Bridging the climate financing gap – seizing the opportunity

Authors: Alba Forns Albuixech, COO & Co-Founder of Climatize, and Kristina Lyubomirova Lazarova, Head CEO Office at the Bulgarian National Electricity Company. Both authors are EUSEW Young Energy Ambassadors

A total of almost EUR 185 trillion is required to deliver Net Zero by 2050. Despite climate finance having grown consistently over the last decade, we are far behind what is needed to meet the goals of the Paris Agreement. As the saying goes ‘we can pay the bill now or pay dearly in the future’. Let’s see how far we have reached and what stands in our way.

The term climate finance refers to a wide variety of financial instruments that are distributed to address climate solutions. These range from grants and loans provided by large public institutions such as governments or multilateral funds to green bonds, carbon taxes, or private funding. All financial resources are either allocated to mitigate the impacts of climate change or build resilience and adaptation to the new reality we live in.

Although there has been an intensive and rapid allocation of funds, current financial flows must increase at least three-fold to achieve the Paris Agreement targets. The key challenges include insufficient funding, especially seen in private sector reluctance; global disparities, and transparency issues among others.

Importance of bridging the gap

70% of the infrastructure investment needed for the low-carbon transition shall be deployed in emerging markets and developing economies that face multidimensional crises, including political and economic instability, corruption, and environmental challenges. Climate finance flows have grown consistently over the past decade, but they still lag far behind what is needed to meet the goals of the Paris Agreement.

EUR 5.7 trillion of climate finance is required annually between now and 2030, and EUR 6.7tn by 2050, to deliver Net Zero – a total of almost EUR 185 trillion. The actions towards the effects of climate change in vulnerable communities and ecosystems shall be handled with priority and due justice.

To bridge the overarching gap, global cooperation and the role of climate finance in achieving sustainability goals must be strengthened to promote several of the economic and social benefits of climate action for all.

Key players in climate finance

Climate finance involves several stakeholders that play crucial roles in advancing the agenda on the way to net zero. On the one hand, international entities such as the United Nations Development Programme (UNEP), the European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), etc. provide blended financial solutions by increased public funding and mobilised private capital flows.

Social awareness, engagement and acceptance are pivotal if we are to meet the goals in the foreseeable future

In addition, well-governed, enabling policy frameworks are crucial to help leveraging public and private finance into meeting the climate-related pledges. Next, private investors contribute to the climate capital market due to the imposed ESG (Environmental, Social and Corporate Governance)/sustainability regulations. Last, but not least – social awareness, engagement and acceptance are pivotal if we are to meet the goals in the foreseeable future.

Challenges and barriers

Market conditions and legal frameworks are, however, not always set right to foster climate finance.

Political and financial sector misalignment: There are relevant policies and regulations in financial and corporate sectors, however they often are ineffective because of piecemeal or lack of coordination. This leads to misalignments with net-zero objectives, impeding an effective mobilization of public and private finance for climate solutions.

Surge in inequality and global trust erosion: There’s a significant lack of trust between the Global North and South regarding financing for the transition. The failure to fulfil the $100 billion pledge made in Copenhagen in 2009 exemplifies strained relations.

Limited climate data and analytics: Gaps in climate data and analytics impede the development of credible transition plans, hindering effective scrutiny and execution of climate finance strategies while opening the door to corporate greenwashing.

In order to tackle the challenges and barriers previously exposed:

Stakeholder alignment: Public finance needs to unlock private finance by being deployed in an optimized manner and ensuring viability across every stage of development, from R&D to first of a kind (FOAK) projects, public procurement and ongoing subsidies as well as concessional funding mechanisms. Policy needs to catalyse private capital flows transcending short-term political cycles. Laws and regulations must be calibrated to encourage clean energy investments.

The public sector should take the lead in paving the way for the private capital market

The public sector should take the lead in paving the way for the private capital market by directing capital towards crucial decarbonisation technologies that currently lack commercial viability. This includes areas such as carbon capture, nuclear energy, green hydrogen, and industrial sectors like cement or steel.

Just transition via increased cooperation: This entails an expansion of funding mechanisms similar to those employed in Just Transition Mechanism with the Just Transition Fund. These resources will be utilized to retire and decommission fossil fuel infrastructure, concurrently offering financial support and employment opportunities for current workers. Multilateral development banks and development finance institutions must secure additional capital to support these initiatives, directing their funding strategically to leverage private finance and amplify the impact of such programs.

Addressing knowledge gaps and keeping stakeholders accountable. A well-informed and accountable ecosystem via investing climate data infrastructure and transparency via public awareness will foster progress toward global climate goals.

Where do we go from here?

The shift towards an economy that is low-carbon, resilient, and equitable presents the greatest investment opportunity of our lifetime. Concerted climate action and investment could add a net 20trillion EUR to the global economy, equivalent to a rise of up to 4.4% in global GDP by 2070 (relative to business as usual).

Solutions to close the financing gap are complex and multifaceted ranging from stakeholder alignment, international cooperation and addressing knowledge and keeping stakeholders accountable. Institutions that are well prepared to embark on net zero pathways will be able to leverage decarbonisation-focused policy shifts to become technology innovators and align their practices with ethical and social responsibility standards.