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Public Policy

Climate Finance: Financial Resources and Investments to Address Climate Change

Sally Ashour
Last updated: 2022/12/04 at 5:15 PM
Sally Ashour
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There is a growing global need for financial resources and rational investment to address climate change, particularly to help developing economies deal with climate change and contain its repercussions by reducing emissions, enhancing adaptation to its existing effects, and building resilience.

Contents
Financing Global Climate ActionClimate Financing in Egypt

Studies on investments in climate action have shown that the world will need significant infrastructure investments over the next 15 years, estimated at $90 trillion by 2030. Estimates vary, but these economies must collectively invest at least $1 trillion in energy infrastructure by 2030, and $3 to $6 trillion annually across sectors by 2050 to mitigate climate change by significantly reducing greenhouse gas emissions. 

In addition, between $140 and $300 billion will be financed by 2030 to adapt to the consequences of climate change on the natural environment, such as rising sea levels and intensified droughts. This amount could rise to between $520 billion and $1.75 trillion annually after 2050, according to climate change mitigation measures.

The World Bank notes that the transition to a green economy may create new economic opportunities and jobs, as investing $1 generates an average of $4. It could also yield an estimated $26 trillion in economic gains until 2030, according to the new report on the climate-based economy. This shift will require a large volume of investment to move away from fossil fuel subsidies, end investment in coal-fired power plants and abandon their construction, and replace them with solar and wind power plants.

Financing Global Climate Action

International institutions have divided climate finance around the world into three categories:

  • Type 1: Financing for mitigation, which is intended to mitigate the damage caused by climate change. Countries use these funds to abandon fossil fuels and other polluting activities. However, several countries still have coal-fired power plants that are not yet out of service, and these countries need support to build clean energy infrastructure and replace those plants with ones such as solar power plants.
  • Type 2: Financing for adaptation, which is used to help developing countries prepare for the worst impacts of climate change.
  • Type 3: “Loss and damage” financing, which is allocated to help developing countries recover from the effects of climate change that they have already incurred. These countries do receive disaster funding through humanitarian aid, but they may vary from year to year.

Responding to the climate crisis requires collective action by all countries, cities, financial actors, businesses, and ordinary citizens. Among these concerted efforts, developed countries have committed to jointly mobilizing $100 billion annually by 2023, from a variety of sources, to meet the pressing mitigation and adaptation needs of developing countries. It rose from about $52.4 billion in 2013, as the following figure indicates. 

Climate finance chart including estimated data from 2021 and 2022

In its 2019 Global Landscape of Climate Finance, the Climate Policy Initiative noted that it is difficult to balance mitigation and adaptation activities, that adaptation finance still constitutes a small proportion of overall climate change financing, and that the bulk of tracked funding continues to flow towards mitigation activities. This is shown in the following figure: 

Climate Financing in Egypt

In line with Egypt’s commitment to sustainable development, it expanded the share of renewable energy in the electricity system to 20% by 2022 and 42% by 2035. In order to finance this ambitious agenda, the Ministry of Finance embarked on an initiative to integrate sustainability considerations into public budget financing plans, which led to the issuance of the first sovereign green bond on 29 September 2020.

Egypt becomes the first country in the MENA region to issue sovereign green bonds, initially announcing a five-year green bond issue of $500 million at an interest rate of 5.75%. With the size of the bond subscription exceeding seven times, it prompted the government to increase its total value to $750 million and cut the interest rate to 5.25% (lower than Egypt’s traditional reference bonds). Moreover, this bond saw the participation of 16 new investors, an unprecedented number in US dollar-denominated bond issuances.

Green bonds have been considered a financial solution to meet the urgent need for environmentally sustainable investments. The proceeds from the bond sale were allocated to financing clean transport, renewable energy, pollution prevention and control, sustainable management of drinking water and sanitation, energy efficiency, and climate change adaptation. Egypt’s Vision 2030 aims to increase the proportion of green projects in the government’s investment budget from 14% in 2020 to 30% in 2022.

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TAGGED: Climate change, Finance
Sally Ashour December 4, 2022
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