A total of almost EUR 185 trillion is required to deliver Net Zero by 2050. Despite climate finance having grown consistently over the last decade, we are far behind what is needed to meet the goals of the Paris Agreement. As the saying goes ‘we can pay the bill now or pay dearly in the future’. Let’s see how far we have reached and what stands in our way.
Bridging the climate financing gap – seizing the opportunity
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Last modified on 11 avril 2024 16h48
By Alba Forns Albuixech, COO & Co-Founder of Climatize and Kristina Lyubomirova Lazarova, Head CEO Office at the Bulgarian National Electricity Company
Both authors are EUSEW Young Energy Ambassadors
Understanding climate finance
The term climate finance refers to a wide variety of financial instruments that are distributed to address climate solutions. These range from grants and loans provided by large public institutions such as governments or multilateral funds, to green bonds, carbon taxes or private funding. All financial resources are either allocated to mitigate the impacts of climate change or build resilience and adaptation to the new reality we live in.
Although there has been an intensive and rapid allocation of funds, current financial flows must increase at least three-fold in order to achieve the Paris Agreement targets. The key challenges include insufficient funding, especially seen in private sector reluctance; global disparities and transparency issues among others.
Importance of bridging the gap
70% of the infrastructure investment needed for the low-carbon transition shall be deployed in the emerging markets and developing economies that face multidimensional crises, including political and economic instability, corruption and environmental challenges. Climate finance flows have grown consistently over the past decade, but they still lag far behind what is needed to meet the goals of the Paris Agreement. EUR 5.7 trillion of climate finance is required annually between now and 2030, and EUR 6.7tn by 2050, to deliver Net Zero – a total of almost EUR 185 trillion. The actions towards the effects of climate change in vulnerable communities and ecosystems shall be handled with priority and due justice. As a means to bridge the overarching gap, global cooperation and the role of climate finance in achieving sustainability goals must be strengthened to promote economic and social benefits of climate action for all.
Key players in climate finance
Climate finance involves a number of stakeholders that play crucial roles in advancing the agenda on the way to net zero. On the one hand, international entities such as UNEP-FI[1], EIB[2], EBRD[3], etc. provide blended financial solutions by increased public funding and mobilised private capital flows. In addition, well-governed, enabling policy frameworks are crucial to help leveraging public and private finance into meeting the climate-related pledges. Next, private investors contribute to the climate capital market due to the imposed ESG[4]/sustainability regulations. Last, but not least - social awareness, engagement and acceptance are pivotal if we are to meet the goals in the foreseeable future.
Challenges and barriers
Market conditions and legal frameworks are, however, not always set right to foster climate finance.
- Political and financial sector misalignment: There are relevant policies and regulations in financial and corporate sectors, however they often are ineffective because of piecemeal or lack of coordination. This leads to misalignments with net-zero objectives, impeding an effective mobilization of public and private finance for climate solutions.
- Surge in inequality and global trust erosion: There's a significant lack of trust between the Global North and South regarding financing for the transition. The failure to fulfil the $100 billion pledge made in Copenhagen in 2009 exemplifies strained relations.
- Limited climate data and analytics: Gaps in climate data and analytics impede the development of credible transition plans, hindering effective scrutiny and execution of climate finance strategies while opening the door to corporate greenwashing.
In order to tackle the challenges and barriers previously exposed:
- Stakeholder alignment: Public finance needs to unlock private finance by being deployed in an optimized manner and ensuring viability across every stage of development, from R&D to first of a kind (FOAK) projects, public procurement and ongoing subsidies as well as concessional funding mechanisms. Policy needs to catalyse private capital flows transcending short-term political cycles. Laws and regulations must be calibrated to encourage clean energy investments.
The public sector should take the lead in paving the way for the private capital market by directing capital towards crucial decarbonisation technologies that currently lack commercial viability. This includes areas such as carbon capture, nuclear energy, green hydrogen, and industrial sectors like cement or steel.
- Just transition via increased cooperation: This entails an expansion of funding mechanisms similar to those employed in Just Transition Mechanism with the Just Transition Fund. These resources will be utilized to retire and decommission fossil fuel infrastructure, concurrently offering financial support and employment opportunities for current workers. Multilateral development banks and development finance institutions must secure additional capital to support these initiatives, directing their funding strategically to leverage private finance and amplify the impact of such programs.
- Addressing knowledge gaps and keeping stakeholders accountable. A well-informed and accountable ecosystem via investing climate data infrastructure and transparency via public awareness will foster progress toward global climate goals.
Where do we go from here?
The shift towards an economy that is low-carbon, resilient, and equitable presents the greatest investment opportunity of our lifetime. Concerted climate action and investment could add a net 20trillion EUR to the global economy, equivalent to a rise of up to 4.4% in global GDP by 2070 (relative to business as usual).
Solutions to close the financing gap are complex and multifaceted ranging from stakeholder alignment, international cooperation and addressing knowledge and keeping stakeholders accountable. Institutions that are well prepared to embark on net zero pathways will be able to leverage decarbonisation-focused policy shifts to become technology innovators and align their practices with ethical and social responsibility standards.
Abbreviations
- UNEP-FI: United Nations Environment Programme Finance Initiative
- EIB: European Investment Bank
- EBRD: European Bank for Reconstruction and Development
- ESG: Environmental, Social and Corporate Governance
Recommended links:
UAE Leaders’ Declaration on a Global Climate Finance Framework, COP28
Laser-focused on Bridging the Climate Finance Gap at COP28, World Bank
What is Climate Finance and Why Do We Need More of It?, UNDP
Bridging the Climate Financing Gap with Public Policy Instruments, EU Commission
Authors
Alba Forns Albuixech is the COO and Co-Founder of Climatize, an impact investing platform bridging the climate finance gap by making it easy, transparent, and accessible to invest in renewable energy projects and potentially earn a return. Since launching in May 2023, over $2,200,000 have been invested in solar projects that support frontline communities via the Climatize platform. Alba was recently selected as Forbes 30 Under 30 Social Impact 2023, is a EUSEW Young Energy Ambassador, has been nominated for the Earthshot Prize 2024 and is actively involved in the entrepreneurial ecosystem as a startup mentor and public speaker. Her goal and mission in life is to fight for climate justice and inclusion.
Kristina Lyubomirova Lazarova is Head CEO Office at National Electricity Company - Bulgaria. In this role she helps the CEO, the Executive team and the Company become more productive and successful through: Operations: Helping manage the rhythm of the business through OKRs; Communication: Helping develop partnership, communication, and branding campaigns; Strategic initiatives: Helping drive important, cross-functional projects (ESG/Sustainability). In 2023 Kristina was selected as EUSEW Young Energy Ambassador and EU Climate Pact Ambassador. Her main interests are related to active (energy) citizenship and advancing a fair and comprehensive sustainability agenda.
Disclaimer: This article is a contribution from a partner. All rights reserved.
Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of the information in the article. The opinions expressed are those of the author(s) only and should not be considered as representative of the European Commission’s official position.
Cet article est publié dans le cadre de la Semaine européenne de l'énergie renouvelable dont EconomieMatin et l'Energeek sont partenaires.
[1]UNDP: United Nations Development Programme
[2] EIB: European Investment Bank
[3] EBRD: European Bank for Reconstruction and Development
[4] ESG: Environmental, Social and Corporate Governance