Climate finance: mobilising domestic budgets and external funds for adaptation
How can vulnerable countries bridge the gap between estimated climate adaptation costs and actual financial flows? Could domestic budgets be used as stepping stones to external funds?
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Date
November 2021
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Area of expertiseClimate, Energy, and Nature
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KeywordClimate policy and finance
The governments of 192 countries have submitted policy commitments on tackling climate change in their Nationally Determined Contributions under the Paris Agreement. However, identifying funding to meet these commitments is extremely challenging. Further, for highly vulnerable countries, the cost of dealing with the impacts of climate change, such as extreme weather events, threatens fiscal sustainability. While annual adaptation costs for low- and middle-income countries are estimated to range from US$ 140 billion to US$ 300 billion a year by 20302, actual financial flows (domestic and international) for adaptation had only reached about US$ 46 billion in 2019/20.
International climate funds can appear to be an attractive solution for closing this funding gap; however, they represent limited sources of finance and their processes can be slow and laborious. Even after the developed nations achieve the US$ 100 billion annual target set for mobilising international climate finance towards the developing world, the majority of the current adaptation financing gap will need to be met by domestic public finance, given the volume of investments required.
An important (but often overlooked) tool for identifying and delivering adaptation funding is integrating climate change into national public financial management (PFM) processes. The PFM cycle supports the setting of medium-term strategic goals, allocations and expenditures, as well as ensures accountability and transparency. When integrated with climate change responses, PFM tools help countries identify and report domestic resources that already address climate risks. Countries can then spend better, by reallocating funds to achieve greater climate benefits. And they can spend wiser, by modifying public investments so as to be better prepared for future climate risks and by steering public resources away from actions that worsen vulnerability to climate risks. They can also pave the way for mobilising additional funds from external sources.
Factoring climate risks into national PFM processes is an important step in meeting the critical challenge of adaptation financing. This paper shares insights into our work in multiple countries and regions on how the benefits of institutionalising climate change into PFM can be achieved.