Climate and Carbon Finance: Strategies to Mitigate Climate Change

Climate change poses one of the gravest threats to humanity and the planet. Rising global temperatures are resulting in devastating consequences such as rising sea levels, extreme weather events, loss of biodiversity and threatened food security. While governments and policymakers are working to reduce greenhouse gas emissions and move towards sustainable development, financing remains a major challenge to combat climate change effectively.

Carbon finance mechanisms play a pivotal role in channeling private capital towards low-carbon solutions. Coherent Market Insights explores some of the major players and evolving trends in climate and carbon finance that are helping advance progress on climate action in Climate And Carbon Finance Market.

Carbon finance utilizes market-based approaches to monetize the social and environmental value of reducing greenhouse gas emissions. It creates financial incentives for private sector investments that help mitigate climate change. Some of the key carbon finance instruments include emissions trading schemes, offset programs and results-based payments. Under emissions trading schemes, a cap is placed on overall emissions and emitters can buy credits or allowances from others who have extra. Carbon Offset programs allow polluters to compensate for their emissions by purchasing carbon credits that are generated from emission reduction projects in other locations. Results-based payments provide upfront financing for activities that verifiably reduce or remove emissions over an agreed timeframe.

The two largest carbon markets operating today are the European Union Emissions Trading Scheme (EU ETS) and China's national emissions trading system. Other compliance carbon markets include those in California, Quebec, Ontario, Tokyo, Shanghai and New Zealand. Voluntary offsets are generated through programs like the Verified Carbon Standard and Gold Standard. Together, these compliance and voluntary carbon markets are facilitating billions of dollars of investments each year towards low-carbon solutions. According to data from Ecosystem Marketplace, $260 billion was invested in 2020 into climate-friendly projects on the back of carbon credit sales, making it the highest year on record.

Role of Financial Institutions

Financial institutions are playing a increasingly important role in driving climate action through carbon finance. Banks, insurers, funds and other intermediaries are recognizing climate change as a systemic financial risk while also seeing investment opportunities in green sectors. Many lenders have developed green or climate bonds which raise capital specifically for climate-aligned projects. For example, the Asia Green bonds raised over $1 billion, funding renewable energy, energy efficiency, green buildings and sustainable transport in Asia. Insurance companies are also supporting climate solutions through innovative risk transfer mechanisms like catastrophe bonds.

Meanwhile, institutional investors are channeling more capital towards low-carbon solutions. Large pension funds and sovereign wealth funds are developing sustainability investment strategies and divesting from fossil fuels. In 2015, over 500 global investors managing $52 trillion collectively called on governments to deliver ambitious climate policies ahead of COP21. Today many investors utilize portfolio decarbonization approaches, screenings, thematic funds and impact investments to align their assets with climate goals. According to the Global Sustainable Investment Alliance, $30.7 trillion worth of assets globally now utilize ESG (environmental, social and governance) investment strategies.

National Strategies and Partnerships

At the national and regional level, governments are employing carbon pricing and public finance to galvanize private capital towards climate action. Many countries have implemented explicit carbon prices either via carbon taxes or emissions trading. Public funds are also catalyzing private investment through risk-sharing mechanisms like green banks.

Moreover, countries are participating in voluntary carbon markets and international partnerships to amplify their climate efforts. The US re-joined the Paris Agreement in 2021 and announced ambitious NDC updates. Initiatives like the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the international REDD+ mechanism support emissions reductions across key sectors. Multilateral development banks have issued $68 billion in climate finance annually to developing countries. Public-private partnerships like the Global Commission on Adaptation are also bringing stakeholders together to spur new solutions.

Market Outlook

The global market for climate and carbon finance continues growing rapidly driven by multiple factors. Countries are strengthening their climate ambitions to align with the 1.5 degree Paris goal, driving higher carbon prices. Private capital recognition of climate-related risks and opportunities is steering investments towards low-emission sectors. Advancing technological solutions in renewable energy, green hydrogen, carbon removal and adaptation are presenting major new market potentials. Though certain regions currently dominate, the future market is expected to be truly global in scope. Overall, climate finance flows will need to multiply significantly this decade to achieve sustainability and limit global warming to safe levels. Strategic partnerships and innovative financing schemes will play a crucial role in mobilizing capital at the scale demanded by this systemic challenge.

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