funded and implemented.
• There are some common misconceptions about the GCF that are helpful to address:
  • The GCF is a critical tool to achieve the goal of $100 billion in climate finance annually, but it is not a $100 billion fund itself.
  • The GCF is a stand-alone entity with its own legal personality. It is not part of the United Nations. It is supposed to be independent from the United Nations Framework Convention on Climate Change, but it does take guidance from it.
  • The GCF does not operate on an allocation method [e.g., countries are not entitled to a share of the funds based on their population].

 

Joe Thwaites, Sustainable Finance Center Associate, World Resources Institute (WRI)

• The World Resources Institute is a global research institute that works at the intersection of environment and development.
• The United States defines international climate finance as providing funding to help developing countries reduce greenhouse gas emissions and/or adapt to the impacts of climate change.
• Why provide international climate finance?
  • The United States is the largest cumulative greenhouse gas emitter.
  • Climate finance is a strategic investment in a cleaner and more resilient world and enhances U.S. credibility and influence internationally. China is ramping up its overseas financing, including for climate. The United States may be able to better maintain its global influence by providing attractive investment packages to developing countries.
  • Integrating climate considerations early on is good development practice, ensuring better outcomes for the poorest and most vulnerable communities around the world. Climate impacts can undermine development gains.
  • Climate funding boosts U.S. export markets for clean technology. Out of the top 30 markets for U.S. renewable energy exports, more than half are eligible to receive funding from the GCF. The GCF is also directly supporting projects that are implemented by U.S. companies.
  • Climate finance reduces the severity and cost of climate impacts for vulnerable countries. Climate finance can also address some of the root causes of migration.
• The United States is part of the $100 billion a year climate finance commitment. At COP21 in Paris, countries agreed to continue to mobilize $100 billion each year through 2025. The commitment includes an acknowledgement that it can come from a wide variety of sources. As a point of comparison, $100 billion is about 0.7 percent of the $15 trillion that developed countries announced in fiscal stimulus to respond to COVID-19.
• Progress towards the $100 billion a year goal has not been going well. The Organization for Economic Co-operation and Development’s latest assessment showed that countries were still about $20 billion short of that goal in 2019. It is widely expected that the goal was also missed in 2020. But developed countries can still deliver and ideally make up for shortfalls.
• In 2018, the United States was the third largest contributor of public climate finance in absolute terms, behind Germany and Japan, and about level with France. But the U.S. economy is more than four times the size of Japan's, five times Germany's, and seven times France’s. When looking at climate finance as a share of gross national income, the United States actually ranked last.
• The United States’ fair share of the $100 billion a year climate finance effort would be between 40 and 47 percent of the total. The U.S. shortfall is more than double the combined shortfalls of all the other countries.
• There is a need to scale up adaptation finance, which has historically not received as much attention as climate mitigation. Some countries are approaching or exceeding 50 percent of climate finance for adaptation. But the United States is at about 25 percent of funding going towards adaptation.
• Last month, the Biden-Harris Administration pledged to increase U.S. climate finance to $11.4 billion per year by 2024, quadrupling the amount the Obama Administration provided and making the United States the single largest country contributing climate finance. However, the European Union provided more than double the amount of climate finance in 2019 compared to what the United States has pledged to do by 2024. The Biden-Harris Administration also committed to scaling up adaptation finance six-fold, but still, it will only be about a quarter of the total share of its climate finance. The Administration was clear about the need to work with Congress to ensure climate finance commitments are delivered.
• Congressional appropriations cover multiple multilateral institutions, the largest of which is the GCF. Other funds include the Global Environment Facility, the Climate Investment Funds, and the Montreal Protocol Multilateral Fund. On the bilateral side, there are three key accounts for adaptation, renewable energy, and sustainable landscapes. This funding is primarily delivered through the U.S. Agency for International Development (USAID) and the State Department.
• Funding for sustainable landscapes has long been in appropriations bills, but the adaptation and renewable energy accounts were added by Congress in 2019. This reflected the concern that the Trump Administration would not voluntarily fund these activities as the Obama Administration had been doing and is an example of Congress using its power of the purse to ensure that more gets spent on climate.
• The Biden-Harris Administration’s budget, across both multilateral and bilateral accounts, significantly increased the amount it requested for climate finance to around $2.7 billion in total. The House and Senate FY2022 appropriations bills increased these further to $2.8 and $3.1 billion, respectively.
• Other channels of U.S. climate finance include funding through multilateral development banks (MDB) and the U.S. Development Finance Corporation (DFC), but only a portion of their funding gets used for climate projects. For the MBDs in 2018, the U.S. share was about $4 billion for climate. The DFC aims to direct a third of its investments from FY2023 onwards to climate projects, which would equate to about $1.5 billion a year.

 

Sashi Jayatileke, Senior Climate Finance Advisor, United States Agency for International Development (USAID)

• USAID is working across every bureau to look at how to integrate climate goals across its portfolio. USAID wants to see all of its work in economic growth, governance, and agriculture contribute to climate goals.
• USAID has programming in about 45 countries, totaling about $360 million.
• Addressing climate change can reduce the cost of climate-related disasters. Tackling the climate crisis can provide enormous economic benefits for Americans. Developing international markets for clean technologies and climate-friendly solutions will also provide opportunities for Americans. Foreign assistance for climate solutions will reduce displacement and migration.
• USAID is looking at ways to mobilize resources and direct funding for solutions on the ground. USAID wants to use its investments to scale up prior work in renewable energy, transform agriculture to make food systems more climate resilient, and update infrastructure needs to reduce the risk of future disasters.
• At COP26, USAID will unveil a new climate strategy for public comment. This strategy is based on USAID’s history and best practices of working in climate mitigation and adaptation, but also integrates structural and system changes to meet net-zero emissions by mid-century and to build resilience in climate vulnerable countries.
• USAID is working to:
  • Improve disaster preparedness for climate hazards. Every dollar invested in climate adaptation and preparedness over the next decade will yield at least three times that amount in returns.
  • Reduce emissions from its operations and safeguard facilities from climate risks.
  • Embed equity, inclusion, and locally-led development in its strategies.
  • Leverage the expertise of other agencies, like the Department of Energy and Department of Transportation, and transfer those learnings to the countries USAID works in.
  • Ensure and integrate gender equity and climate justice considerations into all climate change programming. These are new additions to USAID’s work in climate change.
• Climate finance also means mobilizing trillions of dollars of private finance. USAID is building on its experience of mobilizing private finance and trying to reduce risks for private investors. Blended climate finance needs to support climate outcomes and build on new learnings in adaptation and nature-based solutions.
• USAID hopes to leverage $20 of private finance for every dollar of USAID funding. USAID has the convening power to bring colleagues from the private sector, U.S. government agencies, and partner governments to attract and deploy the necessary financing.
• USAID hopes to support tools and technologies that help businesses and multi-stakeholder communities speak the same language and unlock the trillions of dollars of financing needed for climate solutions. USAID hopes to do this by building a pipeline of credible businesses; assisting partner countries to access climate finance and meet requirements for the GCF and other funds; structuring private financial vehicles to leverage public funds for greater development impact; and supporting the financing of underserved sectors and underserved communities through multiple risk management tools.
• Fortune 500 companies have new carbon neutral commitments. USAID is working to leverage those commitments and further the taxpayer dollar in its climate work. USAID will partner with firms such as Starbucks and Cargill to improve farmer productivity, mitigate the risks for these investors, and ensure benefits reach local communities.
• One example of this is the Althelia Biodiversity Fund that helps investors and private enterprises support conservation in the Amazon.

Q&A

What steps are being taken to ensure that the quantity of climate finance mobilized is matched by its quality?

Hughes: Quantity is important, and it is important to track it. In terms of quality, the COP26 Presidency has held sessions with countries to understand this. The balance between adaptation and mitigation is important—we need to make sure that we are doing both. Access to finance is absolutely critical. Technical assistance is an important part of that to ensure that countries can tap into finance. Another important aspect is the kinds of finance that are provided; there is not a one-size-fits-all for the type of finance we should provide. Finally, monitoring the effectiveness and the impacts of finance is important for making improvements.

Tonkonogy: The United Kingdom has done an exceptional job of understanding and assessing value for money. Barriers to investment are context specific. They are technology, region, and locality specific. Analysis is important to understand what is preventing investment.

Nogueira: Quantity is not the same as impact. However, it is politically and diplomatically important to reach the $100 billion a year in climate finance. The key is figuring out how to use that money in an effective way, which is going to include funding activities that cannot be funded in another way. Governments have been improving on how best to use those dollars, and sometimes that means less money used more efficiently.

Thwaites: There is a need for both more and better investment in climate. Improving access for adaptation is important, including access for developing country institutions. The GCF and the Adaptation Fund do this well. The amount of finance in the form of grants has stagnated. The private sector is more interested in equity and guarantees and more innovative financial instruments, whereas the public sector is more interested in grant finance. So, figuring out how to improve the financial instrument allocation is important because a lot of the time the loans are not best suited for the needs.

Over the last few years, private finance mobilization has not taken off. In 2016, developed countries projected that, of the $100 billion for climate finance annually, $33 billion would come from private sources. As of 2019, less than $15 billion of funding has come from private sources.

Jayatileke: Measuring results is important. USAID has been measuring its historical performance using monitoring and evaluation indicators. It is critical that USAID works with its partners to track performance of every dollar used and ensure that it is impactful.

 

Any final words or key messages ahead of COP26?

Hughes: U.K. Prime Minister Boris Johnson has talked about his goals for COP26, including mitigation, adaptation, finance, and collaboration. He also frames this as goals on "coal, cars, cash, and trees." Finance is in the middle of what brings this all together and what is going to make it work. Finance is needed for the huge transition that every country and institution needs to go through in order to deliver on the commitments made under the Paris Agreement. Every dollar spent and every financial decision needs to take climate into account.

Tonkonogy: International climate finance plays a crucial role in achieving climate action in many countries, and we need to scale it up and deploy it more effectively.

 

Compiled by Savannah Bertrand and edited for clarity and length. This is not a transcript.