The World Bank’s latest report titled ‘Transformative Climate Finance: A new approach for climate finance to achieve low-carbon resilient development in developing countries’ analyses options to make international public climate finance more transformative.
The report has identified 8 sets of levers to drive climate action:
1. Project-based investments
2. Financial sector reform
3. Fiscal policy
4. Sectoral policies
5. Trade policy
6. Innovation and Technology Transfer
7. Carbon Markets
8. Climate Intelligence
Each lever was analyzed according to a standard methodology in order to allow comparisons and draw common lessons for climate finance programming.
The publication also examined how climate finance is deployed to address barriers to action for each lever and derives general principles for transformative climate finance based on this analysis relating to the allocation of climate finance, use of different financial instruments and other improvements in modalities and processes.
To understand better how to improve the effectiveness of climate finance, this report distinguishes four different types of climate finance – Dedicated Climate Finance, Climate-related development finance, private capital and government spending.
Here are the report’s key highlights:
- Climate finance has made significant progress in recent years. Building on years of increases, in 2017 and 2018 annual climate finance crossed the half-trillion-dollar mark for the first time.
- The establishment of the GCF (Green Climate Fund) and the CIF (Climate Investment Funds) has created institutions specifically designed to program dedicated to climate finance. All of this has supported climate action in developing countries leading to improved resilience, co-investment, decarbonization and employment generation, the international financial institution’s report said.
- Despite this progress, more can be done to increase the effectiveness of the climate finance system to support low-carbon resilient development.
- Global emissions continue to rise, having increased 50 per cent in the last two decades. Developing countries still lack adequate resilience to respond to climate impacts.
- At the same time, many positive developments have created opportunities to deploy climate finance more effectively, including decreases in clean technology costs, increased political will, and realization of the economic benefits of clean development pathways.
- The impact of the Coronavirus crisis only increases the need for a more transformative and catalytic climate finance system to build back better.
- National fiscal budgets and finance flows from development finance institutions will be under strain to mitigate the economic fallout from the COVID-19 crisis.
- According to the report, climate finance must be programmed as per the long-term strategies for low-carbon, resilient development of each recipient country. By identifying interim steps to achieve full-scale transformation, policymakers can avoid finance allocations that deliver short-term results inconsistent with a long-term strategy. Similarly, results-frameworks need to be revised for long-term transformative impact indicators.
- The impact of climate finance can be enhanced by complementing project-based financing with more finance for activities that drive systemic change, primarily through enabling policy and environments to address barriers to transformation. A coordinated approach that uses multiple levers is the most effective, the report said.
- Instruments like results-based finance, policy-based finance, equity finance, and guarantees are underutilized in current climate finance provision, which depends almost entirely on grants and loans for project-level interventions. Expanding their use where appropriate would enhance the impact of climate finance deployed.
- Climate intelligence products come at low cost but could have a powerful leveraging effect by demonstrating the benefits of climate action and providing the knowledge to implement it. They include physical climate impact and vulnerability maps; early warning technologies, monitoring, reporting and verification (MRV) methodologies, the report added.
- As per the report, the poorest countries are both most vulnerable to and least responsible for global climate change. While this extends to many middle-income countries, they have a different climate change profile. More can be done to refine the differentiation of climate finance to match countries’ specific needs and circumstances. This includes applying tiered conditionality for more advanced countries depending on their own efforts and orientation toward long-term strategies. Paired with enhanced donor coordination, such approaches can increase the impact of climate finance, in particular for mitigation.