What the Shrinking Climate Finance Mean for Developing Nations

In 2015, country leaders came together to sign the Paris Agreement, an international treaty that legally binds signatories – 195 of them- to limit global warming and fight climate change. Now, ten years later, the urgency of the climate crisis remains as alarming as ever.

According to the BBC, the planet may exceed the critical 1.5°C temperature rise limit as soon as three years from now, driven by the current rate of carbon dioxide emissions.

This warning comes from leading climate scientists, highlighting the concerning trend of countries continuing to utilise fossil fuels at unprecedented levels, thereby jeopardising the global commitment to reduce emissions.

The rate of global warming and sea-level rise is accelerating, and the carbon budget necessary to maintain the 1.5°C target has significantly diminished—from 500 billion tonnes in 2020 to just 130 billion tonnes by early 2025. This stark reduction results in only a 50% chance of fulfilling the goals set out in the Paris Agreement.

In addition to continued fossil fuel use, recent world events could also risk derailing the progress made on climate action. The World Resources Institute (WRI) notes that instead of increasing climate targets, countries are doing the opposite.

The 2024 global election also reveals that climate change is low on voters’ priority list. Funding for climate change programs has also decreased with the dismantling of USAID and budget cuts in Europe; additionally, carbon emissions increased by 0.9% in 2024 rather than decreasing.

The initial efforts to establish a green transition are yielding positive results, with momentum continuing to build despite some setbacks. This progress is evident in the growth of renewable energy, as 90% of new energy additions now come from renewable sources, and one in five cars sold globally are electric vehicles (EVs).

Although climate action faces current challenges, a clear path forward remains to accelerate the green transition. In his new book, “The New Global Possible: Rebuilding Optimism in the Age of Climate Crisis,” WRI President and CEO Ani Dasgupta explains why recent developments that may seem to hinder climate action will not slow down long-term progress and identifies where to refocus efforts for the future.

Based on conversations with over a hundred world leaders, the book weaves stories of unusual partnerships, collaborative leadership, and lessons learned from failure. It explores how to orchestrate change at speed and on a large scale. How can we encourage countries to continue collaborating on climate action when multilateralism is in decline? How do we harness technological innovation to protect nature rather than destroy it? How do we dismantle entrenched power structures and rapidly transition to a clean, resilient economy?

The book states, “Success will entail stronger leadership from emerging economies, strategic efforts to mobilise finance, and—critically—people-centred climate policy. We can deliver the green transition the world so urgently needs.”

Dasgupta’s article on WRI highlights three areas to focus on in the path forward based on decades of experience and proof of success:

1. Focus on people and not on carbon. Transitioning to a green economy can be both economically profitable and improve people’s lives. Dasgupta gave two examples: how IKEA reduced its carbon footprint by over 30% while increasing revenues by more than 23%.
   
   Countries like the US, France and Germany have grown their economies while decreasing their emissions. In terms of pro-people and pro-planet policies, Dasgupta cites Denmark’s Green Tripartite Agreement, which plans to restore nature while incentivising farmers to reduce their GHG emissions and supporting them to make their production more efficient; another is Mexico City’s bus rapid transit system that is continually expanding and brought many benefits with it including reduced congestion and cleaner air. 
   
   Governments have a role in raising awareness about the benefits of the green transition, as many people are unaware of them. They can support these initiatives with policies and investments, ensuring that the transition does not harm the jobs and livelihoods that rely on the traditional economy.
2. The green transition of large and emerging economies increased. Countries such as China, India, Indonesia, South Africa, and Brazil account for half of global emissions, which are projected to increase in the coming years. They also house 75% of the world’s population and most of its poorest.
   
   The success of the green transition hinged on these countries. The good thing is that some of these countries have embraced the green transition and aligned it with their country’s developmental goals. Examples include Indonesia’s commitment to make its forest a net carbon sink by 2030 and the Colombian president’s pledge to phase out fossil fuels.
3. Developing countries should look beyond aid to financing models. Developing countries need an estimated $1.3 trillion annually by 2035 to mitigate and adapt to climate change. However, aid is shrinking due to cuts in foreign aid. Hence, countries would need a new financing source, such as increasing capital from multilateral development banks, which could turn $1 into $4 to $10, and other innovative financing options, including taxes from planes and ships.
   
   However, experts agree that public funds could only cover half of what is needed, meaning other sources would have to come from the private sector. The article cites India’s ‘capital stack” model as an example of success.  India’s government implemented strong policies and allocated $2.4 billion from its budget in 2024, which successfully attracted external investments.
   
   Its capital stack model places public policies and investments at the bottom, which take the most risk. The next layer, the middle, is comprised of bilateral aid and multilateral development banks (MDBs), and the last, the top layer, is derived from private investments, which tend to prefer lower risks. This layered approach to financing makes it easier for investors with various appetites for risk to join.

The article notes that as climate funding and financing dwindle, concessional funding, such as grants and low-interest loans, must prioritise the poorest countries and projects that generate more social and environmental benefits rather than returns.

Other countries should follow India’s example to attract more investors. Some are showing signs that they are taking the financing challenges seriously. Brazil, Kenya, South Africa, and Barbados are establishing “country platforms” to attract more international finance to their most significant climate and environmental priorities.