Recent data from the Climate Policy Initiative (CPI) marks record growth in global climate finance. In 2023, investments reached $1.9 trillion, a 15 per cent rise from 2022. Despite this progress, funding gaps and risks remain. The report stresses the need for $6.3 trillion annually by 2030 to meet climate goals. This overview examines key trends, sectoral allocations, regional disparities and future pathways for climate finance.
Growth and Scale of Climate Finance
Between 2018 and 2023, climate finance expanded at a 19 per cent compound annual growth rate (CAGR). Post-pandemic investment surged, with a 26 per cent CAGR from 2021 to 2023. This acceleration reflects heightened urgency and improved tracking. However, current growth rates will still fall short of the $6.3 trillion annual target needed by 2030 to prevent severe climate impacts. If the 19 per cent growth continues, total flows may approach $6 trillion by 2030, leaving a shortfall.
Mitigation Versus Adaptation Finance
Mitigation dominates climate finance, accounting for 94 per cent of spending in 2023. Energy systems and transport sectors received over 75 per cent of mitigation funds. Solar, wind and electric vehicles led growth. Energy investments reached $831 billion in 2023. Other sectors like buildings, agriculture, forestry and waste also saw increases. Agriculture, forestry and other land use (AFOLU) finance rose by 286 per cent since 2018. Waste sector finance doubled between 2022 and 2023. Adaptation finance remains insufficient, with only $65 billion tracked in 2023. This is far below the $222 billion needed annually for emerging and developing economies. Water, wastewater and disaster risk management were key adaptation areas.
Regional Concentration and Domestic Sources
Climate finance is heavily concentrated in East Asia and the Pacific, Western Europe and North America. These three regions received 79 per cent of global flows in 2023. Domestic sources provided 89 per cent of climate finance in these regions. Conversely, emerging markets and developing economies (EMDEs) received less domestic funding, with only 23 per cent from local sources in sub-Saharan Africa. This reveals the need for stronger local policies and institutions to mobilise domestic finance and reduce reliance on international funds.
Private Versus Public Finance Dynamics
Private finance surpassed $1 trillion in 2023 for the first time. Households were major contributors, investing in electric vehicles, rooftop solar and energy efficiency. Rising energy prices in Europe partly drove this trend. Public climate finance declined by 8 per cent from 2022 to 2023 due to budget constraints in countries like the United States and Germany. Over 90 per cent of climate finance came as market-rate debt or equity. Concessional finance, such as grants, fell to 7 per cent. EMDEs and least developed countries depend heavily on concessional finance to reduce investment risks.
Strategies for Scaling Climate Finance in EMDEs
The report recommends several measures to boost climate finance in EMDEs. These include building pipelines of bankable projects and using concessional capital to de-risk investments. Mobilising catalytic instruments like guarantees and blended finance is essential. Strengthening carbon markets and pricing mechanisms can also attract more funding. International public finance to EMDEs doubled since 2018, reaching $196 billion in 2023, but disparities remain, especially for least developed countries.
Global Coordination and Future Outlook
Scaling climate finance requires coordinated global action and innovative financial tools. Accountability mechanisms such as the Baku-to-Belém roadmap and the 30th Conference of the Parties (COP30) will be crucial. The success of climate goals depends on the ability to mobilise sufficient and effective finance worldwide. Long-term benefits of climate investment outweigh costs and are vital for a low-carbon and resilient future.
Questions for UPSC:
- Discuss the role of private finance in global climate change mitigation and adaptation efforts. How can public finance complement private investments effectively?
- Critically examine the challenges faced by emerging markets and developing economies in mobilising domestic climate finance. What policy measures can address these challenges?
- Explain the significance of concessional finance in supporting climate action in least developed countries. With suitable examples, discuss how blended finance can enhance climate investments.
- Comment on the importance of international climate finance coordination mechanisms like the United Nations Framework Convention on Climate Change (UNFCCC) conferences. How do such platforms influence global climate finance flows?
