Climate finance is a heavily contested term. From a climate justice perspective, it refers to the transfer of public resources from North to South to cover the costs of dealing with the long-term impacts of climate change. This money, a key component of climate debt, should also be provided to help Southern countries to pursue low-emissions paths without repeating the unsustainable reliance on fossil-fuels that was central to the industrialization of Northern countries.
The UN Framework Convention on Climate Change (UNFCCC) set out the basis for climate finance in similar, if slightly more technical terms. Article 4.3 of that agreement commits Annex II countries (a list that including all members of the European Union, the USA, Canada, Japan, Australia, Switzerland and New Zealand) to provide ‘new and additional financial resources’ for the ‘full incremental costs’ of addressing climate change.
Other definitions are more broad, and refer to all financial flows relating to climate mitigation and adaptation. Mitigation can include renewable energy, energy efficiency and fuel switching, forestry and land use, urban transport and carbon sequestration projects, as well as technical assistance and capacity building to address climate change. Adaptation includes projects are those which are partly or wholly dedicated to addressing the impacts of climate change, such as water scarcity, agricultural resilience, infrastructure to withstand floods and other extreme weather, and capacity building.
The key difference between these broader and narrower definitions of climate finance are that the latter includes one or more of the following: sources that are not ‘additional’ (such as aid money), private finance, and ‘capital investment’ (rather than just ‘incremental costs’). Counting capital investment means including market-rate loans (which will need to be paid back) as well as equity investments (ownership of a stake in projects, or companies running these projects) in the figures.
Proponents of a broader definition argue that the private sector already provides three times more money than the public sector, and that an emphasis should be placed on encouraging (or leveraging) even more money from the private sector. But counting non-additional finance towards this total means that it calculates for-profit investment that would have happened anyway.
Measuring climate-related finance in this way can be a useful diagnostic exercise, showing the limited financing capacity of carbon offsets, for example, or the rising share of financing that is passing through bilateral institutions (such as members of the International Development Finance Club). Critics argue that such a definition can distort the policy debate, overstating the role that leveraging plays in for-profit companies’ decisions, and lead to an institutional set-up that will side track community-led projects, adaptation and finance to ‘least developed countries.’
Further reading and resources
Heinrich Böll Stiftung and Overseas Development Institute, Climate Finance Fundamentals
Buchner B. et al. (2012) The Landscape of Climate Finance 2012, Climate Policy Initiative