The near-mystical Green Climate Fund returns to the front page of the COP26 climate summit in Glasgow. The fund grew out of a pledge made by rich countries in 2009 to provide US $ 100 billion (£ 74 billion) per year in “climate finance†to help developing countries decarbonize their economies. So far, the amount actually raised is well below, although we could at least get there soon.

Climate finance is notoriously difficult to define. It is rarely clear how much is actually available, or how much is actually needed. So where is this money coming from, and can these richer countries even afford it, especially in the wake of the COVID-19 pandemic?

The lack of a coherent and globally accepted definition of what counts as climate finance has led to a Wild West scenario, making it impossible to calculate how many there really are and how respectful it truly is. of the environment. Governments and fund managers can attach “green†labels to investments in new airports or “green†funds with significant holdings in fossil fuel companies. Some of these things are probably glaring greenwash. But some of them simply reflect the complexity of the real world: if the fossil fuel majors are raising funds to decarbonize their portfolios by building wind and solar farms, should that be considered “green”?

There are three broad categories of climate finance. The first is debt, which can be public (states issuing bonds) or private (companies issuing bonds). A second category comes from shares and private capital. It can take many forms, but often includes “green funds†that filter out polluting businesses and industries.

The last category, and which is of major interest at COP26, is the role of international aid in providing finance to help developing countries decarbonize – for example by phasing out coal, developing low-carbon transport or by restoring ecosystems such as mangroves that protect against floods and storms.

In principle, climate-focused international assistance can take the form of grants, loans or direct investment and insurance, each with varying degrees of conditionality. In practice, however, these categories are very controversial. Take the example of a hypothetical loan of US $ 50 million to India for a new solar farm, which must be repaid with $ 10 million in interest. From a US perspective, US $ 50 million in climate finance has been provided. From India’s perspective, it received US $ 50 million but will ultimately send US $ 60 million to the United States, which begs the question of who is funding whom.

Three categories of climate finance. Kamiar Mohaddes et al, author provided

What is the Green Climate Fund and how important is it?

At COP15 in Copenhagen in 2009, rich countries pledged to provide US $ 100 billion per year by 2020, which led to the formal creation in 2010 of the Green Climate Fund with the aim of helping developing economies fight climate change. Whichever measure or definition of climate finance you use, we clearly haven’t reached the target of US $ 100 billion per year yet. This figure will rather be reached in 2023 according to the latest estimates, although some at COP26 were more optimistic: both the EU Leyden Ursula and American envoy for the climate John Kerry said the target would be met in 2022.

A tree planting project in Rwanda, funded by the Green Climate Fund. Rwandan Ministry of the Environment, CC BY-SA

However, because there is no clear definition of what counts as climate finance, there are huge variations in the estimates of what has been committed so far. The OECD estimate (this is what COP26 climate finance delivery plan is based on) is at the higher end, while Oxfam estimates that a little over a fifth of what was promised has materialized so far.

How much does it really take

Estimates of the amount of finance needed to truly decarbonise the global economy vary between $ 50 trillion and $ 90 trillion. With a trillion out of a trillion, that US $ 100 billion everyone is referring to is just a decimal point.

It is also almost impossible to determine exactly how much green funding will be needed, as the total amount required depends on where the money is going and how quickly we spend it. Early investments in new technologies generate rapid cost reductions and reduce asset stranding (wasted investments in already obsolete carbon-intensive infrastructure). Any further delay simply slows down innovation and worsens the climate crisis.

Climate change will reduce savings rich, poor, hot and cold countries and more difficult and more expensive to raise the necessary funds for decarbonization in the future. The cost of early action is a lot less expensive than the cost of deferred action.

We have just witnessed a comprehensive and coordinated political response to the pandemic, with more than $ 16 trillion government support deployed globally (and at lightning speed). Climate change will require the same coordinated response, and the pandemic response shows that significant decarbonization funding can be mobilized relatively quickly.

Ultimately, mobilizing climate finance is a win-win solution for developed and developing economies. And in the context of what will really be needed to tackle climate change, that US $ 100 billion is really just a distraction.

Kamiar Mohaddes receives funding from the Keynes Fund and INSPIRE.

Matt Burke receives funding from the INSPIRE network.

Matthew Agarwala receives funding from ESRC, the Productivity Institute and the INSPIRE network.

Patrycja Klusak receives funding from the INSPIRE network.

Kamiar Mohaddes, Associate Professor in Economics and Politics, University of Cambridge