Congress and International Climate Finance

The Environmental and Energy Study Institute (EESI) held a briefing on Congress’s role in the global effort to finance climate solutions. While investments in climate action are expensive, the impacts of climate change at home and abroad are even more costly. With demand for climate-related finance increasing around the globe, what levers are available to Congress to scale up financial flows? How does Congress’s approach to international climate finance impact actions by the private sector, multilateral development banks, and other global financial institutions? This briefing brought together a panel that explored these questions and discussed possible policy solutions.

Highlights

KEY TAKEAWAYS

Average annual climate finance flows reached almost $1.3 trillion in 2021 and 2022—nearly double the annual average from 2019 and 2020.
Adaptation is starkly underfunded, comprising just five percent of total global climate finance.
Much of the current funding Congress appropriates to international climate finance is through the annual State and Foreign Operations Appropriations bill.
Multilateral development banks can support the financing of low-carbon pathways, share information and technical assistance, and prioritize interventions that align with climate and development goals.
Almost every discussion at COP28 will touch on climate finance in some way.

Rep. Adriano Espaillat, U.S. Representative (D-N.Y.)

The United States has a responsibility to lead the global effort to fight climate change.
The United States must work together with its allies and partners to mobilize adequate resources to support developing countries transitioning into low-carbon and climate-resilience development.

Stacy Swann, Founding Partner, Former CEO, Climate Finance Advisors, BLLC; Board Member, Climate Policy Initiative

The Climate Policy Initiative (CPI) tracks and assesses climate finance flows, which is important for understanding where public dollars go, where private dollars come from, how public dollars leverage private dollars, and what they are both used for.
Climate finance comes from many different sources, including governments, corporations, development finance institutions, and multilateral climate funds.
CPI tracked $653 billion in average annual climate finance flows in 2019 and 2020, which is a 15-percent increase from 2017 and 2018.
Money is allocated to climate and climate-related investments with different financial instruments such as grants, low-cost project debt, project-level market rate debt, project-level equity, and balance sheet financing.
The majority of the climate finance flows in 2019 and 2020 went towards mitigation-related activities, which, in this context, relates to energy transitions and energy efficiency. Climate-mitigation activities comprised $586 billion of the $653 billion in average annual climate finance flow.

Bella Tonkonogy, Director, Climate Policy Initiative

Bella’s segment was recorded on November 13, 2023, and added to the briefing video.

According to CPI’s Climate Finance Tracking Program, average annual climate finance flows reached almost $1.3 trillion in 2021 and 2022—nearly double the annual average from 2019 and 2020. This uptick in finance flows was primarily driven by significant acceleration in mitigation finance, methodological improvements, and new data sources.
Despite this increase in finance, current investment levels are nowhere near enough to limit global warming to 1.5°C (2.7°F). CPI estimates that $5.9 trillion in annual investment is required by 2030 to stay on track for this goal.
With limited public budgets, mobilizing private finance at scale is critical to closing this gap in climate finance.
National domestic finance institutions provide the majority of public climate finance. Commercial financial institutions and corporations provide the majority of the private sector’s climate finance, but individual decisions like buying energy efficient appliances and vehicles are also important contributions.
Most climate finance is concentrated in East Asia and the Pacific, Western Europe, and the United States and Canada. Climate finance should be diversified to other regions to support low-carbon and resilient pathways in those countries.
Adaptation is starkly underfunded, comprising five percent of total global climate finance. More adaptation finance is critical to addressing vulnerabilities and economic impacts of climate change.
Increasing the scale and speed of climate finance will require transforming the financial system in both the public and private sectors, bridging climate and development needs, mobilizing domestic capital to increase the capacity of domestic financial institutions to support adaptation and mitigation efforts, and acting to improve climate finance data and methodology.

Joe Thwaites, Senior Advocate, International Climate Finance, Natural Resources Defense Council

The “grand bargain” that allowed countries to support the Paris Agreement is the idea that richer countries should provide support to poorer countries to enable them to do more to combat the climate crisis. As the biggest economy in the world, the United States has a critical role in supporting international climate finance.
Much of the current funding Congress appropriates to international climate finance is through the State and Foreign Operations Appropriations bill, one of the 12 appropriations bills passed every year.
Climate-specific accounts are lines in the appropriations bill that are undeniably beneficial to the climate. Within the climate-specific accounts, there are two key buckets: bilateral and multilateral accounts.
- Bilateral accounts, which fall under Title III, are primarily delivered by the S. Agency for International Development and the U.S. Department of State. Congress has added three lines to Title III for environmental programs that are related to climate: clean energy, adaptation, and sustainable landscapes. These lines set a minimum amount of funding that Congress wants to see directed to these areas.
- Multilateral accounts are international entities created over many years by the international community. They include major funds like the Green Climate Fund and the Clean Technology Fund, which are multi-billion dollar funds to which all major developed countries have contributed.
Other potential sources like bilateral development finance agencies and multilateral development banks (MDBs) are entities that the appropriations bill funds but do not designate as climate-specific.
- Congress approves the annual budgets of bilateral development finance agencies, including the Export-Import Bank and the International Development Finance Corporation. They are increasingly dedicating more of their financial flows towards climate initiatives in order to meet specific targets driven by demand from the private sector.
- MDBs are international institutions that most of the world’s governments are shareholders of. They are increasingly involved in climate financing. The United States is often the largest shareholder, which means it has influence to encourage MDBs to increase climate finance.
The Biden-Harris Administration has requested more funding for international climate finance in the budget each year than what Congress has ultimately appropriated.

Valerie Laxton, Senior Associate, Development Finance Institutions, Finance Center, World Resources Institute

MDBs are major providers of public climate finance, especially to developing countries.
The World Bank is the largest MDB with 189-member countries. It lends to governments and private firms.
In 2022, MDBs committed around $60 billion to low- and middle-income economies and $38 billion to high-income countries. Around 43 percent of their total commitments in 2022 were intended for climate finance.
MDBs use loans—and, occasionally, grants and project-based financing—to invest in low-carbon, resilient solutions. MDBs can finance climate and development together. They are well-positioned to lead the transition to low-carbon and resilient economies.
To address development and climate challenges, MDBs can support the formulating and financing of low-carbon pathways, share information and technical assistance, and prioritize interventions that align with climate and development goals. To implement these strategies, MDBs must remain well-resourced, take more risks, and partner together.
Mitigation finance includes clean energy, energy access, energy efficiency, clean urban transportation, and improvements to public infrastructure.
Adaptation finance can include water and wastewater systems, crop and food production, and coastal and riverine infrastructure.
It is critical that greater amounts of adaptation finance go to developing countries and small island states. Adaptation finance for developing countries is currently five to 10 times below estimated needs.
There are gaps in climate finance and investment as global capital is channeled elsewhere. Current levels of global climate finance account for around 30 percent of what is needed to align with the 2°C (3.6°F) or 1.5°C (2.7°F) trajectories.
To bridge gaps in climate financing, MDBs would need to mandate shared prosperity goals, triple lending by 2030, add new partners and investors, and expand MDB lending to the private sector.

Stacy Swann, Founding Partner, Former CEO, Climate Finance Advisors, BLLC

September 2023 was an extreme month for rising global ocean and air temperatures.
Climate risk is expected to increase in the future, and we are beginning to feel the effects of that risk today. These effects—such as water scarcity, extreme weather, and increased temperatures—will have economic consequences for companies and investors. The world has already “locked in” at least 1.4°C (2.5°F) of warming, and that warming will have both acute and chronic impacts.
Climate risks will continue to change the way economic and social systems function in the future in all segments of the supply chain.
Climate risks will also affect the geography of commerce as people choose to grow food, start businesses, and live in areas that are less severely damaged by the climate crisis.
Damage from extreme heat, weather, and natural resource extraction put stress on public balance sheets and private investors.
Today, there is increased pressure to transition to a net-zero world faster. The private sector must invest in climate resilience and adaptation measures to prevent more physical and financial risk.
Climate readiness is the most important investment opportunity of this generation. Investing in climate solutions has a positive return on investment for the largest number of people in the greatest number of places. Both climate-safe communities and overall resilience are positive, not just for people and for Congress but also for finance.
Environmental risk and climate risk impact how companies understand their assets and investments.
- Environmental risks include repercussions from damage a project might cause to the environment or the people living in it through pollution and resource loss. The resulting reputational or legal consequences make up environmental risk.
- Climate risk is the result of climate-related impacts changing the value of an asset.
The need for investment in climate-related transitions is not met by federal budgets and requires private investment in order to be sufficient. The cost of climate risk may undermine investments for both public and private investors.
Blended finance consists of taking public sector investments and leveraging them to encourage private investment. Blended finance could support private sector investment in resilience and energy projects. Models like blended finance are necessary to fund the transition to a climate-safe world.

Elizabeth Lien, Senior Director, Federal Climate Policy and Subnational Programs, World Wildlife Fund

Heading into COP28, almost every discussion will include climate finance in some way. The central finance priorities of COP28 from a U.S. perspective include investing in public sector programs (e.g., Green Climate Fund, Loss and Damage Fund, nature finance, bilateral finance), encouraging action (e.g., accelerating the energy transition, private sector investment, fossil fuel phaseout), and accelerating multilateral action (e.g., MBD evolution agenda, meeting the $100 billion commitment).
The United States is also prioritizing Just Energy Transition Partnerships, through which donor countries incentivize developing countries like South Africa Indonesia, Senegal, and Vietnam, to transition away from coal production to renewable energy. As a donor country, the United States contributes tools for analysis of the current condition, in-country policy reform options, support for coal plant retirement, and investment options for new energy systems.
The private sector should be capable of supporting energy transitions in most countries, but governments are expected to lead the way by investing in their own nation’s futures.
S. involvement in COP28 will also focus on nature finance. There has been increased investment in nature-based solutions to the climate crisis and ongoing conversations over the best ways to finance nature in a way that is consistent with the climate agenda and vice versa.
Both public and private sector investors are presenting new ideas for projects that make good investments while conserving forests, wetlands, and other natural resources and biologically productive areas.

Q&A

Q. It has been reported that advocates and some countries are unhappy with the World Bank or the Green Climate Fund. Why is this?

Laxton

There is a long history to the World Bank and its impact. One of its core missions is to eliminate poverty. Right now, it is struggling to promote development and fight climate change without reallocating resources that are designed to combat poverty. Investing in adaptation to climate change does address many of the issues that cause poverty, but tension over where to allocate resources is still an issue.

Thwaites

The negotiations around the creation of the Loss and Damage Fund have been contentious because some countries have suggested that the World Bank should be a host for the fund. A few less developed countries have resisted this idea because of historical neglect or mistreatment on the part of the World Bank.
The World Bank primarily provides loans, but developing countries want the Loss and Damage Fund to be grant-based, which would be a misalignment in terms of financial instruments.
The bank would not be a perfect host, although it has the size and infrastructure required. If a separate organization were to be created in order to host the fund, it would take years.

Lien

The Green Climate Fund is still very young and does not yet meet a lot of the needs it is intended to. Because the Green Climate Fund has a shareholder system, some less developed countries are left out of essential conversations. The Green Climate Fund is still figuring out how to deliver on getting funding directly to country entities in effective ways.

Q. What are some of the ways in which the United States is funding nature-based climate solutions through international finance?

Lien

The U.S. government has some core programs dedicated to nature-based climate solutions. There are also nonprofit organizations and philanthropic groups who step in where the government is not doing enough. There are smaller programs, for example the Tropical Forest Conservation and Coral Reef Act, which allows the Treasury Department to forgive debt in countries with biologically productive landscapes so their resources can go towards conservation rather than paying off

Laxton

The World Resources Institute works with a number of institutions that deliver on-the-ground results in communities that depend on the natural environment for their livelihood and there is a lot of emerging research in that space.

Q. How can private finance be scaled and expanded? What mechanisms do you think are the most promising for the United States, specifically?

Swann

Some exciting things have happened in the world of private finance. One is that, because we are getting better at assessing and quantifying risk, it is starting to show up in rating agencies. S&P, Moody’s, and Fitch have all acquired, built, or grown climate risk analytics teams that are used to quantify the financial risk of climate impacts on certain assets. This builds awareness and understanding of climate risks among investors.
Another important area is the insurance sector. Frontline underwriters are having a hard time writing new policies that can accommodate climate-related hazards. The mainstream financial sector takes that seriously because climate change has financial risk.

Lien

The economic policy team at the Treasury Department has done some great analysis for Inflation Reduction Act (IRA) (L. 117-169) investments, and the numbers show that there are over one hundred announced projects that total up to about $200 billion dollars. We have seen enormous investments in the United States because of IRA incentives.

Q. What is the biggest change or shift you have seen in international climate finance since COP27? What is the biggest international climate finance issue you look forward to seeing addressed at COP28?

Thwaites

The scale of finance we are starting to talk about has shifted dramatically. We are talking about trillions of dollars in terms of need. The shift in conversation from billions to trillions is essential to making progress on these issues.
When we talk about reforming MDBs and other international financial institutions we now have a benchmark measure to reform against. At COP27, there was a report by the Independent High-Level Expert Group on Climate Finance finding that around $2.4 trillion would be needed by 2030 to address climate change in developing countries. That money will need to come from international sources, public and private.

Laxton

Public, private, national, and international financing will all play a role in the climate transition. Climate finance to developing countries, particularly adaptation financing, has increased in the last year, which gives me hope.

Swann

Not only has the share of adaptation financing for developing countries increased, but the share of private investment in adaptation has, too.

Lien

At COP26, a significant number of private banks committed to net-zero greenhouse gas emissions. This year, I am excited to see those banks develop energy transition plans.
Big financial firms are actually holding clients to account, asking for lower greenhouse gas emissions, and then developing their own strategy for hitting five- and ten-year emission reduction

Compiled by Laura Gries and Maggie Christianson and edited for clarity and length. This is not a transcript.

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The briefings in this series are:

Congress and International Climate Finance

What’s on the Table for the Negotiations?

The First Global Stocktake