Promises to Progress: Bridging the climate finance gap for developing countries

According to the Global Landscape of Climate Finance 2024 report by the Climate Policy Initiative (CPI), annual investments in climate finance have nearly doubled from $674 billion in 2018 to approximately $1.46 trillion in 2022. However, only about 17 per cent of these funds (approximately $244 billion) were raised by developing countries, excluding China. Including China, this figure stands at about $862 billion.

Meanwhile, a recent OECD report, “Climate Finance Provided and Mobilised by Developed Countries in 2013-2022”, highlighted that developed countries contributed around $115.9 billion to climate funding for developing countries in 2022, indicating that a significant portion of climate finance was mobilised domestically by developing nations.

As per the OECD “Finance and Investment for Climate Goals”, developing countries need approximately $2.4 trillion annually till 2030 to meet mitigation goals alone by 2030. This implies that climate finance needs to scale up very quickly for developing countries to help them achieve their climate goals. This underlines the urgent need for greater international contributions to meet global climate goals.

Most climate finance investments have been directed towards technologies aimed at mitigation, focusing on reducing greenhouse gas emissions to address global warming. Data on adaptation finance is limited. According to UNEP’s Adaptation Gap Report 2024, international public adaptation finance for developing countries is around $28 billion, a mere fraction of the $215 billion-$387 billion needed for these countries.

Clearly, the gap between what is needed and what is available remains vast, even with the recent scaling up of investments. Consequently, one of the key agenda items at COP29 was to increase commitments from developed countries to support developing nations. While key outcomes from COP29 have provided some grounds for optimism, significant challenges remain.

COP29 boosts climate finance commitments, yet gaps remain

After much deliberation, the final text adopted at COP29 acknowledges the substantial gap in climate finance and establishes a minimum annual support target of $300 billion by 2035 from developed nations (“COP29 UN Climate Conference Agrees to Triple Finance to Developing Countries, Protecting Lives and Livelihoods”: UNFCCC). This funding is expected to be sourced from various channels, including public, private, bilateral, multilateral and alternative sources. While this represents a threefold increase from the earlier climate finance commitments of $100 billion annually, it still falls short of the developing countries’ call for at least $1.3 trillion annually, according to media reports.

In order to address this gap, it was agreed to launch the “Baku to Belém Roadmap”, which outlines the pathway to enabling $1.3 trillion as climate finance for developing countries by 2035 (“COP29 Outcomes: Unpacking the NCQG and More”: World Resources Institute).

Nevertheless, the tripling of climate investments is expected to significantly scale up transition efforts in countries, which is particularly critical as nations prepare to submit their revised Nationally Determined Contributions (NDCs) by February 2025. These revisions aim to enhance emission reduction targets through 2035, thereby increasing the need for climate-related investments, especially in high-impact areas such as clean energy.

The COP29 agreement also underscores the importance of public and grant-based resources to provide highly concessional finance for least developed countries (LDCs) and small island developing states (SIDS), aiding them in addressing climate change impacts and transitioning to sustainable development.

Driving climate finance through cross-border investments and innovations

Another significant outcome from COP29 is the advancement of Article 6, which facilitates cross-border investments in emission reduction projects by businesses and governments. This dual benefit allows investing countries to meet their emission targets more cost-effectively while chanelling funds into developing nations.

Despite ongoing discussions about transparency, methodologies and accountability, the progress made is a vital step forward. Carbon markets play a crucial role in attracting investments in sectors such as renewable energy, energy efficiency, sustainable land use and resource efficiency. Additionally, they stimulate innovation by offering financial incentives to develop new technologies and methods for reducing emissions, thereby supporting the creation of a more sustainable and efficient future.

Creating the ecosystem for effective climate finance: The transformative power of AI

As nations prepare to receive the committed climate funding, it becomes crucial to establish the right ecosystem to channel these funds effectively into climate projects. This involves creating an enabling policy and regulatory environment, strengthening institutional capacity for implementation, and ensuring that the necessary skills and ease of doing business are in place.

Countries should also leverage advanced solutions such as artificial intelligence (AI), which can play a transformative role in overcoming barriers and facilitating the identification, deployment and scaling up of sustainable projects. AI enhances overall transparency, efficiency and accountability, making it a powerful tool in driving climate action forward.

Effective policy and regulation are vital for accelerating climate finance. AI can assist policymakers and regulators by providing data-driven insights into the effectiveness of climate finance and the impact of specific regulatory measures. For instance, by analysing historical data, AI can identify which policies have been most successful in mobilising climate finance and recommend adjustments to improve outcomes.

AI provides an extensive toolkit that unlocks new possibilities in climate finance. It enhances project evaluation, risk management, carbon market transparency, real-time impact monitoring, reporting and governance. By streamlining processes and making climate finance more efficient, accessible and data-driven, AI attracts greater capital to sustainable initiatives.

AI technologies, thus, have the potential to bridge the gap between financial goals and sustainability objectives, establishing a robust foundation for a low-carbon economy. Embracing AI-enhanced climate projects may be the most crucial intervention needed to unlock the full potential of global climate finance flows.

A version of this article was published by PowerLine Magazine in its December 2024 Print Issue. The same can be read here