Climate finance is an umbrella term for financial resources such as loans, grants, or domestic budget allocations for climate change mitigation, adaptation or resiliency. Finance can come from private and public sources. It can be channeled by various intermediaries such as multilateral development banks or other development agencies. Those agencies are particularly important for the transfer of public resources from developed to developing countries in light of UN Climate Convention obligations that developed countries have.
There are two main sub-categories of climate finance based on different aims. Mitigation finance is investment that aims to reduce global carbon emissions. Adaptation finance aims to respond to the consequences of climate change. Globally, there is a much greater focus on mitigation, accounting for over 90% of spending on climate. Renewable energy is an important growth area for mitigation investment and has growing policy support.
Finance can come from private and public sources, and sometimes the two can intersect to create financial solutions. It is widely recognized that public budgets will be insufficient to meet the total needs for climate finance, and that private finance will be important to close the finance gap. Many different financial models or instruments have been used for financing climate actions. For example green bonds, carbon offsetting, and payment for ecosystem services are some promoted solutions. There is considerable innovation in this area. Transfer of solutions that were not developed specifically for climate finance is also taking place, such as public–private partnerships and blended finance.
While public funding plays an important role in U.S. climate finance, the majority of climate-related investment in the United States is provided by private sources. According to the International Energy Agency, most clean energy and low-carbon investment in advanced economies is financed through private capital, including corporate balance sheets, project finance, bank lending, and capital markets, with public policy primarily serving to reduce risk and improve investment incentives. Public climate policies such as tax credits, loan guarantees, and regulatory standards are therefore designed not only to fund projects directly but also to mobilize significantly larger volumes of private investment toward mitigation and resilience objectives.
There are many challenges with climate finance. Firstly, there are difficulties with measuring and tracking financial flows. Secondly, there are also questions around equitable financial support to developing countries for cutting emissions and adapting to impacts. It is also difficult to provide suitable incentives for investments from the private sector.
Definition and context Climate finance is "finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts", as defined by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance.
The terminology of sustainable finance has evolved over time alongside policy frameworks and market practices. A review study in 2026 demonstrated that early research primarily used fragmented concepts such as ethical finance, socially responsible investment, and environmental finance, before the gradual consolidation of the field around ESG-based sustainable finance. Their periodization clarifies the differences and similarities between the rival terms (carbon finance, climate finance, environmental finance, green finance and sustainable finance). The authors distinguish three main periods: The first period spans from the 1970s to 2010. During this time, the theoretical foundations were established, and following the publication of the Brundtland Report, the first green financial instruments and the first targeted research emerged. The establishment of the Green Climate Fund (2010) was followed by the eras of carbon, environmental, and climate finance. Collectively, this constitutes the era of early sustainable finance research, which lasted until 2021, the year of COP26. This is followed by the era of mature research, characterized by green and sustainable finance.
UNFCCC obligations
Under the UN Climate Convention, climate finance refers to transfers of public money from high income countries to low and middle income countries. This would be in light of their obligations to provide new and additional financial resources. The 2015 United Nations Climate Change Conference introduced a new era for climate finance, policies, and markets. The Paris Agreement, which was adopted at that conference, defined a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2 °C above pre-industrial levels. The agreement covers climate change mitigation, adaptation, and finance. The financing element includes climate-specific support mechanisms and financial aid for mitigation and adaptation activities. The aims of these activities are to speed up the energy transition towards a low-carbon economy and climate-resilient growth.Barbara Buchner, Angela Falconer, Morgan Hervé-Mignucci, Chiara Trabacchi and Marcel Brinkman (2011) "The Landscape of Climate Finance" A CPI Report, Climate Policy Initiative, Venice (Italy), p. 1 and 2.
At the 16th Conference of the Parties in 2010 (Cancun 2010) developed countries committed to the goal of mobilizing jointly US$100 billion per year by 2020 to address the needs of developing countries. The decision by the 21st Conference of the Parties (Paris 2015) also included the commitment to continue their existing collective mobilization goal through 2025. In 2025, a new goal is expected to be adopted.
However, the amount of finance actually provided was estimated to be well below what had been targeted. According to OECD figures, climate finance provided and mobilized reached $83.3bn in 2020 and $89.6bn in 2021.OECD (2022), Aggregate trends of Climate Finance Provided and Mobilised by Developed Countries in 2013-2020, https://www.oecd.org/climate-change/finance-usd-100-billion-goal . This means that the US$100 billion per year by 2020 target has been missed.
Policies to Mobilize Private Capital Tax credits (ITC, PTC) and production incentives are explicitly designed to "crowd in" private investment in renewable energy, storage, and low-carbon technologies. The Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law employ long-term predictable incentives, loan guarantees, and public co-investment to lower the risk and cost of capital for investments in climate finance projects. Empirical studies indicate that public policy and concessional finance can mobilize significant private capital flows into clean energy.
Global estimates of financing needs
Global climate finance was estimated to have reached around $1.3 trillion per year in 2021/2022. However, much more is needed to keep global temperature rises within 1.5°C and avoid the worst impacts of climate change. A 2024 report estimated that climate finance flows must increase by at least sixfold on 2021/2022 levels, reaching $8.5 trillion per year by 2030. Subcategories Mitigation finance is investment that aims to reduce global carbon emissions. Adaptation finance aims to respond to the consequences of climate change.Kreibiehl, S., T. Yong Jung, S. Battiston, P. E. Carvajal, C. Clapp, D. Dasgupta, N. Dube, R. Jachnik, K. Morita, N. Samargandi, M. Williams, 2022: Investment and finance. In IPCC, 2022: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [P.R. Shukla, J. Skea, R. Slade, A. Al Khourdajie, R. van Diemen, D. McCollum, M. Pathak, S. Some, P. Vyas, R. Fradera, M. Belkacemi, A. Hasija, G. Lisboa, S. Luz, J. Malley, (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA. These two subcategories of climate finance are normally considered separately. However, the two areas are known to have many trade-offs, co-benefits and overlapping policy considerations. The Paris Agreement is an important international agreement between governments, which has also helped to engage financial institutions in the climate agenda. The third aim of the Agreement (article 2.1 c) is to make finance flows consistent with the mitigation and adaptation goals of the agreement. The Agreement called for a balance of climate finance between adaptation and mitigation.
Finance for mitigation
Global climate finance is heavily focused on mitigation. Key sectors for investment have been renewable energy, energy efficiency and transport. There has also been an increase in international climate finance towards the 100 billion target. Most of the estimated US$83.3 billion provided to developing countries in 2020, was targeted at mitigation (US$48.6 billion, or 58%). On a worldwide scale, mitigation financing accounts for over 90% of investment in climate finance. Around 70% of this mitigation money has gone towards renewable energy, however low-carbon mobility is a key development sector. Global energy investment has increased since the 2020 COVID-19 pandemic crisis. However, the crisis has placed great additional strain on the global economy, debt and the availability of finance, which are expected to be felt in years to come.
Mitigation costs and mitigation financing needs In 2010, the World Development Report preliminary estimates of financing needs for mitigation and adaptation activities in developing countries range from $140 to 175 billion per year for mitigation over the next 20 years with associated financing needs of $265–565 billion and $30–100 billion a year over the period 2010–2050 for adaptation.World Bank Group(2010), "World Development Report 2010: Development and Climate Change, World Bank Groupe, Washington DC, ch. 6, p. 257
The International Energy Agency's 2011 World Energy Outlook (WEO) estimates that in order to meet the growing demand for energy through 2035, $16.9 trillion in new investment for new power generation is projected, with renewable energy (RE) comprising 60% of the total.International Energy Agency (2011). World Energy Outlook 2011, OECD and IEA, Paris (France), Part B, ch.2 The capital required to meet projected energy demand through 2030 amounts to $1.1 trillion per year on average, distributed (almost evenly) between the large emerging economies (China, India, Brazil, etc.) and the remaining developing countries.International Energy Agency (2011). World Energy Outlook 2011}, OECD and IEA, Paris (France), Part B, ch.2 It is believed that over the next 15 years, the world will require about $90 trillion in new infrastructure – most of it in developing and middle-income countries. The IEA estimates that limiting the rise in global temperature to below 2 Celsius by the end of the century will require an average of $3.5 trillion a year in energy sector investments until 2050.
A meta-analysis from 2023 investigated the "required technology-level investment shifts for climate-relevant infrastructure until 2035" within the EU, and found these are "most drastic for power plants, electricity grids and rail infrastructure", ~€87 billion above the planned budgets in the near-term (2021–25), and in need of sustainable finance policies. Expert reviews of the study:
Finance for adaptation