Addressing the climate finance gap: a path forward for global emissions alignment and ambitious action
The stark reality of the climate crisis presents us with an inescapable truth: global emissions are not on track to meet the goals of the Paris Agreement, and the effects of rising temperatures are ever more devastating, especially in those countries most exposed to climate change. In this critical hour, we need an unprecedented level of ambition in both climate action and climate finance. The International Energy Agency reckons that climate investment must double in advanced economies and China, and quadruple in the rest of the world by 2030. The sheer scale of the challenge highlights the need for a transformation of the financial system. Bridging the financing gap requires a holistic approach that looks at the role of all actors, finance sources and policy levers.
Public finance is a central driver of climate action. Budgetary constraints, however, require that its efficacy be improved. Domestically, this means first and foremost ensuring that public finance ‘does no harm’: investments and public subsidies in high-emission activities should be redirected to clean technologies and infrastructure. Setting the right incentives and price signals is crucial. In this respect, carbon pricing remains the most effective tool at our disposal. Besides encouraging a shift to less carbon-intensive alternatives, carbon pricing can also provide a boost to public finances, as well as resources to compensate the most vulnerable during this transition period. For instance, the revenues of the European Union’s new Emissions Trading Scheme for buildings, road transport and fuels will feed into a Social Climate Fund that supports the people and businesses most affected by this measure. The EU’s carbon border adjustment mechanism is another such example. Despite still being in a transitional phase of implementation, CBAM is already inspiring other countries to introduce or strengthen their carbon pricing frameworks.
At the international level, optimising the use of scarce public resources means facilitating synergies among multilateral development banks to increase the impact and scale of their work. This is a powerful lever, considering that MDBs manage an estimated $2.2 trillion of global assets. The European Union is engaging with its G20 partners to develop a roadmap for MDBs to be “bigger, better and more effective” and work as a system to facilitate access to climate finance, in particular for developing countries.
Closing the gap
Despite this effort, the scope of climate-related investment needs goes well beyond the reach of the public purse. Closing the financing gap requires public investment to be complemented by private funding. Well-developed, liquid and integrated capital markets have the potential to mobilise the necessary financing at scale. The EU’s sustainable finance framework, built on a taxonomy defining sustainable economic activities and mandatory sustainability disclosures, plays a key role in channelling funds for the green transition, as it enables market participants to understand, assess and integrate climate and other sustainability impacts into their decisions. At the international level, the EU is working with its G20 partners and beyond to develop principles for financial institutions and corporate transition plans, interoperable sustainability disclosures and taxonomies, aiming to drive a similar ambition in partner countries and facilitate cross-border financial flows.
Creating the conditions conducive to greater financing for climate mitigation and adaptation is critical. This includes creating an enabling environment, introducing effective financial instruments to reduce investment risks and fostering a pipeline of bankable projects. For the first time, at the request of Brazil’s G20 presidency this year, finance and climate ministries are working together in the joint Task Force on Global Mobilization against Climate Change to establish recommendations on how to advance ambitious national transition plans and reset climate finance on a more ambitious path.
The magnitude of the challenge is daunting – but I remain hopeful. In 2022, developed countries provided and mobilised $115.9 billion in climate finance for developing countries, exceeding the annual goal of $100 billion for the first time. Reaching this milestone was made possible by the contribution of the EU and its member states, which increased by 24% from the previous year to reach approximately $30 billion. I believe this result can help foster trust and secure an ambitious agreement on a new climate finance goal for the post-2025 period. It should be designed to accelerate the mobilisation of climate finance at the necessary scale. This means broadening the contributors’ base and mobilising all sources of finance, all actors and channels – public and private, domestic and international. It means identifying new, innovative measures and sources. Above all, it means viewing climate finance as a global effort, shared fairly and as part of our broader action to achieve the United Nations Sustainable Development Goals. The green transition must be a just one, or it will not succeed. The EU will continue to play its part.
