Climate Finance - an overview (2024)

11.11 Outlook

Climate finance is an excellent place for first experiments with global democratic consensus mechanisms. And the most vital component of it is the creation and conservation of legitimacy. But initially, electronic democratization of climate finance will remain for a “club of the willing.” Most importantly, lots of experiments on the rules, user interfaces, and incentives, etc., are required before any serious proposals for a USD$100 billion apparatus can be made. Believably, creating a show-case for functional electronic democracy could be a door opener for wider efforts to turn the tide on the global recession of democracy with new technologies (https://www.eiu.com/topic/democracy-index, 2017).

1.7 Climate Finance

Climate finance refers to local, national, or transnational financing, which may be drawn from public, private, and alternative sources of financing. Climate finance is critical to addressing climate change because large-scale investments are required to reduce emissions significantly, notably in sector that emit large quantities of greenhouse gases. Climate finance is equally important for adaptation, for which significant financial resources will be similarly required to allow countries to adapt to the adverse effects and reduce the impacts of climate change. Climate finance should not be confused with carbon finance as the two are totally different; climate finance refers to the funds required for addressing the climate change whereas carbon finance is the revenue realized by projects through sale of carbon credits earned.

In accordance with the principle of common but differentiated responsibility and respective capabilities set out in the Convention, developed countries (Annex-I countries) are to provide financial resources to assist developing countries (non-Annex-I countries) in implementing the objectives of the UNFCCC. It is important for all governments and stakeholders to understand and assess the financial needs the developing countries have so that such countries can undertake activities to address climate change. Governments and all other stakeholders also need to understand the sources of this financing, in other words, how these financial resources will be mobilized.

Equally significant is the way in which these resources are transferred to and accessed by developing countries. Developing countries need to know that financial resources are predictable, sustainable, and that the channels used allow them to utilize the resources directly without difficulty. For developed countries, it is important that developing countries are able to demonstrate their ability to effectively receive and utilize the resources. In addition, there needs to be full transparency in the way the resources are used for mitigation and adaption activities. The effective measurement, reporting, and verification of climate finance are keys to building trust between Parties to the Convention, and for external actors.

At international level, the Adaptation Fund (AF), the Green Climate Fund (GCF) and the GEF are major instruments of climate finance at present.

The AF was established in the year 2001, through a decision taken by COP to UNFCCC, to finance concrete adaptation projects and programs in developing countries that are particularly vulnerable to the adverse effects of climate change. The AF is financed through financial contributions from developed countries and with a share of proceeds from the CDM project activities. The share of proceeds amounts to 2% of CERs issued for a CDM project activity. This fund has achieved its goal of raising a fund of US$100million by end of the year 2013 with target for the resource mobilization of US$80million per calendar year in 2014 and 2015 to support the approved projects and programs.

The GCF was established by the COP in its 16th session during November 29 to December 10, 2010 as an operative entity to the financial mechanism of the Convention. The GCF supports projects, programs, policies, and other activities in developing countries, which are Party to Kyoto Protocol. The World Bank is the interim trustee of the GCF. This fund has mobilized US$10.2billion to date by contributing Parties, enabling it to start its activities in supporting developing countries and making it the largest dedicated climate fund.

The GEF, a partnership for international cooperation where 183 countries work together with international institutions, civil society organizations, and the private sector, to address global environmental issues, also serves as financial mechanism for UNFCCC and its Kyoto Protocol.

10.4 Blockchain and Tracking Financial Flows to the Poor

Climate finance is the flow of donor and government funds toward activities that reduce or mitigate greenhouse gas emissions or help communities adapt to climate change’s impacts, and can catalyze other investment flows. Climate finance and adaptation will play an important role in helping developing countries meet the UN’s Sustainable Development Goals⁸ (United Nations, 2017).

Each year, over one trillion dollars flows from individuals, governments, and businesses to address the challenges of poverty and crisis across the world (Carraro, 2017). The distribution and tracking of global development and humanitarian aid funds remains complex, opaque, and hugely inefficient. Transfers can take weeks to arrive and 5–10% losses are not uncommon (The World Bank, 2017).

Lack of transparency is also a key issue as there is an inability to trace the flow of funds from end to end. The UN estimates that up to 30% of official development assistance is lost due to fraud and corruption (Jenny, 2012). The result is less funds, leading to reduced impact for those who need it most. On the ground, organizations face multiple barriers to ensuring full transparency of fund distribution–weak infrastructure, capacity limitations, and cash-based systems all contribute to the challenge for international agencies and local organizations to be fully accountable to both their donors and the communities and individuals they work with.

The Climate Funds Update⁹, a joint initiative of the Heinrich Böll Stiftung (HBF)¹⁰ and the Overseas Development Institute (ODI)¹¹, monitors dedicated climate change funds from the stage when donors pledge funding, through to the actual disbursem*nt of financing for projects, in an effort to increase the transparency of climate finance flow (Climate Finance Fundamentals, 2017). Blockchain applications to track financial flows and report results, and smart contracts that target beneficiaries have potential to speed up financial flows and vastly improve accuracy and transparency of reporting.

4.5 Barriers for Unlocking Climate Finance

An example of a sector where there has been a significant climate finance shortfall is in the clean cooking sector. In this sector, finance is needed for improved biomass and clean-fuel supply chains, working capital for improved cookstove producers and distributors, support for market transformation programs and enabling infrastructure. According to the World Bank, estimates of the total funding gap vary, but they suggest that the sector is significantly underfunded with roughly US$70 million of investments globally in clean cooking interventions by donors (Putti, Tsan, Mehta, & Kammila, 2015). This contrasts with IEA estimates that annual investments of US$4.7 billion are needed globally to ensure universal application of clean cooking fuels through 2030. To address the significant shortfalls, the World Bank calls for a significant increase in clean cooking solutions, potentially via smart and targeted subsidies, and continued investment in improved cookstoves.

Abstract

A major reason for the chronic climate finance underspend (US$1 trillion per year required, US$360 billion per year spent) is that there is a misalignment between institutional investors looking to invest in climate finance and the fundamental characteristics of the most impactful technologies and projects that will drive the global transition toward a low-carbon economy. Many highly effective activities are well below the investment hurdle of most institutional investors. CleanTek Market has created an on-line marketplace for the global climate finance community. The marketplace provides matchmaking services to participating organizations, whereas a range of Blockchain-based tools and services is being developed that will mobilize climate finance and direct it to where it is required. Tools and services include: deal aggregation, investor syndication, crowdfunding, corporate power purchase agreements (PPAs), and other niche marketplaces. All are designed around our smart algorithms to match organizations together, and Blockchain technology to provide algorithmic authentication, smart contracts, and settlement services.

22.3 The Dawn of a New Economy

Abstract

Understanding the potential blockchain has to offer the world of climate finance, is essential in achieving the goals set out by the Paris Climate Agreement. Based on conversation with masterminds in the field, this chapter aims to demystify the innovative new technology and explore the areas in which blockchain’s application could make a crucial difference in the pursuit of climate pledges. These range from its potential in helping to upscale private climate investment to the vital role which it could play in facilitating peer-to-peer energy transactions. The experts interviewed in this chapter are Sven Braden, a climate change negotiator with over a decade of experience in representing the nation of Liechtenstein, and Stefan Klauser, a FinTech expert with an extensive background in blockchain innovation as a lead organizer at the Swiss Federal Institute of Technology in Zurich (ETH Zurich).

12.2.3 The Sources of the Problem

The lack of technical knowledge and existing bureaucracy in the current climate finance architecture may be quite restrictive for organized communities to implement climate adaptation initiatives in their territories.

First, the selection or prioritization of adaptation projects for funding is subject to governmental discretion, justified with technical arguments and metrics, and usually also impacted by unavoidable political calculations. Consequently, many interesting climate adaptation ideas originated at local community levels have never passed the proposal assessment stage by conventional international climate funds.

Second, funding entities are characterized by cumbersome bureaucracies and procedures, lengthy approval processes and complicated structures designed to safeguard the integrity of the funds. It could take years for an international climate fund to complete a project funding cycle.

Abstract

A central problem of the climate crisis is a need to mobilize sufficient climate finance to generate a low-carbon transition, and to do so quickly enough to prevent dangerous anthropogenic interference with the climate system. In response to this challenge, a case is presented for a coordinated central bank policy that involves a Central Bank Digital Currency (CBDC) for rewarding climate mitigation actions. Justification for the CBDC is framed on a new model for costing externalities and pricing systemic risk. A hypothetical 100-year storyline, called “Avoiding Catastrophe,” is presented to illustrate how the CBDC could be used to mobilize trillions of dollars of new climate finance and manage climate risk. Effectiveness of the CBDC reward is appraised by comparing the 100-year storyline with a speech given by Mark Carney—the Governor of the Bank of England—titled “Resolving the climate paradox.” A technical brief is provided for a CBDC platform, including recommendations for Blockchain ledgers, smart contracts, rules, and strategies for ensuring accountability and scalability.