The Unequal Distribution of International Climate Finance Flows and Its Underlying Drivers

Abstract

Developed country pledges to provide finance to developing countries for their mitigation actions and adaptation needs sit at the heart of international climate cooperation. Present commitments are deficient both in terms of their quantity and their distribution among developing countries. Using wind and solar energy financing data we highlight the unequal distribution of international climate finance among developing countries and identify the determinants of investment suitability that drives the flows of non-aid climate finance more generally. Economic capabilities, business environment, climate policy environment and electricity access levels are significant drivers of private finance flows, whereas public finance is driven chiefly by domestic climate policy ambition since the Paris Agreement. Climate-vulnerable countries however struggle to access finance, with path dependency in investment flows further reinforcing existing inequalities. Forthcoming deliberations on quantifying long-term finance targets should thus incorporate mechanisms to distribute finance more equitably to meet country-specific needs and priorities.

International climate finance mechanisms: A review with focus on Africa

“…However, it has been noted that transparency alone may not be sufficient, as it needs to be accompanied by robust systems of accountability to ensure that climate finance is utilized effectively (Lipper et al, 2021;Ameli et al, 2019). The absence of accountability mechanisms can lead to challenges such as the rebranding of existing developmental aid as climate finance, imbalance in funds targeting climate change mitigation and adaptation, and the support of profit-seeking investments over needs-based financing (Rickman et al, 2022).…”

“…Existing mechanisms for climate finance include green bonds, sustainable finance, and carbon finance, which focus on promoting environmentally friendly projects and reducing greenhouse gas emissions (Taghizadeh-Hesary et al, 2021). However, challenges such as the unequal distribution of international climate finance flows, the lack of coordination and collaboration among multiple actors, and the methodological challenges in estimating mobilized climate finance have been identified (Rickman et al, 2022;Alexandraki, 2016;Moarif, 2017). Furthermore, the complexity and fragmentation of climate finance pose challenges to its management and effectiveness (Liang & Liu, 2020).…”

The momentum of the solar energy transition

“…Developing countries are particularly financially and fiscally constrained. Domestically they are characterised by under-developed capital markets and lack capital stock 44 ; whereas international finance is restricted due to high sovereign risks and local currency risks on account of volatile economic fundamentals (as projects are funded with foreign currency while returns are generated in local currencies 45,46 ). This leads to a chronic lack of available finance to support investments in solar energy.…”

“…Consequently, a key challenge for global solar deployment lies in the mismatch between high investment needs (see Fig. 6 for modelled investment needs) and finance flows mobilised in developing countries 44 . Latest estimates suggest that climate financial flows would need to increase by a factor 4 to 8 in most vulnerable countries (IPCC 2022) 47 .…”

Cross-Border Risks of a Global Economy in Mid-Transition

“…The same financing tool might lead to exchange rate depreciation and increased indebtedness if it leads to an unexpected increase in the import propensity of the country to achieve a lowcarbon transition (Godin et al, 2023). Conversely, it could attract private finance in the low-carbon sector and limit macro-financial destabilization if the public sector has done its share of initial investment in strategic parts of the green supply chain (Rickman et al, 2022).…”