Climate finance is the flow of funds to address the issues related to climate change. It refers to local, national, or transnational financing, primarily provided by developed countries, which may be drawn from public, private and alternative sources and mobilized to help developing countries mitigate and adapt to the impacts of climate change.

 

In recent years, financing adaptation and mitigation has been a key area of focus in the international battle against climate change. In an effort to support countries such as Jordan to mitigate and adapt, mechanisms have been established internationally and regionally to enable financial assistance to flow between countries. Despite the systemic and comprehensive approach enabling climate change finance, it remains a broad and very dynamic concept with infinite definitions. The UNFCCC defines climate finance as “local, national or transnational financing, drawn from public, private and alternate sources of financing that seeks to support mitigation and adaptation actions that will address climate change”.

 

Climate finance can be categorized in a variety of ways:

  • The source of the finance: public or private.
  • The type of finance: mitigation finance, adaptation finance
  • The type of instruments: grants, concessional loans (senior and subordinated), equity, and guarantees.
  • The flow mechanism of the finance: nationally at a state level, bilaterally from developed countries to developing countries, or multilaterally through multilateral  development banks and international financial institutions (IFI).

 

Climate Finance typically comes in the form of one or a blending of the financial instruments described below.

 

Grants

Promotes investment in activities that often remain unfunded through mainstream financial channels, such as adaptation activities to alleviate disruptions to business from climate change in climate-vulnerable areas.

Concessional loans

Provides liquidity or absorbs high market rate costs of debt with the agreement that the money will be repaid on conditions more favorable than market terms.

Guarantees

Mitigates and de-risks and can help crowd-in private sector investment.

Equity

Nurtures a project in its early stages until it is commercially viable. Higher risk type of financing.