Climate Finance Challenges Amidst Geopolitical Crises

Introduction

Climate change, a quintessential existential threat, demands a global response. Yet, the mobilization of climate finance, the lifeblood of mitigation and adaptation efforts, remains entangled with the treacherous currents of geopolitical tensions. The UNFCC, born amidst Cold War anxieties, sought to foster collective action against climate change. The Paris Agreement, a beacon of hope, emerged from the ashes of COP21, with developed nations pledging $100 billion annually in climate finance for the developing world. However, COP26, COP27 and COP28 held amidst a geopolitical storm, exposed the fragility of climate finance  commitments. The lack of concrete implementation plans and growing geopolitical fissures cast a long shadow over the future of climate finance.

• Power Politics and the Fragmented Order

The realist lens illuminates how the international order, shaped by power competition and systemic rivalry, hinders climate finance. Weak governance, escalating conflicts, and the retreat from multilateralism exacerbate fragmentation, making collective action difficult. The conflict in Ukraine & Palestine a stark illustration of this fragmentation, has triggered an energy crisis and undermined key multilateral institutions like the G20, further complicating international cooperation.

• The Ripple Effects: Cross-Border Investment and Financial Stability

Geopolitical tensions ripple through the financial system, impacting cross-border investment and financial stability. Voting patterns in international forums influence investment flows, while diverging foreign policies, evident in the US-China rivalry, can reduce cross-border investment by 15%. This uncertainty fuels financial instability, increasing funding costs for banks and limiting lending to the private sector, ultimately hindering climate finance initiatives.

• Climate Change Adaptation Measures at COP 27 and COP 28

Climate change adaptation was prioritized during COP27, acknowledging the increasing intensity and frequency of extreme weather. The IPCC's Sixth Assessment Report 2022 highlighted climate change's impacts on nature, lifestyles, and infrastructure globally. The Sharm-El-Sheikh Adaptation Agenda launched 30 Adaptation Outcomes to improve resilience for 4 billion people by 2030, with varying effectiveness across regions.

• Financing Mechanisms at COP27 and COP28 COP27

Prioritized raising climate finance. The conference debated how to reform international financial institutions (IFIs) and multilateral development banks (MDBs) to improve their role in financing climate action. It also looked into measures to mitigate the risks of funding and investing in climate and development projects in developing countries6.

At COP277, innovative financing methods and debt-for-nature swaps were put into action. The importance of establishing carbon markets in underdeveloped countries was also stressed to assist them in financing their climate and development efforts.

• The Current Landscape of Climate Finance

In recent years, there has been a remarkable increase in annual climate finance flows. According to the Global Landscape of Climate Finance 2023 report, average annual climate finance reached nearly USD 1.3 trillion in 2021/2022, almost doubling compared to 2019/2020 levels. This growth can be attributed to a significant acceleration in mitigation finance, which increased by USD 439 billion from 2019/2020. In addition, methodological improvements and new data sources contributed USD 173 billion each year to the overall growth.

Despite this progress, the current flows of climate finance represent only about 1% of global GDP. There exists a pronounced lacuna in climate financing necessitating redressal to ensure the commensurate allocation of resources toward climate imperatives across the geographical expanse of Africa, Asia, and Latin America.

Within this discourse, elucidation is provided on nine pivotal mechanisms poised to engender the requisite allure for both private and public capital infusion indispensable for catalyzing investments towards forging a safer and more prosperous trajectory in these regions.

Photo by Markus Spiske on Unsplash

Projections indicate that in the interim leading up to 2050, approximately half of the incremental augmentations to the global populace are anticipated to manifest in Africa, with an additional 30 percent anticipated in Asia. Concurrently, the International Monetary Fund (IMF) posits that, vis-à-vis the year 2021, developing nations may witness an expansion of their Gross Domestic Product (GDP) by up to 40 percent, with estimations projecting a surpassing of the $60 trillion mark by 2028, emblematic of a per-capita growth trajectory exceeding 30 percent. Nevertheless, the specter of climate change looms ominously, posing an existential threat capable of impeding, if not obviating, the aforementioned developmental strides.

• The Growing Demand for Climate Finance

The coming decades will witness a dramatic escalation in the demand for climate finance, far exceeding current commitments and posing a significant challenge to international cooperation. Average projections indicate a steady increase in annual requirements, rising from $8.1 trillion in 2020 to $9 trillion by 2030. This seemingly modest upward trend, however, masks a more alarming trajectory: post-2030 estimates suggest a precipitous jump, exceeding $10 trillion annually until 2050. Such figures underscore the dire need for a fivefold annual increase in climate finance to avert catastrophic climate change and its attendant security implications.

This stark reality demands immediate and decisive action from the international community. Failure to address this burgeoning financial gap will not only hinder our ability to mitigate climate change but also exacerbate existing geopolitical tensions and potentially trigger conflict over scarce resources. It is imperative, therefore, to rethink current financial instruments, incentivize private sector participation, and foster a renewed spirit of multilateral cooperation if we are to navigate this complex and consequential challenge.

Furthermore, the estimated losses do not fully capture the potential capital losses from stranded assets, impacts on nature and biodiversity, or the socio-economic consequences of increased conflict and human migration. These factors emphasize the economic imperative to invest in climate finance now, while also highlighting the opportunities for businesses to embrace low-carbon and climate-resilient pathways.

Photo by Tania Malréchauffé on Unsplash

In the realm of climate finance, the empirical evidence delineated in the Global Landscape of Climate Finance 2023 report by the esteemed Climate Policy Initiative reveals a profound narrative. Within the temporal confines of 2021/2022, the global allocation of climate finance surged to an unprecedented annual average of USD 1.3 trillion, a monumental ascent from the preceding biennium's figure of USD 653 billion in 2019/2020. These statistics, while ostensibly laudable, signify merely a fraction of the multifaceted discourse underlying contemporary climate finance dynamics. Preliminary estimations for the fiscal year 2021 unveil a further escalation, with climate finance disbursements ranging between USD 850 billion and USD 940 billion, thereby constituting a formidable 28% to 42% augmentation vis-à-vis the prior period and attaining an apogee hitherto unrivaled.

Beneath the veneer of apparent progress, however, lie discernible contours of asymmetry and inequity. The lion's share of this financial influx gravitates towards a select constellation of geopolitical actors, prominently featuring China, the United States, Europe, Brazil, Japan, and India, collectively absorbing a staggering 90% of the augmented capital flows.

Yet, this ostensible concentration belies a harsh reality: even within these bastions of affluence, pronounced lacunae persist, engendering palpable disparities in addressing the exigencies of high-emission and climate-vulnerable polities. The World Bank Group's pronouncement of disbursing a record $38.6 billion in climate finance during the fiscal year 2023, emblematic of a 22% surge vis-à-vis its antecedent period, heralds a commendable endeavor, albeit one that falls short in ameliorating the pervasive chasm of climate finance inadequacy.

Amidst this mosaic of complexity, the Green Climate Fund, through the articulation of its 2024-2027 Strategic Plan, aspires towards a horizon characterized by heightened ambition and efficacy, pledging to galvanize critical global climate action.

Concurrently, the resounding clarion call emanating from the echelons of developing nations, epitomized by the impassioned advocacy of India, reverberates throughout the corridors of international diplomacy, demanding that affluent nations accede to a new paradigm of global climate finance governance by the precipice of 2024.

Whether this rallying cry catalyzes a transformative shift towards equitable climate finance redistribution or merely perpetuates extant patterns of asymmetry remains an open question, one imbued with profound implications for the trajectory of global climate governance in the coming epoch.

Conclusion

The path to a sustainable future is contingent upon surmounting the substantial impediments presented by geopolitical rivalries to climate finance. By adopting an offensive realist outlook and incorporating climate considerations into diverse financial mechanisms, we can navigate this treacherous terrain and secure the resources essential to alleviate the existential peril of climate change.

Recommendations for Strengthening Climate Finance Amid Geopolitical Challenges

1.    Foster greater coordination and cooperation between major economies.

2.    Incentivize private capital through de-risking measures.

3.    Strengthen existing multilateral development banks and climate funds.

4.    Encourage regional partnerships.

5.    Mainstream climate considerations.

6.    Employ trade and carbon pricing as incentives.

7. Highlight national co-benefits.

References

Climate Champions. "The Sharm-El-Sheikh Adaptation Agenda." November, 2022. https://climatechampions.unfccc.int/system/sharm-el-sheikh-adaptation-agenda/.

SIPRI. "Climate Finance and Geopolitics: The China–US Factor." November 28, 2023. https://www.sipri.org/commentary/essay/2023/climate-finance-and-geopolitics-china-us-factor

Politico. "They’re Talking, but a Climate Divide Between Beijing and Washington Remains."

November 20, 2023. https://www.politico.eu/article/cop28-climate-divide-beijing-china-us-washington-john-kerry-xie-zhenhua-joe-biden-xi-jinping/.

McKinsey. "Solving the Climate Finance Equation for Developing Countries." December 6, 2023. https://www.mckinsey.com/capabilities/sustainability/our-insights/solving-the-climate-finance-equation-for-developing-countries.

Climate Policy Initiative. "Global Landscape of Climate Finance: A Decade of Data." October 27, 2022. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-a-decade-of-data/.