Climate Finance

Mains Marks Booster     31st July 2023        
  • Definition: Climate finance refers to financial resources provided by developed countries to support climate mitigation and adaptation efforts in developing nations.
  • Importance: of climate finance in addressing global climate change challenges and promoting sustainable development.

Sources of Climate Finance:

  • Public finance: Contributions from governments, both domestic and international.
  • Private finance: Investments from private entities, including businesses, banks, and philanthropic organizations.
  • Innovative finance: Exploring new financing mechanisms, such as carbon pricing, green bonds, and climate funds.

Climate Finance Mechanisms:

  • Multilateral funds: Institutions like the Green Climate Fund, Global Environment Facility, and Adaptation Fund.
  • Bilateral funds: Direct financial assistance from developed countries to developing countries.
  • Climate funds at regional and national levels: Initiatives established to mobilize and disburse climate finance within specific regions or countries.

The Green Climate Fund (GCF):

  • Creation and mandate of the GCF under the United Nations Framework Convention on Climate Change (UNFCCC).
  • Objectives: Mobilize climate finance, promote low-emission and climate-resilient development, and enhance the capacity of developing countries to address climate change.
  • One of the largest vehicles for climate finance connected to the UNFCCC is GCF
    • It offers financing through “a flexible combination of grants, concessional debt, guarantees or equity instruments”.

Adaptation fund

  • The Adaptation Fund is a financial mechanism that plays a crucial role in addressing the challenges of climate change by providing targeted climate finance for adaptation efforts. 
  • It focuses on supporting vulnerable communities, promoting equity, and ensuring the resilience of countries most affected by climate change impacts. 

Shortcomings in green financing 

  • Insufficient funding: as the available funds fall short of the required resources to address the scale of climate change.
  • Complex approval process and Limited direct access 

Way forward

  • Scaling Up Funding: Mobilize additional financial resources to bridge the funding gap Strengthening Access and Capacity: Provide technical assistance and capacity-building support 
  • Streamlining Application Processes: to reduce administrative burdens and expedite project implementation.
  • Enhancing Collaboration: financial institutions, development agencies, and private sector entities leverage additional resources and expertise.

Carbon markets and trading:

Carbon markets are trading systems in which carbon credits are sold and bought. Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.

  • Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill their NDCs (Nationally Determined Contributions).
  • The right to emit a tonne of CO2 is often referred to as a carbon ‘credit’ or carbon ‘allowance’.
  • There are broadly two types of carbon markets: compliance and voluntary.
    • European Union’s Emissions Trading System (ETS)
    • The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997.

Uniform Carbon Trading Market

Context: India has recently announced its intention to establish a domestic uniform carbon market within a year.

Introduction: A Uniform Carbon Trading Market is a globally coordinated system where countries and entities can trade standardized emissions allowances, driving emission reductions, promoting global cooperation, and fostering sustainable development.

Key Aspects of a Uniform Carbon Trading Market:

  • Standardized Emission Allowances: The EU ETS enables over 11,000 installations and airlines to trade allowances based on a common metric ton of CO2, ensuring transparency, comparability, and fairness across different regions and sectors.
  • Cap-and-Trade Mechanism: RGGI has successfully reduced power sector emissions by over 50% since 2005 through the cap-and-trade mechanism, incentivizing emission reductions and the adoption of cleaner technologies.
  • Market-Based Economic Instrument: The EU ETS has stimulated €130 billion investment in renewable energy and energy efficiency projects by 2020, incentivizing entities to reduce emissions by integrating environmental concerns into economic decision-making processes.
  • International Cooperation and Equity: The UNFCCC fosters global collaboration, equity, and shared responsibility in a uniform carbon trading market. 

Benefits of a Uniform Carbon Trading Market:

  • Cost-Effectiveness: Carbon pricing mechanisms like carbon markets can deliver emissions reductions at just $6-42 per ton of CO2. 
  • Flexibility and Innovation: California's cap-and-trade program has promoted innovation, with over $5 billion invested in clean technology
  • Environmental Integrity: The Verified Carbon Standard ensures the credibility of emission reductions by requiring rigorous monitoring, reporting, and verification processes,
  • Sustainable Development: Initiatives like the Green Climate Fund support climate projects in developing countries, contributing to sustainable development goals.


  • Policy Harmonization: Ensuring consistent policies and regulations across countries, like the EU ETS and California's cap-and-trade program, faces challenges due to differences in carbon pricing and emission reduction targets. Example: Varied carbon pricing mechanisms exist, such as Sweden's high carbon taxes and the United States' cap-and-trade systems.
  • Fair Allocation: Example: Some industries received excessive allowances, creating a surplus that lowered their market value.
  • Market Manipulation: Example: Industries may move production to countries with less stringent emission controls, potentially resulting in the transfer of emissions rather than actual reductions on a global scale.
  • Monitoring and Verification: Establishing robust systems for accurate measurement and verification of emissions reductions is a significant challenge, especially in verifying offset projects.

Way forward:

  • Carbon Price Collar Mechanism: Setting a price floor and ceiling to stabilize carbon markets, ensuring market confidence, and reducing price volatility.
  • Blockchain-enabled Carbon Offset Platform: Utilizing blockchain technology to enhance transparency, traceability, and accountability in carbon offset projects, improving market integrity and trust.
  • Carbon Dividend Policy: ensuring an equitable distribution of costs and incentivizing public support for carbon pricing.
  • Carbon Removal Innovations Fund: Establishing a dedicated fund to support research and development of carbon removal technologies
  • Global Carbon Market Linkages: Promoting international cooperation and market integration by linking regional carbon markets, fostering a more comprehensive and interconnected global trading system.

Indian Scenario:

  • Economic Benefits: The establishment of a carbon trading market in India has the potential to generate significant economic benefits, with projections estimating a potential gain of $11 trillion over 50 years.
  • Boosting Green Investments: The uniform carbon trading market will incentivize green investments by allowing green plants and energy-efficient units to estimate earnings through carbon trade, thus promoting sustainable development.
  • Exporting Decarbonization Solutions: India's carbon trading market could position the country as a leader in exporting decarbonization solutions to the world, contributing to global efforts in combating climate change.
  • Encouraging Green Technologies: The carbon trading market will encourage the adoption of green technologies by providing economic incentives and creating a competitive market for low-carbon solutions.
  • Enhancing Climate Ambition: The establishment of a uniform carbon trading market reflects India's commitment to enhancing its climate ambition and contributing to global climate change mitigation efforts.


A Uniform Carbon Trading Market offers a comprehensive and effective solution for tackling the challenges of climate change. By implementing carbon pricing, promoting international cooperation, and fostering sustainable development, it not only drives significant emission reductions but also incentivizes innovation and facilitates the transition to a low-carbon economy.