The $1.3 trillion in climate finance that has become the established goal at this COP will be made up of cash from a range of sources.
The range of sources can best be thought of as a staircase: steps which build on each other to add up to $1.3 trillion. Here’s what each step represents—and the challenges to surmount at each level.
Source: this graphic is based on the IHLEG report on climate finance and was created by the content team at UNCS.
First step: public climate finance
The first and largest step in the staircase is money that is provided by governments from rich, historically responsible countries to support the climate action efforts of the poorest countries. This is the basis of the current $100 billion goal that was agreed on in Copenhagen, and was first met in 2022, two years past the deadline. Everyone agrees it needs to be increased—but by how much?
Some rich countries have argued that this step should amount to about $250 billion per year. They describe this money as “mobilised,” rather than “provided.” In other words, “mobilised” finance includes assumptions that the investment is pulled through from the private sector, rather than being money provided directly from national coffers.
Developing countries, meanwhile, think that this step should significantly above $300 billion. This needs to be public money, they argue: it should be made up of grants that are easy to access and do not create more debt. It should be deployable in line with the national plans of the countries that receive it.
Second step: diversification of sources
Some countries say that the definition of which countries count as developed—aka, which nations should contribute to that “mobilised’ first financing step—needs to be updated. The definition, which dates back to the Kyoto protocol in 1994, does not include countries like China, now the world’s second-largest economy, and Saudi Arabia, a G20 state.
In Baku this year, for the first time in a COP setting, China has described its support to developing countries as “climate finance,”—a nod to the request to be part of this effort. China has pointed to its current efforts totalling about 3.1 billion—depending on how you define it, it could be a lot more. But China has also made it very clear that this contribution is voluntary. The “first step” money, by contrast, would be a firm commitment for which countries are accountable. Other countries, like Saudi Arabia, have historically held firm against being included as a donor country.
Third step: multilateral development banks
Big development banks, like the World Bank, believe they can deliver $120 billion a year by 2030 to low and middle income countries, including $42 billion for adaptation. When added with an anticipated $65 billion from the private sector, this is more than the $74.7 billion collective climate financing mobilised in 2023 for low- and middle-income countries. Still, the Independent High-Level Expert Group says banks must triple their financing by 2030 to support climate goals: $480 billion is possible without affecting their ratings.
The view that multilateral development banks are under-delivering on their potential is also the focus of the Bridgetown initiative led by Barbados PM Mia Mottley. If those recommendations were implemented, banks could further leverage their balance sheets and deploy in developing countries “special drawing rights” which have only been available to traditional donor countries.
Multilateral development banks must also become more involved in the global effort to develop solutions for relieving debt. For many developing economies, the burden of debt repayment as interest rates rise is far outstripping any of the income from climate finance; there is no formal forum or mechanism through which countries can seek to restructure their debt with creditors, whether “official” (governments, MDBs) or “commercial” (bondholders, commodities traders, banks). Preferential rates, debt brakes and debt forgiveness must be coordinated to ensure the benefits of climate finance aren’t wiped out by the vagaries of the markets. While MDBs can play a crucial role, it’s important to note that addressing global debt will require help from all participants in this financial ladder.
Fourth step: Innovative sources of finance
This step represents a diverse set of proposals; this step alone could probably be described as a series of steps or a flight. It includes:
- A global levy on stock-market trades of 0.1%, as described by Macron, Mottley & Ruto in this piece could raise up to $418 billion per year.
- A levy on shipping of $100 per ton of carbon dioxide emitted could raise $80 billion per year they write.
- $250 billion a year could be delivered by a G20 wealth tax proposal by economist Gabriel Zucman
- $2 billion a year could come from voluntary carbon markets, says Mark Carney
- $80 billion a year – global shipping emissions tax under discussion at the IMO
- $121 billion a year – amount a $9-a-flight ‘frequent flying levy’ could raise, proposed by ICCT
- $720 billion by 2030 – climate damages tax on oil majors, backed by Greenpeace
That set of proposals stacks up to $1.6 trillion—but it’s November 2024. The world is already late on delivering $1 trillion. Not one of these mechanisms is set up to deliver. What’s more, the biggest vehicle in this list—the proposed oil major tax—would be implemented on companies that are generally either based in the US, which is about to leave the Paris Agreement, state-owned and therefore protected, and/or have the political links and lobbying and legal firepower to ensure it doesn’t happen for a long long time.
So how much can we depend on this step delivering? That picture will emerge over the coming years, because countries back different proposals based on their circumstances. But it is clear the potential is considerable.
Fifth step: Private finance
At the top of this ladder is private finance. The private sector holds the majority of the world’s wealth—the sector manages more than $210 trillion in assets—yet it has invested comparatively little in climate finance.
Governments and public institutions have a pivotal role in creating the right conditions to mobilise and unlock private finance. Current estimates indicate that private sector mobilisation could generate up to $650 billion for climate action by 2035. Public leaders need to focus on creating the right conditions for private finance to mobilise on this issue.
Related Articles
