Better late than never. After a two‑year delay, advanced economies finally honored their 15‑year‑old Copenhagen pledge to mobilize $100 billion annually from 2022 for low‑carbon growth strategies and climate adaptation in developing countries, delivering $115.9 billion in 2022, according to the OECD’s 29 May 2024 report. In fact, they exceeded the target by an additional $20 billion. If this accomplishment is positive news for global climate efforts, several reasons suggest that the effective net contribution of this financial flow to combating global warming may not align with its nominal amount, and, a fortiori, may fall short of actual needs.

A first question arises regarding the lack of clarity in allocating climate funds between its two primary objectives: the mitigation of GHG emissions to reduce future global warming and adaptation to climate change. Such a lack of rules and coordination among the many stakeholders involved in climate finance management suggests that the distribution of funds toward these two goals is likely inefficient.
Second, closely related to the previous point, the definition or assessment of climate finance depends on combining two distinct activities:

• Investment in new infrastructure, which underpins adaptation finance by building hard or soft systems—such as flood defenses, drought‑resistant agriculture, or resilient health clinics—to protect communities from climate impacts; and
• Greening or retrofitting existing (or new) infrastructure, which is the essence of mitigation finance and involves upgrades like energy‑efficiency improvements, clean‑energy integrations, and emission‑reduction technologies.

Strictly speaking, mitigation finance targets reductions in greenhouse‑gas outputs from standing assets, while adaptation (and broader development) finance focuses on entirely new infrastructure. By blending these two under one umbrella, policymakers risk misaligning objectives, misreporting financial flows, and obscuring the true impact on emissions reduction or resilience outcomes.

Third, a question arises concerning the issue of the “additionality” of public international climate finance in relation to development finance, particularly Official Development Assistance (ODA). Many projects in developing and emerging countries that receive climate finance also qualify as ODA for the donors, leading to some confusion between climate finance and ODA. Although many projects receiving climate finance are not classified as ODA, and conversely, a larger number of ODA projects do not relate to climate, there is a risk that the increase in climate finance may subtly crowd out conventional development aid.
Recent evaluations indicate that developing and emerging economies (excluding China) will need much more than $100 billion each year by 2030 to achieve carbon neutrality by 2050 while also meeting their development goals. At COP29 in Baku, estimates reached as high as $1.3 trillion. Yet, negotiations settled on a North‑South annual flow of only $300 billion to be achieved within ten years. Regardless of how far such an amount may fall short of actual needs, it is imperative to learn as much as possible from the past $100 billion experience to ensure that every dollar of this enhanced flow is utilized to its maximum potential.

Regarding the first point, blending mitigation and adaptation flows in the distribution of international public climate finance is problematic, as they serve fundamentally different economic objectives. Mitigation finance involves a global public good —the reduction of GHG emissions— whose provision would be inadequate at the national level without appropriate financial incentives or constraints on emitters. Countries where mitigation projects are implemented benefit only marginally from them – that is, to the extent that they reduce the global volume of emissions and mitigate future adverse climate effects on their own land. In contrast, adaptation finance supports national initiatives aimed at mitigating the negative effects of climate change on local development. Combining adaptation and mitigation finance is like adding apples and oranges.

Furthermore, the lack of distinct targets for the two funding streams is likely to lead to an inefficient allocation of resources. On the demand side of climate finance, developing countries often prefer financial flows that address their adaptation needs rather than those focused on reducing emissions. In contrast, donors tend to prioritize emission reduction efforts. Without clear regulations or constraints governing the allocation of climate finance, whether on a global or local scale, biases favoring one approach over the other are likely to arise, diverging from what would be optimally efficient from an economic standpoint. Although the overall financing target was set jointly, distinguishing between mitigation and adaptation flows is essential for evaluating the impact of climate finance. The so‑called ‘Rio markers’ in the OECD‑DAC reporting system for public financial flows from advanced countries and multilateral organizations to developing and emerging nations are designed to achieve precisely this. However, the results remain imprecise and ambiguous. Many projects funded by climate finance may not have climate as their “principal” objective but rather as a “significant” one, in which case, the amount of their funding that should be attributed to mitigation or adaptation is essentially uncertain. It also appears that a substantial proportion of projects are classified as both ‘mainly mitigation’ and ‘mainly adaptation,’ while others are only loosely related to climate.

Confusion also arises regarding the additionality of climate finance due to the overlap between climate finance reporting and ODA reporting. The fact that total ODA, as a proportion of donors’ GNI, has barely changed since 2009 suggests that any progress in climate finance flows qualifying as ODA—because they consist of grants and concessional loans—was achieved at the expense of development ODA. Therefore, additionality would mostly come from flows that do not qualify as ODA—essentially non‑concessional loans. However, such loans contribute less to climate action in recipient countries than their ODA counterparts. While these loans may help address liquidity constraints and enable quicker action, they still must be repaid in full. Reporting loans in terms of grant equivalents, including the potential liquidity easing function of non‑concessional loans, would more rigorously appraise the actual contribution of climate finance and its additionality.

Even if the $100 billion were fully and efficiently allocated to climate goals, this amount pales in comparison to the estimated annual spending required for developing countries to achieve the net‑zero goal by 2050 while sustaining satisfactory economic growth and adhering to the Sustainable Development Goals. According to Songwe et al. (2022), IHLEG (2023), and McKinsey (2023), approximately $2 trillion would be needed annually to finance all the infrastructure and technological investments necessary for these objectives, with a significant portion expected to come from donors—and possibly from upper‑middle‑income countries such as China. However, these figures should be interpreted with caution, as they encompass climate mitigation, adaptation to climate change, including losses and damages from climate‑related disasters, as well as the hard infrastructure investments essential for economic growth and the pursuit of the Sustainable Development Goals.

This article is an excerpt. Full note can be found here.