“Even if the promise made at the 2021 climate summit in Glasgow to double adaptation finance support to US$40 billion per year by 2025 were to be met – and this doesn’t look likely – the finance gap would fall by only 5 to 10 per cent. So, we need to deliver more finance – by strengthening international public flows, private sector engagement and a reform of the global financial architecture.”
In 2023, temperature records were shattered, and the impacts of storms, floods, droughts, and heatwaves led to widespread devastation. Despite significant efforts to curb greenhouse gas emissions, numerous climate change risks persist, underscoring the crucial importance of climate adaptation. However, a major impediment to effective adaptation is the lack of financial resources.
According to a recent report from the United Nations Environment Programme (UNEP), the projected costs of adaptation in developing countries for this decade stand at approximately US$215 billion annually. The financial requirements for implementing domestic adaptation priorities are even higher, estimated at US$387 billion per year. Regrettably, public multilateral and bilateral adaptation finance directed towards developing nations witnessed a decline of 15 percent in 2021, reaching a total of US$21 billion.
As a consequence of the widening gap between the growing needs for adaptation finance and the diminishing financial flows, the current adaptation finance deficit is now estimated to range between US$194 billion and US$366 billion per year. Simultaneously, there seems to be a stagnation in the planning and execution of adaptation strategies. This failure to adapt carries significant implications, especially in terms of losses and damages, disproportionately affecting the most vulnerable populations.
The term ‘climate finance’ is a multifaceted concept encompassing various dimensions. Broadly, it refers to financial support for endeavors geared towards mitigating or adapting to the effects of climate change. However, there is occasional confusion as it intersects with interconnected notions such as green finance, sustainable finance, and low-carbon finance.
While there isn’t a singular definition for climate finance, the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance provides the closest approximation:
“Climate finance aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.”
This interpretation of climate finance encompasses the financial flow directed to all activities, programs, or projects designed to address climate change—both in terms of mitigation and adaptation—across all economic sectors, irrespective of geographical location.
Globally, there is a concerning insufficiency of financial resources to support developing nations in their pursuit of the Climate Convention goals. This lack of funds poses a significant obstacle to addressing climate change effectively. Complicating matters further, many developing countries already find themselves burdened by substantial debt, leaving them with little choice but to allocate a major portion of their limited budgets to debt servicing. Unfortunately, this leaves minimal room for critical investments in sectors like healthcare, education, and climate action.
Consequently, these nations are constrained in their ability to prioritize climate change and environmental protection due to a constricted fiscal space. Such circumstances create formidable challenges in combating global warming, necessitating the reliance on climate finance from multilateral funding avenues and bilateral donors to provide the crucial support needed for their climate efforts.
The current efforts to address climate change fall far short of what is necessary to achieve the temperature and adaptation targets set out in the Paris Agreement. Despite global temperatures already surpassing pre-industrial levels by 1.1°C, the goals outlined in the nationally determined contributions (NDCs) would potentially lead us to a temperature increase of 2.4°C–2.6°C by the end of the century.
In recent years, the financial gap between the allocations made by developed countries and the actual amount needed for adaptation has significantly widened. A report by UNEP indicates that this gap ranges from $194 billion to $366 billion annually. Clearly, the $100 billion promised by developed nations, as well as the commitment to double the collective provision of climate finance for adaptation agreed upon at the Glasgow Climate Pact in 2021, will fall short.
Additionally, international public climate finance flows to developing countries experienced a 15% decrease to $21.3 billion in 2021, following an increase to $25.2 billion between 2018 and 2020. Moreover, over the past five years, international public adaptation finance has suffered from a low disbursement ratio of 66%, compared to the overall development finance disbursement ratio of 98%. To meet the target of doubling adaptation finance flows to around $40 billion by 2025, as pledged in COP26, finance providers must increase annual adaptation flows by at least 16% on average between 2022 and 2025.
Under the Paris Agreement, governments reached a decision to establish the New Collective Quantified Goal (NCQG) with a minimum threshold of $100 billion per year. This goal takes into consideration the needs and priorities of developing nations. It presents an opportunity to rebuild confidence in the transformative changes necessary to address climate change effectively, mobilize financial resources, and meet the requirements of developing countries.
Developed nations have an obligation to provide climate finance to support the implementation of the UN Framework Convention on Climate Change and the Paris Agreement by developing countries. The distinction between “developed” and “developing” countries is crucial, as they bear different responsibilities and capabilities in relation to the climate crisis. As the global economic and financial landscape evolves, and the influence and weight of various countries shift, the complexities of climate finance discussions have resurfaced, particularly regarding the successor to current climate finance commitments in the form of the New Collective Quantified Goal.
The UNEP Adaptation Gap report has identified a variety of strategies to bridge the financing gap for climate adaptation. The main contributors to closing this gap are identified as (i) international public adaptation finance, (ii) domestic expenditure on adaptation, and (iii) private-sector finance for adaptation, although the relative impact of each remains uncertain. The report also highlights four potential approaches to address the finance gap: (iv) leveraging remittances sent by migrants to their home countries, which can significantly contribute to GDP, (v) increasing finance options specifically tailored to small and medium-sized enterprises, as they form a significant portion of the private sector in many developing nations, (vi) reforming the global financial architecture, such as through the Bridgetown Initiative, which holds great potential to enhance the resilience of developing countries against future climate shocks, including exploring changes in managing the debt burden of vulnerable nations, and finally, (vii) implementing article 2.1(c) of the Paris Agreement, which emphasizes aligning financial flows with low-carbon and climate-resilient development pathways. By employing these approaches, progress can be made in closing the finance gap and supporting adaptation efforts in the face of climate change.
To effectively address the domino-like risks and consequences of the climate crisis, a comprehensive and collaborative approach is necessary. This entails integrating multiple disciplines, considering different scales, and involving various sectors. It is crucial to understand, identify, and attribute the ripple effects of climate shocks and stressors in order to develop strategies that enhance adaptability and resilience. However, it is highly likely that the costs of adapting to these impacts will be greater than initially anticipated.
Without a strong framework that ensures sufficient, timely, and accessible climate finance, it will be incredibly challenging to effectively mitigate global warming and protect vulnerable communities in developing nations. Policymakers at COP28 must prioritize the critical issue of climate finance to prevent the Paris Agreement from falling further behind and, ultimately, save lives.