Climate Finance for Local Solutions

WHAT IS CLIMATE FINANCE FOR?

• Fighting climate change through mitigation projects: This money helps reduce pollution and increase the use of clean energy. 
• Supporting adaption to changes: It also supports communities feeling the brunt of climate change, like extreme weather or rising sea levels.
• Most climate finance is still mostly directed to mitigation-related investment (measured in 2021/2022). 

WHERE IS THE MONEY FROM?

• Public funds: Governments can fund climate action in their countries or provide funds to other countries to assist them in taking climate action. Climate finance flows from developed to developing countries occur bilaterally through Development Finance Institutions (DFIs) or international intermediary bodies such as multilateral climate funds.
• Private funds: Companies and households are increasingly financing climate action and in some cases, invest directly in climate action projects or provide capital in the form of loans to others looking to invest.

HOW IS IT USED?

• Grants: Money provided for specific projects that need not be paid back.
• Loans: Money that needs to be paid back (i.e. commercial debt), often with little to no interest and other favourable loan conditions (i.e. concessional loans).
• Business investments (i.e. equity): Businesses might fund projects in exchange for a share in profits or other benefits.

WHO RECEIVES IT?

• Countries in Need: Countries with fewer resources often get help to combat climate change.
• Industries Making Changes: Like a coal industry switching to solar energy.
• Local Communities: Especially those hit hardest by climate impacts.

FACTS AND FIGURES

CLIMATE FINANCE IN CONTEXT

Climate finance flows have reached USD 1.3 trillion in 2021/22, equivalent to 1.3 percent of global output (GDP). The global climate financing needed to respond to climate change adequately is estimated to be  (USD 8.6 trillion ).

Annual global climate finance flows fall way short of the projected need of annual flows until 2030. Governments are spending much more annually on other areas, such as military expenditure and fossil fuel subsidies.

SOURCES OF CLIMATE FINANCE

Climate finance comes from domestic and international public, private, and other innovative sources.

In most countries, climate finance is raised and spent domestically. In developing countries, we see an almost even split in domestic and international climate finance, whilst in least developed countries, the provision of international finance makes up the majority of climate finance flows.

While adaptation finance increased by 29% in 2021/2022 to USD 63 billion, compared to USD 49 billion in 2019/2020, the share of total climate finance directed to adaptation almost halved in the same period. This demonstrates a worrying lack of progress when climate risks escalate and countries’ vulnerabilities grow.

Adaptation increased by 29% to an annual average of USD 63 billion in 2021/2022, compared to USD 49 billion in 2019/2020. This reflects a drive by public financial institutions to avoid or minimise the adverse impacts of climate change.

Nevertheless, the global adaptation funding gap is widening. CPI analysis indicates that developing countries need USD 212 billion per year in adaptation finance up to 2030 and USD 239 billion annually between 2031 and 2050. 

SOURCE OF ALL FACTS AND FIGURES: CLIMATE POLICY INITIATIVE (CPI) GLOBAL LANDSCAPE OF CLIMATE FINANCE 2023

To learn more about the fundamentals of climate finance, watch part I of the VCA Climate Finance for Local Action Dialogue.

CLIMATE FINANCE DIALOGUES: SESSION 1

DISTINGUISHING BETWEEN FORMS OF CLIMATE FINANCE

When discussing climate finance, it is useful to distinguish between two main forms of climate finance, namely, domestic and international. Domestic climate finance comes from your own country’s government or local organisations, used for climate projects within your country. You often work directly with local or national agencies to access this, following your country’s specific guidelines and requirements. On the other hand, international climate finance is money from foreign countries or global organisations, like the Green Climate Fund, given to help developing countries tackle climate challenges. Accessing international finance can be more complex. It often involves navigating international guidelines, collaborating with global entities, and sometimes meeting stricter criteria or competing with other countries for funds.

While local organisations can typically seek domestic climate finance through their government agencies, tapping into international climate finance is trickier. Small groups can’t directly approach international climate funds. Instead, these funds enter the country through approved middlemen, often called Direct Access Entities (DAEs). These intermediaries play a key role: they spot potential projects that could use climate finance and bundle several smaller projects together. This bundling creates a larger, unified project that meets international climate finance support criteria.

ACCESSING CLIMATE FINANCE FOR LOCAL-LEVEL ACTION

Climate finance flows are not readily and reliably accessed for local-level climate action.

Furthermore, insufficient tracking and data gathering are being undertaken to understand how much of the limited climate finance flows reach the local level. According to IIED, between 2003 and 2016, less than 10% of committed international climate finance was prioritised for local-level activities. In the VCA’s briefing paper, Putting Justice at the Heart of Climate Finance, we point out that Least Developed Countries (LDCs) are leading a call for localising international climate adaptation finance and have committed to delivering  70% of their climate finance to the local level. Nepal has set an 80% commitment for local-level climate finance spending3, and Kenya has set a 70% commitment to be spent at the ward level and 20% at the county level in its County Climate Change Funds.

Below, we explore the challenges associated with accessing climate finance at the local level and elaborate on some of the opportunities for advocacy that emerged from the VCA Climate Finance Dialogue 2023. We specifically look into two case studies that featured during the dialogue event and illustrate mechanisms for channelling climate finance to the local level and the associated challenges and opportunities.

To learn more about the challenges and opportunities for climate finance to support locally-led climate action, watch part 2 of the VCA Climate Finance for Local Action Dialogue.

CLIMATE FINANCE DIALOGUES: SESSION 2

CHALLENGES OF DOMESTIC CLIMATE FINANCE ACCESS FOR LOCALLY-LED CLIMATE ACTION

While sourced within a country, domestic climate finance often faces bureaucratic hurdles, limited transparency, and a lack of prioritisation for grassroots initiatives. Local organisations and communities may find it challenging to navigate the complexities of national funding mechanisms, especially when there’s a mismatch between national priorities and local needs and where access requirements are unclear. Additionally, there might be a lack of awareness or capacity at the local level to tap into available funds, and sometimes, political or regional biases can influence the distribution of these resources.

In the VCA Climate Finance for Local Action Dialogue, we heard about the approach known as devolved climate finance, which is intended to overcome some of these obstacles by making domestic climate finance flows more consistent, reliable and accessible by integrating climate finance into local county budgeting processes for spending on county government-led projects and allocation to community-led projects.  Think of devolved climate finance as a way of giving local communities more say in how money for climate projects is used. Instead of big decisions being made far away, they’re made closer to home by people who understand local needs best. A great example is what’s happening in Kenya. Some areas in Kenya, called counties, have their own pots of money (or funds) to tackle climate issues. This means they can choose projects that make the most sense for their local challenges and opportunities.

The Kenyan County Climate Change Fund (CCCF) approach offers several insightful lessons for community-based climate action and finance:

• Local Ownership: The CCCF approach emphasises the importance of local ownership. When communities have a stake in the decision-making process, project success and sustainability are more likely.
• Flexibility: The fund is designed to be flexible, allowing counties to address their unique climate challenges and priorities. This flexibility ensures that interventions are tailored to local contexts.
• Leveraging Additional Funds: The CCCF acts as a catalyst, attracting funds from national and international sources. By showcasing successful local interventions, it becomes easier to secure more resources.
• Capacity Building: Continuous training and capacity-building efforts are integral to the CCCF approach. The project ensures long-term sustainability by equipping local entities with the necessary skills and knowledge.
• Transparency and Accountability: The CCCF mechanism has built-in transparency and accountability measures, ensuring that funds are utilised effectively and that a clear reporting mechanism is in place.
• Collaboration: The CCCF approach fosters collaboration between county governments, local communities, civil society, and other stakeholders. This multi-stakeholder approach ensures diverse input and expertise in project implementation.

LEARN MORE ABOUT THIS CASE STUDY

OPPORTUNITIES FOR ADVOCACY TO IMPROVE DOMESTIC CLIMATE FINANCE ACCESSIBILITY AND IMPACT

Advocacy can be pivotal in streamlining and democratising domestic climate finance. Local organisations can collaborate to raise awareness about the importance of grassroots climate initiatives, emphasising their cost-effectiveness and direct impact. By engaging with policymakers, they can push for more transparent, inclusive, and simplified funding mechanisms, such as devolved funding mechanisms that are more locally accessible. Advocacy can also focus on capacity-building workshops for local entities, ensuring they’re equipped to apply for and manage the funds effectively. Engaging media and leveraging success stories can further highlight the value of directing finance to local climate actions.

In the VCA Climate Finance for Local Action Dialogue, we heard about the approach of establishing an Enhanced Direct Access (EDA) grant facility managed nationally by the GCF-accredited entity, to which rural conservancy communities were able to apply for grant funding for specific resilience-building initiatives.

The Namibian Community-based Natural Resource Management (CBNRM) network’s project with the Green Climate Fund (GCF), Empower to Adapt, on enhanced direct access offers several valuable lessons for community-based climate action:

• Local Empowerment: The project underscores the importance of enabling local communities to manage and utilise their natural resources sustainably. Projects can better align with local needs and aspirations by giving communities a direct role in decision-making.
• Capacity Building: The CBNRM initiative highlighted the need for continuous capacity building at the grassroots level. Training and equipping local communities with the necessary skills ensure projects’ long-term sustainability and success.
• Flexibility: Enhanced direct access means that funding mechanisms should be flexible enough to cater to diverse local needs. The CBNRM project demonstrated that a one-size-fits-all approach might not always be effective.
• Stakeholder Collaboration: The success of the CBNRM project can be attributed to the collaboration between various stakeholders, including local communities, government agencies, and international partners. Such collaborations ensure that projects are holistic and benefit from diverse expertise.
• Monitoring and Evaluation: Continuous monitoring and evaluation are crucial to track the impact of projects and make necessary adjustments. The CBNRM initiative emphasised the importance of feedback loops to ensure projects remain effective and relevant.
• Sustainability: Projects should aim for long-term sustainability. The CBNRM project showcased how community ownership and involvement can lead to sustainable outcomes beyond the project’s official duration.
• Scalability: The CBNRM approach in Namibia offers a model that can be replicated or adapted in other contexts. The lessons from this project can guide similar initiatives in other regions, emphasising the importance of local involvement and direct access to resources.

LEARN MORE ABOUT THIS CASE STUDY

CHALLENGES OF INTERNATIONAL CLIMATE FINANCE FOR LOCALLY-LED ACTION

Accessing international climate finance for local projects presents its own set of challenges. International funds often prioritise large-scale initiatives, side-lining smaller, community-driven projects. The flow of finance from global entities, like the Green Climate Fund, usually goes through intermediary organisations, adding layers of bureaucracy and diluting the focus on local needs. The size of grants, stringent reporting requirements, and complex access modalities can make it nearly impossible for grassroots organisations to tap into these funds directly.

OPPORTUNITIES FOR ADVOCACY IN INTERNATIONAL CLIMATE FINANCE

There’s significant room for advocacy to reshape international climate finance to be more locally responsive. Grassroots organisations can unite to voice the need for more direct, simplified access to global funds. By showcasing the effectiveness and sustainability of local projects, they can make a case for dedicated funding channels or grant categories tailored for smaller initiatives. Engaging with Direct Access Entities (DAEs) and international platforms can help refine fund criteria and processes. Collaborative efforts can also push for capacity-building measures, ensuring local entities are better equipped to navigate and benefit from international finance structures.