The Yawning Climate Financing Gap

While progress is being made on increasing global climate finance, there is still a vast gap between how much money is being set aside now and the amount needed to be spent in order to avoid the worst impacts of climate change, according to estimates by the Climate Policy Initiative. The United Nations Framework Convention on Climate Change (UNFCCC) explains that climate finance is an umbrella term for funding investments aimed at “reducing emissions and enhancing sinks of greenhouse gasses and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.” The term covers both public and private finance sources and is often used in the context of talking about the transfer of resources from richer countries to developing economies.

As the following chart shows, almost $1.3 trillion was calculated to have been put into climate financing in 2021-22, up from $364 billion in 2011-12. According to analysts at the Climate Policy Initiative (CPI), most of this growth is due to an increase in mitigation finance (tackling reducing greenhouse gas emissions), largely with gains in the renewable energy and transport sectors. In 2021-22, this was mainly due to significant increases in clean energy investments in countries such as China, the United States, Europe, Brazil, Japan and India.

By contrast, the CPI says that adaptation finance is still some way behind: While it reached an all-time high of $63 billion in 2021-22, this is some way off the estimated $212 billion needed by developing countries alone in 2030. Adaptation finance is defined by the World Resources Institute as finance used to improve communities’ resilience to climate hazards by paying for solutions such as more drought-tolerant crops and social safety nets.

In the average scenario, in which the world continues along a pathway of warming by 1.5 degrees centigrade, then by 2030, analysts estimate that nearly $9 trillion will be needed to go towards climate mitigation and adaptation. Estimated needs jump to over $10 trillion each year from 2031 to 2050.  

The CPI writers of the Global Landscape of Climate Finance 2023 report pose that while daunting, in theory it could be possible to close this funding gap, especially when taking into consideration global spending patterns. For example, they cite how global military expenditure in 2022 was estimated at $2.2 trillion (SIPRI, 2023), while the International Monetary Fund calculated that $11.7 trillion in emergency fiscal measures were announced globally in 2020 in response to the COVID-19 pandemic - as points of comparison.

In terms of moving forwards, the CPI outlines a number of recommendations, including addressing the gaps of where climate finance is currently unequal. For example, despite the sectors of agriculture and industry both being large sources of emissions, they received a level of finance that was "disproportionately low in 2021-22 considering their mitigation potential". In addition to greater focus on adaptation, they also then reference the importance of emerging technologies, stating that while progress has been made, there is still considerable potential for investment into areas such as battery storage and hydrogen.