Does it make sense to discuss climate finance—and specifically critique its management—at a time when global urgency for climate action seems to be waning and closely related Official Development Assistance is declining?
We believe it does. Such a shift underscores the necessity to scrutinize and reform climate finance management to ensure it is both effective and efficient.
The note identifies key flaws in climate finance management, including unclear fund allocation between mitigation and adaptation efforts, confusion over definitions, and potential crowding out of Official Development Assistance (ODA).
With developing nations needing far more than $100 billion to meet climate goals, this paper advocates for reforms to optimize the effectiveness and efficiency of climate finance, ensuring that resources meet actual needs and maximize their impact.
In this new Policy Note, Francois Bourguignon, former chief economist and senior vice-president of the World Bank, critically examines the management of climate finance, focusing on advanced economies' commitment to providing $100 billion annually to support developing countries in climate mitigation and adaptation.
Despite meeting this target in 2022, significant concerns arise regarding the actual impact of these financial flows.
Examining the structure of the climate finance ecosystem reveals contributions from various sectors.
The chart from the 2024 OECD Report on Climate Finance Provided and Mobilized by Developed Countries offers insights into these contributions, breaking them down into mitigation and adaptation projects.
A pivotal question emerges: Did climate finance displace development finance?
The Copenhagen climate finance commitment aimed to ensure that climate funding would not detract from existing development flows, particularly ODA. However, many climate finance projects also qualify as ODA due to their funding mechanisms, creating ambiguity in assessing their additionality.
The paper highlights an urgent need for reforms within the climate finance framework. This includes addressing issues such as the merger of mitigation and adaptation funding, imprecision in reporting, and the challenges faced by heavily indebted countries.
- The paper advocates for the establishment of distinct, clear targets for both mitigation and adaptation and proposes the creation of an independent agency to oversee contributions to climate finance.
- Moreover, evaluating all financing based on its grant equivalent is crucial for ensuring substantial support from advanced economies. This is particularly important for fostering meaningful progress towards climate action in developing nations grappling with severe financial challenges.