Consensus: Climate finance needed, now more than ever
The ongoing US-Israeli war against Iran has triggered yet another global energy crisis. With an estimated 74 percent of the world population living in countries that are net importers of fossil fuels as of 2022, the closure of the Strait of Hormuz—the narrow pathway through which one-fifth of global oil typically transits—has once again exposed the vulnerability of fossil fuel-reliant economies.
This has placed governments under immense pressure to adopt alternative support policies that support the development of national energy mixes less reliant on the volatile fossil fuel markets. At the same time, the escalating threat of global warming is intensifying calls for governments to move beyond climate pledges and provide concrete plans on how to transition away from oil, gas, and coal.
In this context, green finance becomes even more critical for long-term resilience. The Asian Development Bank defines green finance as a type of “future-oriented finance” that simultaneously supports financial industry development, environmental improvement, and economic growth.
Within this broader framework is a subset known as “climate finance,” which refers to financial resources and instruments that are used to support action on climate change. These include grants provided by multilateral funds, market-based and concessional loans from financial institutions, sovereign green bonds issued by national governments, and resources mobilized through carbon trading and carbon taxes.
Major barrier
Discussions at a recent global conference in Santa Marta, Colombia—where governments from 60 countries convened to accelerate the transition from fossil fuels to cleaner energy—stressed a common point: While many countries and regional governments are not opposed to shifting away from fossil fuels, the lack of financing remains a major barrier. Debt, limited fiscal space, and the high cost of financing cleaner energy projects continue to deter progress.
Nicolas Lippolis, founder and executive director of the Centre for Energy, Finance, and Development, noted that although climate finance is a global challenge, it is even more pronounced at the subnational level.
This is especially evident in developing regions, where borrowing costs for renewable energy can be several times higher than in wealthier economies—averaging about 15 percent in parts of Africa, compared with roughly two percent in Europe and North America.
Meanwhile, in many Asian economies, aligning growth and sustainable development presents greater challenges due to their growth models being very resource- and carbon-intensive.
Central role
While continued investment in oil and gas may appear cheaper in the short term, it risks locking countries into a “debt-fossil fuel trap,” where reliance on oil and gas revenues to service debt and maintain energy access leaves little room to invest in sustainable alternatives.
Governments play a central role in encouraging the flow of private finance in green growth through policies and financial instruments. Some have sought to use fossil fuel revenues themselves as a way to help finance the transition. However, experts warn that fossil fuel revenues can be volatile, tied to global energy prices, and are likely to decline over time as countries reduce production and consumption.
Wealthier regions, meanwhile, are attempting to close the financing gap through policy and market mechanisms. A commonly cited example is the carbon market—a green market launched and developed by governments where carbon credits are traded. These systems require companies to pay for or limit their emissions.
By assigning a price on carbon and rewarding efforts to reduce or remove emissions, such markets can help raise the billions needed to build low-carbon, climate-resilient economies. As of 2024, carbon pricing covers 28 percent of global emissions and has generated over $100 billion.
Several countries and regions have implemented carbon market mechanisms tailored to their national contexts, with varying levels of maturity and scope. Examples include European Union Emissions Trading System (EU ETS), China’s national ETS, and Brazil’s national ETS.
National competitiveness
In the United States, California has used carbon markets and low-carbon fuel standards to generate investment and guide its energy transition.
Looking ahead, the long-term imperative for green finance remains strong as the world faces more energy volatility. Another role the government must undertake, therefore, is to invest in infrastructure that will result in improved long-term management of resources, by strengthening national competitiveness while attracting private-sector capital into domestic green markets.
By directing investment toward environmentally sustainable technologies such as clean energy, developing countries can bypass the development model of “grow first, clean up later,” thus reducing costs, speeding up technology adoption, and moving directly toward more eco-efficient infrastructure.
Sources: Inquirer Archives, apnews.com, greencentralbanking.com, iisd.org, adb.org, un.org, unescap.org, climatepromise.undp.org, unctad.org, iso.org
