1) Climate finance refers to financial resources and instruments that are used to support action on climate change. It aims at reducing emissions and enhancing sinks of greenhouse gases. It also and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.
2) Examples of climate finance include grants provided by multilateral funds, market-based and concessional loans from financial institutions, sovereign green bonds issued by national governments, and resources mobilized through carbon trading and carbon taxes.
3) Investments in climate action can yield results that dramatically outweigh the upfront costs, yet significant funding gap remains to advance the green transition and enhance resilience in developing countries.
4) Current financial flows for climate change mitigation need to increase at least three times, if we are to limit global warming to 2°C or below and achieve the Paris Agreement targets.
5) UNDP is one of the major entities supporting countries access and effectively use climate finance.
6) Developing countries can access some of their climate finance in the form of grants from the GEF, the GCF, and the AF. Governments and the private sector can also access market-based and concessional loans from financial institutions such as the World Bank, the African Development Bank, and the Inter-American Development Bank, among others.
These grants and loans can be used to invest in projects that reduce, absorb, or prevent greenhouse gas (GHG) emissions, such as renewable energy power plants, electric buses, and forest conservation, or projects that build resilience to climate change such as establishing early warning systems, increasing coastal protection, enhancing the resilience of agriculture and food systems, and building infrastructure that can withstand storms and flooding.
7) Governments, through their budgeting processes, can allocate funding to priority climate actions, such as those set out in their national climate pledges (referred to as Nationally Determined Contributions under the Paris Agreement), or issue sovereign green bonds to fund those projects.
Sovereign bonds are loans that governments take from a pool of investors in exchange for regular interest payments over a certain number of years. At the end of this period, when the bond reaches maturity, the government returns the initial investment to the investors.
8) Governments can also mobilize climate finance from carbon trading and carbon taxes. Through carbon trading, GHG emissions are quantified into carbon credits that can be bought and sold. One tradable carbon credit equals one tonne of carbon dioxide, or the equivalent amount of a different GHG reduced, sequestered, or avoided.
Carbon credits can be bought by countries or private companies that want to enhance their GHG emissions reduction efforts. Carbon taxes are typically applied to discourage the use of products and services with big carbon footprints.
For instance, a tax can be applied on gasoline at the pump or on electricity generated from fossil fuels. Proceeds from these taxes can be used to invest in renewable energy, forest conservation, and other forms of climate action.
Source: UNDP
