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What is Climate Finance?

Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change. The Convention, the Kyoto Protocol and the Paris Agreement call for financial assistance from Parties with more financial resources to those that are less endowed and more vulnerable. Climate finance is needed for mitigation, because large-scale investments are required to significantly reduce emissions. Climate finance is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.

In accordance with the principle of “common but differentiated responsibility and respective capabilities” set out in the Convention, developed country Parties are to provide financial resources to assist developing country Parties in implementing the objectives of the UNFCCC. It is important for all governments and stakeholders to understand and assess the financial needs of developing countries, as well as to understand how these financial resources can be mobilized. Provision of resources should also aim to achieve a balance between adaptation and mitigation.

Overall, efforts under the Paris Agreement are guided by its aim of making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. Assessing progress in provision and mobilization of support is also part of the global stocktake under the Agreement. The Paris Agreement also places emphasis on the transparency and enhanced predictability of financial support.


Financial Mechanism & Other Funds

To facilitate the provision of climate finance, the Convention established a financial mechanism to provide financial resources to developing country Parties. The financial mechanism also serves the Kyoto Protocol and the Paris Agreement.

The Convention states that the operation of the financial mechanism can be entrusted to one or more existing international entities. The Global Environment Facility (GEF) has served as an operating entity of the financial mechanism since the Convention’s entry into force in 1994. At COP 16, in 2010, Parties established the Green Climate Fund (GCF) and in 2011 also designated it as an operating entity of the financial mechanism. The financial mechanism is accountable to the COP, which decides on its policies, programme priorities and eligibility criteria for funding. In addition to providing guidance to the GEF and the GCF, Parties have established two special funds—the Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF), both managed by the GEF—and the Adaptation Fund (AF) established under the Kyoto Protocol in 2001.

At the Paris Climate Change Conference in 2015, the Parties agreed that the operating entities of the financial mechanism – GCD and GEF – as well as the SCCF and the LDCF shall serve the Paris Agreement. Regarding the Adaptation Fund serving the Paris Agreement negotiations are underway in the Ad hoc Working Group on the Paris Agreement (APA).


Landscape of global climate finance

                 Source: A Handbook of Climate Finance in India by Vasudha Foundation, 2014


Climate Finance in India

Climate finance in India has been understood as budgetary outlays made towards climate missions under the NAPCC. This understanding has gradually given way to a more nuanced picture of climate finance structure, which is heterogeneous, fragmented and decentralized with several public, private, national and international actors playing important roles (Jha, 2014). The institutions providing climate finance in India include amongst others, the national government, state governments, Civil Society Organisations (CSOs), international donor agencies, bilateral development agencies, private investors, public and private banks.

Climate Finance in India can be distinguished into public and private. Public climate finance is in the form budgetary outlays (both at the national and the sub national level), tax, subsidies and government backed market mechanisms. Private climate finance exists in the form of loans (local and foreign currency loans), private equity, venture capital, partial risk guarantees, green bonds and Clean Development Mechanism (CDM). Apart from these sources, international funds, multilateral Development banks and bilateral financial institutions also provide climate finance in the form of grants, loans and concessional loans. The distinction between public and private finance in many instances is difficult to maintain. The public climate finance both national and international have the potential to incentivize private climate financing in the country, something that is the need of the hour as recognized by the Low Carbon Committee and the Economic Survey (2015). The need is also to blend the various disparate sources of funds in a manner that they align with the national development priorities.


Source: Climate Finance architecture in India by Centre for Budget and Governance Accountability (CBGA), 2017


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