Climate financing offers golden opportunity

The success of the green transition will depend on the availability of financing, along with the entire financial system transitioning toward green finances. However, the efforts across countries are rather scattered right now.

The Leaders Summit on Climate, organized in April by US President Joe Biden, emphasized the role of climate finance. During the summit, the US unveiled its international commitments, listed in the US International Climate Finance Plan. It also promised to double climate financing for developing countries to $5.7 billion by 2024, to scale up and attract private investment, and to end support for fossil fuels. These are major contributions to relaunching the global climate agenda.

What has the European Union done in the area of climate finance? According to the EU Council, the climate finance support provided in 2019 to developing countries by the EU and its member states (the United Kingdom then included) amounted to 23.2 billion euros.

Between 2014 and 2020, around 19.7 percent of the central EU budget (209 billion euros out of around 1.7 trillion) was spent on climate issues. From 2021 to 2027, this amount will almost triple, as the agreed upon multiannual EU budget foresees climate spending to reach at least 547 billion euros out of 1.08 trillion euros.

Moreover, most of the green spending will come from EU member states. According to recent estimates provided in the national climate and energy plans of EU member states, in order to reach the goal of 55 percent reduction in CO2 emissions, member states from 2021 to 2030 will need to spend 350 billion euros more on an annual basis, in addition to about 180 billion euros spent annually over the previous decade. This will involve funds from the EU budget, national budgets and private investment.

A boost in climate financing is also foreseen in the post-COVID-19economic recovery packages around the world, including the EU's. The years 2021 to 2024 will be decisive to switch from fossil fuel-related spending to climate change-related spending.

The countries of the EU need to speed up clean energy spending following the plans of the European Commission to increase green spending for the post-COVID recovery, for example while allocating funding via Next Generation EU, a temporary program to boost the COVID-19 recovery, and the Recovery and Resilience Facility. Both are part of the EU's 2021-27 budget.

The Recovery and Resilience Facility will provide 672.5 billion euros in loans and grants to support reforms and investments from 2021 to 2023/24 undertaken by the EU's member states, under the condition that they will spend no less than 37 percent of the funds for green recovery, and no less than 20 percent for digital transition.

It follows the solidarity approach, with higher allocations foreseen for countries most affected by the pandemic. Properly spent, the funds might facilitate the long-awaited jump toward a green EU, while providing for this irreversible change. Italy, one of the major recipients of recovery and resilience funding, will spend half of the allocated EU funding of 191.5 billion euros for green and digital transition. Germany will receive 25.6 billion, all to be spent on the green and digital transition. Half of the 41 billion euro allocation for France will go for a green recovery.

What is the future of global green climate finance? Certainly, given the importance of climate finance, the forthcoming US Infrastructure Investment plan of $2 trillion directed toward green transition, and China's estimates of $21.5 trillion in green investment over the next 40 years, the recent vacuum of climate finance leadership will not remain for long.

Could the European Union, a pioneer of green transition policy, assume the leadership role? Climate is one of the few areas in which the EU punches above its weight. The EU has all in place for developing an effective climate financial system. Refusing to do so would waste a golden opportunity and undermine the EU in this area.

However, effective climate financing is not just about the numbers. Fredrik Eriksson, the director of the European Centre for International Political Economy, has said the recent top-to-bottom approach to defining the figures for climate financing might be wrong.

"There is no good way to put a number to the necessary funding for the climate transition. Much of the effort to reduce carbon emissions will be based on new technologies and innovation, and what the capital requirements will be to develop and diffuse those are impossible to measure," he said.

"Furthermore, a good part of the climate investments will be an investment that would have to be taken anyway to upgrade infrastructure, buildings and production technology," Eriksson added.

The author is a European economist working on green transition and a former European Commission official. The views do not necessarily reflect those of China Daily.