What is Climate Finance? - Managing the unavoidable...avoiding the unmanageable

Why do we need climate finance?

A world that is out of balance with atmospheric carbon is a world that must adapt.

I know what you are thinking – an increase of two degrees – it doesn’t sound like much, right? But two degrees is the average worldwide. It will be higher in some places, and lower in others. Dry places in Africa will get drier. Wet places in Asia will get wetter. A two degrees warmer world is a world with a 50/50 risk that coral reefs will bleach, and fish stock will migrate. For many small island states, this means that they would lose most of their economic revenues from tourism and fisheries. Mountainous countries such as Bhutan, which experience the melting of glaciers, would experience water shortages and severe difficulties with their hydropower production.

We live in a very uncertain world. A world that needs investment, but in things we haven’t invested in before, or at least never as a priority. Adapting to a world that is two degrees warmer will cost money. Green technologies are expensive.

''We don’t know what climate finance is…but we are sure we need a lot of it''.

So what is climate finance?

There are three prevailing rationales for providing climate finance:
       Climate justice: Transfer of public resources from north to south to cover the costs of dealing with the long-term impacts of Climate Change.

       UNFCCC: “New and additional financial resources” by developed countries for the “full incremental costs” of climate change in developing ones.

       Broadly: Financing for climate change mitigation and adaptation projects and programmes.

In 2014, global climate finance amounted to approximately US$391 billion. It is made up of public and private money. The money is split between financial flows to climate change adaptation and climate change mitigation projects. To date, there is far more investment in mitigation (related mostly to energy and transport systems): US$361 billion versus US$25 billion.

Investing in the climate is fast becoming a popular notion in the private sector. Big businesses like Google and The Rockefeller Foundation are both providing it. But it is by no means mainstreamed. Other foundations such as the Bill and Melinda Gates Foundation have thus far stayed out of climate finance.

IFAD partner countries tap into climate finance from multiple sources. The Fund receives donations from a subset of member states who contribute to the Adaptation for Smallholder Agriculture Programme (ASAP). There is also the Global Environment Facility, Least Developed Countries Fund (LDCF), Special Climate Change Fund (SCCF) and the Adaptation Fund. IFAD uses this money to ''Climate-proof'' its projects, which effectively means these projects are investing in specific activities to reduce risks from extreme weather events, adopt environmentally sustainable landscape and natural resource management practices, and sequester organic carbon.

The amount of money pledged by governments has the potential to make an incredible difference. 
But it needs to be accessed, used judiciously, and replenished.

How does this help smallholder farmers?

For IFAD, climate finance is used to analyse new and emerging risks. The current generation of smallholder farmers are facing a level of threats and uncertainties they’ve never experienced before. Understanding the risks that are emerging in a changing climate is the first step towards preparing for, and adapting to it.

Climate finance can also help to finance new and innovative technologies to manage climate risks, which have not been widely considered in the agricultural sector before. Such technology can take many forms: Solar panels to power lights and heat water; biogas units, that can turn human and animal waste into cooking gas and fertilizer; half-moon- shaped contour bunds that help arrest erosion and turn degraded dry-lands into arable land again; early warning systems, allowing farmers to know when a flood or monsoon is coming; improved storage infrastructure, so that farmers can safely store their harvests before the rains are coming. The list is long, and these are just some of the ways that smallholders can benefit.

Perhaps the most obvious way that smallholder farmers can benefit is through improved yields. Using techniques such as conservation agriculture and agroforestry, farmland can be made more productive. Such techniques protect the agricultural soils from erosion, whilst intensifying production over a small farm area.

Take-away messages

Climate finance is out there. There's a lot of it, and the trend is rising. After Paris's COP21, there is a worldwide commitment to combat climate change and support developing countries in adopting green and resilient development pathways. IFAD is ahead of the curve in making climate finance work for smallholder farmers, but more work is needed. ''Climate finance is most effective when used as an incentive to improve and adjust the approach of other public or private sector investment programmes'', said Gernot Laganda, IFAD's Climate Adaptation Specialist. Basically, you take a rural development project that is under development or already active, and you mould it into a climate-smart programme through the systematic integration of climate finance.

Climate finance is a new source of financing to do development better. Organisations such as IFAD need to adjust their business processes to use it well.