The almost mystical Green Climate Fund is back in the headlines at the COP26 climate summit in Glasgow. The fund grew out of a promise made by rich nations in 2009 to provide US$100 billion (£74 billion) per year in “climate finance” to help developing countries decarbonise their economies. So far, the amount actually raised has fallen far short, though we might at least get there soon.
Climate finance is notoriously tricky to define. It’s rarely clear how much is really available, or how much is actually needed. So where does this money come from, and can those richer nations even afford it, especially following the COVID-19 pandemic?
There are three broad categories of climate finance. The first is debt, which can be public (governments issuing bonds) or private (companies issuing bonds). A second category comes from shares and private capital. This can take many forms, but often includes “green funds” that screen out polluting firms and industries.
The final category, and one that is a key interest at COP26, is the role of international aid in providing finance to help developing countries decarbonise –for example by phasing out coal, developing low-carbon transport, or restoring ecosystems such as mangroves that buffer against floods and storms.
In principle, climate-oriented international aid can take the form of grants, loans or direct investments and insurance, each with varying degrees of strings attached. In practice, however, these categories are highly controversial. Take for example a hypothetical US$50 million loan from the US to India for a new solar farm, which is to be repaid with US$10 million in interest. From the US perspective, US$50 million of climate finance has been provided. From India’s perspective, it received US$50 million but will ultimately send US$60 million to the US, prompting the question of who is financing whom.