Climate Finance at a Glance

Author:
Otar Antia, Green Economy Transition Expert at the Investors Council Secretariat

Sustainable finance, climate finance, green finance, and related terms have taken the spotlight in contemporary literature. Their significance has grown in parallel with the acknowledgment of climate change as a pressing issue for humanity. The acceleration of this trend has increased with the recognition of human-induced factors as the main drivers of the climate change issue. Despite the apparent similarities among these terms, they cannot be used interchangeably. Climate Finance, in particular, is recognized as a subset of Sustainable Finance, responsible for supporting initiatives across the entire spectrum of environmental concerns, with a primary focus on addressing climate change, while the term Sustainable Finance serves as a comprehensive umbrella, covering all three pillars of sustainability—economic, environmental, and social.
Despite the fact that the term “Climate Finance” is gaining increasing popularity, a universally accepted definition is still missing. One of the widely adopted definitions was introduced by the United Nations Framework Convention on Climate Change (UNFCCC), characterizing Climate Finance as: ‘Climate Finance aims at reducing emission 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 impact.’
In contemporary literature, there is currently ambiguity not only concerning a unified definition of Climate Finance but also regarding the tools and mechanisms referred to as Climate Finance. Various sources suggest that Climate Finance is considered a result of the “common but differentiated responsibility and respective capabilities” principle of the Paris Agreement, which encourages developed countries to provide financial assistance to developing countries in meeting their objectives under the UNFCCC. In most cases, this support is provided through multilateral funds such as the Global Environmental Facility (GEF), the Green Climate Fund (GCF) and Adaptation Fund (AF). Additionally, following this approach, funds can be transferred from developed to developing countries through bilateral and regional initiatives as well. On the other hand, according to the UNDP, apart from conventional mechanisms such as grants from multilateral funds, market-based loans from financial institutions, and sovereign green bonds issued by national governments, Climate Finance now also encompasses a broader spectrum, incorporating revenues generated through activities like carbon trading and carbon taxes.
Amidst the uncertainty surrounding its definition, there’s an undeniable truth—the pivotal role played by various Climate Finance mechanisms in driving the development of climate-friendly technologies. A comprehensive evaluation of Climate Finance by the UNFCCC Standing Committee, as presented in its Biennial Assessments, reveals a substantial impact. Global climate finance flows averaged $803 billion annually in 2019–2020, marking a substantial 12% increase from 2017–2018.
Delving into the specifics, the sectors that emerged as the primary beneficiaries in 2019–2020 were renewable energy, attracting an average of $336 billion per year, and sustainable transport, securing $169 billion.
Carbon Trading as an Effective Climate Finance Mechanism
Beyond countries accessing funds from entities like GEF, GCF, and AF, the Paris Agreement also envisions the introduction of market-based mechanisms to create an environment supportive of Climate Finance. One such mechanism involves the mobilization of funds through carbon trading. In this process, greenhouse gas (GHG) emissions are quantified and transformed into carbon credits available for purchase and sale. Each tradable carbon credit represents one tonne of carbon dioxide or an equivalent amount of another GHG that has been reduced, sequestered, or avoided.
Presently, two types of carbon markets exist: voluntary and compliance. Compliance markets emerge due to national, regional, and/or international policy or regulatory requirements, while voluntary carbon markets, both national and international, involve the issuance, buying, and selling of carbon credits on a voluntary basis.
According to various research studies, the role of the Carbon Trading mechanism is steadily increasing. Preliminary estimates indicate that issuance of carbon credits is projected to grow by up to 40%, reaching approximately USD 1.9 billion in value by 2023. Various analyses also demonstrate that the development of carbon trading can significantly contribute to meeting the 2030 targets.
The true advantage of the carbon trading mechanism lies in its diverse benefits. Not only does it contribute to environmental protection by stimulating the adoption of sustainable technologies, but it also proves advantageous for countries and businesses.
Furthermore, there is a growing global interest in Carbon Trading, driven by the commitment to implementing Nationally Determined Contributions (NDCs) by countries. According to the submitted NDCs, more than 80% express the intention to leverage international carbon trading platforms to reduce greenhouse gas emissions.
Climate Finance Needs and Opportunities in Georgia
Georgia is making significant progress in addressing climate change through the initiation of key strategic documents. Among these, the Long-term Low Emission Development Strategy (Lt-LEDS) and the National Energy and Climate Plan (NECP) hold crucial importance. In a noteworthy move in 2021, Georgia updated its Nationally Determined Contributions (NDC) under the Paris Agreement, committing to a substantial 35% reduction in greenhouse gas (GHG) emissions below the 1990 level by 2030.
Positioned as a non-Annex 1 Party to the Paris Agreement, Georgia, as a developing nation, acknowledges its vulnerability to the consequences of climate change and seeks assistance in overcoming these challenges. Pledging a more ambitious GHG emissions reduction of 50 to 57% from the 1990 baseline by 2030, the country emphasizes its commitment to sustainable practices with the provision of sufficient financial support.
According to the ‘NDC Financing Strategy and Investment Plan’ technical report developed by the UNDP, Georgia has received substantial support from international financial institutions such as the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), the International Bank for Reconstruction and Development (IBRD), and the World Bank Group, among others. Impressively, the cumulative contributions from these institutions reached an impressive GEL 28.35 billion during the period from 2010 to 2022. In terms of financial mechanisms utilized in this period, up to 97% of the funds dedicated to climate-related projects took the form of loans. The remaining 3%, meanwhile, encompassed guarantees, equity, and technical assistance.
However, despite substantial contributions, the country finds itself in need of significant investments to meet its NDC and other climate-related targets. Beyond the existing support from both bilateral and multilateral sources, there is a pressing need to draw in more private financing for climate action investments. However, attracting private capital requires the implementation of mechanisms that improve the overall risk-reward calculus for sustainable and green investments.
International experience shows that activation of carbon trading mechanisms in addition to existing Climate Finance mechanisms, emerges as a strategic move that could unlock additional revenues for private investors, ensuring the attraction of extra funds for sustainable and climate-smart development. This innovative approach not only addresses financial gaps but also aligns with the broader goals of fostering a green and sustainable future for Georgia.
It’s noteworthy that Georgia has already taken the initial steps by signing two bilateral Carbon Trading Agreements—one with Switzerland and another with Japan. These agreements mark a significant milestone, opening new opportunities for the Georgian private sector to secure additional financial resources from these countries for the adoption of sustainability practices. As the groundwork is laid, there is now a crucial need to develop a clear roadmap for businesses for the effective utilization of the potential offered by these agreements. Additionally, it is important to expand the list of countries for collaboration in carbon trading.