Climate finance

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Climate Finance: An Overview of Current Research and Practices

Introduction to Climate Finance

Climate finance involves the mobilization of local and global funds to support both mitigation and adaptation efforts against climate change. This field encompasses public and private investments aimed at reducing greenhouse gas emissions and enhancing climate resilience. The importance of climate finance has grown significantly, especially following the Paris Agreement, which has spurred a surge in related academic publications.

Incorporating Climate Risk in Financial Markets

Research has explored various methods to integrate climate risk into macrofinance models. These models help in understanding how climate risks are priced across different asset classes, such as real estate, equities, and fixed income securities. Investors can use these insights to construct portfolios that hedge against climate risks. The empirical literature highlights the need for more sophisticated tools to price and manage these risks effectively.

Effectiveness of Climate Finance Policies

A comprehensive review of climate finance policies reveals mixed results. Policies like feed-in tariffs, tax credits, loan guarantees, and national development banks have been effective in mobilizing private finance. However, there is limited evidence on the effectiveness of national climate funds, targeted lending, disclosure policies, and green bonds. The effectiveness of these policies depends on various criteria, including economic efficiency, environmental integrity, and equity.

Challenges in Climate Finance Allocation

Allocating climate finance effectively remains a significant challenge. Project-based approaches have encountered numerous obstacles, including inadequate attention to the spending side of climate finance. Supporting price-based national policies, such as carbon pricing, could offer several advantages, including cost-efficient mitigation and enhanced international cooperation. This approach aligns global mitigation goals with national policy priorities, potentially making climate finance a central pillar of sustainable development.

The Role of Climate Finance Beyond Renewables

While a substantial portion of climate finance has been directed towards renewable energy, other critical areas like demand-side management (DSM) and carbon capture, usage, and storage (CCUS) remain underfunded. For instance, sustainable cooling, which is projected to account for 13% of global emissions by 2030, receives just 0.04% of total Official Development Assistance (ODA). Increasing investment in these areas is crucial for meeting the Paris Agreement targets without significantly raising costs.

Global and Local Perspectives on Climate Finance

Climate finance flows from developed to developing countries to help them cope with climate change impacts and reduce emissions. This financial stream, which includes public funding, is expected to reach $100 billion annually by 2020. However, the effectiveness of these funds varies, and there is a need for better coordination among multiple actors and channels to ensure that climate finance serves the intended purposes effectively.

Conclusion

Climate finance is a multifaceted field that requires coordinated efforts across various sectors and regions. While significant progress has been made in mobilizing funds and developing policies, challenges remain in effectively allocating these resources and addressing underfunded areas like DSM and CCUS. Future research and policy efforts should focus on enhancing the effectiveness of climate finance policies and ensuring that investments align with both global and national climate goals.