Climate Finance Additional Funding Package

Mobilising public and private funds for climate change mitigation (climate finance) plays a key role in limiting global warming – which makes it an important objective for the International Climate Initiative (IKI).

The ‘Decade of Action’ planned for 2020 to 2030 has massively increased the demand for support relating to climate finance in emerging and developing economies. At the same time, industrialised nations have thus far failed to provide the annual sum of $100 billion for financing climate change mitigation from 2020 to 2025 – a goal set back in 2009. A key problem here is the difficulty of mobilising private capital.

Thanks to its initiatives with development banks and international organisations, the IKI is considered a pioneer in this field. At the end of 2022, the IKI quickly responded to the increasing demand and growing requirements in partner countries by providing four ongoing projects for the mobilisation of public and private funds with additional (top-up) funding. By doing so, the IKI facilitated the swift allocation of financial resources to already thriving projects.

Three IKI projects receive total of €65 million in additional funding

The following IKI projects were granted additional funds in 2022 as part of the ‘Climate Finance Additional Funding Package’.

City Climate Finance Gap Fund II – EIB

The challenges faced by cities and municipal governments in developing and implementing climate change mitigation projects range from increasing debt levels and budget bottlenecks to inadequate credit ratings. Local governments often lack the planning, drafting and preparatory capacities that are required to develop the corresponding projects. The City Climate Finance Gap Fund (Gap Fund) closes this gap by providing direct support early in the project preparation phase to cities in low- and medium-income countries that have already taken on commitments in line with the goals of the Paris Agreement. The Gap Fund is the first global fund that provides support to city and subnational actors in developing and emerging countries during the initial, high-risk stage of climate-oriented infrastructure project development, empowering them to independently achieve long term objectives.

The IKI support for the Gap Fund comprises two projects being implemented by the World Bank Group (City Climate Finance Gap Fund I) and the European Investment Bank (EIB) (City Climate Finance Gap Fund II). As part of the Climate Finance Top-Up Package, the IKI is expanding its contribution to the City Climate Finance Gap Fund II by an additional €25 million. This fund is already helping 39 cities in 19 countries and aims to support at least 80 cities in light of the growing demand.

At present, per-city funding stands at approximately €100,000, despite a considerably greater demand. The top-up funding will substantially enhance the goals and scope of the support services offered. In addition, it will finance urgently needed capacity building initiatives to bolster infrastructure planning and implementation in collaboration with local partners.

25 € Mio.

of additional IKI funds for the City Climate Finance Gap Fund II

City Climate Finance Gap Fund II - EIB

Scaling of climate finance by the financial sector – ‘30 by 30 Zero’

Emerging economies need financial resources to implement their nationally determined contributions (NDCs). Banks and capital markets play a key role in providing this funding. To date, various factors have hindered the effective mobilization of climate-related financial resources. These include limited comprehension of climate-related financial products and the absence of consistent policymaking.

To increase climate funding, the project, which is being implemented by the World Bank Group’s International Finance Corporation (IFC), is supporting partner countries establish domestic markets for climate-related financing. To this end, the project pursues an integrated approach encompassing measures at policy, market and financial sector level. This also involves aligning financial sector strategies to the respective NDCs.

30 € Mio.

additional IKI funds for the project Scaling Climate Finance through the Financial Sector - '30 by 30 Zero'.

Scale up climate finance through the financial sector – “30 by 30 Zero”

By 2030, the project also aims to significantly increase the share of climate credit within participating banks’ overall credit portfolios while mitigating climate- and coal-related risks. As a complementary measure, climate investment is also to be promoted by the development of green bonds.

In 2022, the IKI topped-up its funding by another €30 million. These resources were used to expand the project to include a finance component, which is being used to provide incentives such as interest rate cuts for specific investment projects from partner institutions. In doing so, the project is promoting the adoption of climate-relevant targets and rewarding those institutions that successfully achieve their objectives. This approach is intended to mobilise private finance amounting to €600 million.

Promotion of climate-targeted fiscal policy in Latin America and the Caribbean

To redistribute financial flows, it is crucial to consider fiscal policy measures and approaches to the design and implementation of green budgets. Fiscal policy is a general term encompassing the actions taken by a nation to modify its public earnings and public expenditure with the aim of steering economic development.

Although finance ministers in Latin America and the Caribbean increasingly recognise the need to address climate change through fiscal policy, the magnitude of the challenge requires even wider-ranging measures. The project, which is being implemented by the Inter-American Development Bank (IDB) is currently implementing a project that works with finance ministries to support initiatives aimed at enhancing the transparency, effectiveness and efficiency of climate-related financial policy. These activities are contributing to the successful design and implementation of NDCs and long-term strategies (LTS). The fund also supports the regional climate change platform operated by finance ministries to facilitate the transfer of knowledge. These activities are helping the countries increase the efficiency of their climate-related spending while supporting the transition to net-zero emissions and a climate-resilient economy.

10 € Mio.

additional IKI funds for the project "Promoting Climate-Smart Fiscal Policies in Latin America and the Caribbean".

Fostering fiscal policy for climate change in Latin America and the Caribbean

To date, the project has successfully provided support in relevant areas to 11 countries in the region. The additional €10 million in IKI funding makes it possible to both expand the number of countries supported and extend the project term. The project will therefore grow to match the strong interest expressed by IDB member countries. Recognising the pivotal role of central banks in steering global financial flows, the additional funding will also be used to broaden project activities concerning the involvement of central banks in climate change mitigation.

The IKI strengthens its private capital mobilisation efforts

The additional fundings described above are helping the IKI to further expand its primary objective of mobilising private capital for climate-friendly endeavours, especially relating to project preparation, blended finance and providing advice to partner countries on crafting sustainable fiscal policy.

The main goal of the additional fundings is to improve regulatory frameworks for mitigating emissions across different sectors, to leverage private and public finance for climate change mitigation, and to elevate the ambitions of NDCs in 10 to 15 countries while providing support for their implementation.