What is climate finance and how does it work? | Knowledge & Environment | DW

Money and justice are at the heart of the climate negotiations this year Egypt. Low-income countries that have barely contributed to global warming are urging richer countries to provide finance for a climate-friendly future and to pay for damages caused by the climate crisis.

“We are the ones whose blood, sweat and tears paid for the industrial revolution,” said Mia Mottley, Prime Minister of the island nation of Barbados, to the heads of state present at the World Climate Conference COP27 .

“Do we therefore now have to bear the double burden for the greenhouse gases of the industrial revolution?”

Poorer countries, particularly in the Global South, will need trillions of dollars a year going forward, shows a new report commissioned by Egypt and the United Kingdom, current and previous hosts of the climate conference.

The countries need the money on the one hand to reduce emissions and adapt to extreme droughts, floods and storms in a warmer world, on the other hand to be able to pay for the damage caused. The funds promised so far are far from sufficient.

Activists are demanding climate finance and reparations from rich countries

Rich countries had pledged to provide $100 billion annually between 2020 and 2030. But that has not happened so far. A higher funding target by 2025 is one of the negotiation issues in Egypt. But where exactly is the money supposed to come from?

Green climate fund for most affected countries

The Green Climate Fund (GCF) is one way to provide the 100 billion for countries particularly affected by climate change. It was set up to help countries make the energy transition and fund projects to adapt to a warmer planet. This can be used to finance drought-resistant seeds for farmers, for example, or the creation of cooling green spaces so that cities can better cope with heat waves.

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Private companies, public institutions or civil society organizations must be accredited with the GCF to apply for funding. The fund itself gets its money from public funds and the private sector.

Man stands in front of a large solar park in the Egyptian desert

Climate finance is urgently needed, for example for the construction of solar parks.

Given the huge sums of money needed, such funds also need to tap into the vast financial resources of the private sector. UN experts have published a list of $120 billion worth of projects that investors could support, including sustainable energy and agriculture projects.

Such financial aid can make sense both for companies and for people affected by climate change, says Jyotsna Puri of the International Fund for Agricultural Development (IFAD), a United Nations agency in Rome. She works on poverty reduction in rural areas.

That works if companies can market themselves publicly with such contributions, for example, “thanks to our project, we have increased the resilience of the region by 20 percent,” Puri told DW.

What about voluntary emissions markets?

Many low-income countries are also hoping to raise funds through the market for so-called carbon credits. Kenyan President William Ruto announced at the World Climate Conference that such CO2 credits will be his country’s next big export hit.

Companies or countries can buy carbon credits to offset the greenhouse gases they emit. The money is then invested in projects such as wind farms or solar parks or the protection of carbon sinks such as peat bogs or forests.

According to another UN report, emission credits can help low-income countries raise money for climate protection. However, this should not lead to buyers stocking up on certificates over the long term instead of reducing their own emissions. And they are not a panacea.

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“The voluntary carbon market, like any other financing mechanism at COP27, will not be the magic solution to climate change adaptation and will provide all the funding needed,” said Owen Hewlett, chief technical officer at the Gold Standard Foundation, a voluntary civil society organization carbon markets.

Reparation payments for climate damage and losses

Highly vulnerable and low-income countries have long advocated a special loss and damage fund to help them pay for damage caused by climate change, such as when floods destroy a village or drought destroys crops and people’s livelihoods.

“Loss and damage is not an abstract topic that can be discussed endlessly,” said Kenyan President William Ruto at the climate conference.

“It is our daily experience and the real nightmare for millions of Kenyans and hundreds of millions of Africans.”

Starving animals in the red parched Kenyan savannah

Damage and losses due to the climate crisis have long been a reality.

The richer industrialized countries have so far resisted the idea of ​​a special fund for losses and damages set up because they fear that they could be burdened with large sums of money. This year, however, the topic was put on the official agenda of the climate negotiations for the first time.

Some see the fund as a form of reparation from developed countries that for years have developed their economies by burning coal, oil and gas, at the expense of other countries that have done little to mitigate climate change.

The fund should not be viewed as development aid, said Emem Okon, executive director of Nigeria’s Kebetkache Women Development and Resource Centre, a non-profit organization dedicated to supporting women.

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“The rich countries have to give back to Africa and the local communities what they took from them,” Okon told DW at the climate conference.

Exchange, debt relief for climate protection?

Much of the climate finance for low-income countries comes in the form of loans rather than grants. According to the Stockholm Environment Institute (SEI), a non-profit think tank, this pushes already indebted countries deeper into the debt trap.

The SEI, like the African and Pacific island states, is among the many voices calling for debt relief.

A man digs in the ground in a green jungle to plant a small tree, other people stand in the background.

Debt relief in exchange for nature conservation could do both: solve the debt problem and help the climate

One possibility would be the exchange model: “debt for nature” or “debt for climate”. Part of a country’s debt is canceled and investments are made in nature conservation programs to protect important natural resources such as rainforests or coral reefs.

If states don’t agree on some form of debt relief, the injustices surrounding climate change will only worsen, according to Mark Bynoe, environmental economist at the Caribbean Community Climate Change Centre. “Our countries are already today so much in debt. Any more debt would be almost unbearable.”

The text has been adapted from English.

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