Closing the Gap: The Role of National Climate Funds in Meeting Global Climate Finance Goals

By Rishikesh Ram Bhandary

In 2009, developed countries committed to mobilizing $100 billion in climate finance to developing countries every year by 2020. Eleven years later, however, developed countries have not yet met this commitment, and political attention has been solely focused on how countries can bridge the remaining gap of roughly $20 billion.

While this $20 billion is, indeed, critical to meeting global climate finance goals, it excludes an important piece of the puzzle: how is climate finance actually being delivered? And as existing efforts have primarily focused on estimating global climate finance flows and not on the expansion of national-level flows, how is the current understanding of the global climate finance landscape incomplete?

In the late 2000s, developing countries began establishing national climate funds (NCFs), marking an important turning point in the history of climate governance and a shift away from seeking climate finance from international agencies and multilateral climate funds. NCFs enable countries to mobilize, pool and blend both domestic and external sources of finance, to support more coordinated programming of resources across stakeholders. In creating NCFs, developing countries signaled greater commitment to tackling climate change, and delivery channels for donor countries were greatly expanded.

In November 2021, the Boston University Global Development Policy Center launched the first-of-its-kind National Climate Funds (NCF) Tracker, an interactive identifying dedicated climate finance vehicles at the national level, capturing 46 NCFs in 39 countries. A new policy brief summarizes key findings and takeaways from the tracker, shared below.

As data on NCFs are not easily available, the interactive brings information on NCFs together into a single interface. In recent years, NCFs have proliferated across Asia, Africa and Latin America; as such, the interactive focuses on countries that are not members of the Organization for Economic Cooperation and Development (OECD). For each country, the interactive displays the NCF established, the scope of the funds, the host entity, funding commitments, enabling legislation and capitalization. The interactive also tracks whether NCFs work with multilateral climate funds, such as the a United Nations-backed multilateral Global Climate Fund (GCF), as implementing or executing entities. In doing so, it provides the operating context for developing country actions on climate change and an empirical basis for understanding NCFs and their design features, effectiveness and the role they play in the overall international climate finance architecture.

The NCF Tracker will be regularly updated and expanded to include more information on each country’s NCF, as well as the range of financing vehicles shown.

Understanding the role of national climate funds

The climate finance landscape has significantly shifted since developed countries made the $100 billion commitment in 2009. In the years since, the GCF has become fully operational. Multilateral and national development banks have also emerged as major actors in the clean energy space. In 2016, the Paris Climate Agreement further heightened the importance of national-level pledges by establishing a bottom-up architecture in the global effort to tackle climate change.

While a critical new part of the global climate finance architecture, national-level climate finance tracking has been sporadic; there is a clear need to build an evidence base for understanding how these funds actually work and how they complement the international climate finance landscape.

To that end, the NCF Tracker highlighted four key findings:

1. NCFs are becoming important building blocks of the international climate finance architecture. When NCFs were initially established, it was unclear how they would fit within the international landscape of climate finance. However, as the tracker shows, these funds have been engaging with the GCF, meaning they have the necessary standards and safeguards to be recognized by the multilateral fund. Of the 46 NCFs in the tracker, 16 have been accredited with the GCF, and 11 are already receiving GCF funding. While not all NCFs meet these guidelines, the growing coordination between national and multilateral funds will go a long way in bringing coherence into the overall climate finance ecosystem.
2. Funds established as conservation trusts have expanded into climate change and have started to engage directly with the GCF. Conservation trust funds have shown increasing interest in working on climate change, playing a major role in addressing climate change through their efforts in protecting and conserving nature. As conservation trust funds were established in the 1980s and the 1990s, they have longer track records and are able to demonstrate their effectiveness in a compelling way. This inspires confidence from fund contributors.
3. Short-term grants from donors reduce the ability of national climate funds to engage in transformational programming. In-depth case studies of the NCFs in Bangladesh and Ethiopia, as documented in a recent journal article, received grants of limited time horizons. Such funding restrictions deterred the NCFs from engaging in longer-term activities that would have helped to reinforce climate action in national planning. Instead, activities funded by these NCFs did not always have clear linkages with sectoral and national plans.
4. A lack of consistent data hinders tracking of how domestic expenditures are being made through these funds. A number of these funds were designed to receive earmarked allocations from domestic taxes and fees. However, it is challenging to track how much money these funds receive and how much they disburse.

The interactive also tracks the legal form of the NCFs. Understanding the legal make-up is important for two reasons. First, the legal wiring of a fund shapes the instruments it is able to use. Because most of these funds are not legally independent, they are restricted to grant-making and often cannot offer loans or other products that may lead to losses. Second, NCFs that are independent and at an arms-length from the government are less subject to political pressure.

The legal form of the NCFs are not static, however. Some of the funds, such as Ethiopia’s Climate Resilient Green Economy Facility, were established with the goal of eventually transforming into full-fledged green banks. Others, such as the Indonesian Climate Change Trust Fund, were created as capacity building programs and were handed over to the host governments after a certain amount of time.

Policy implications

Reviewing these findings, four key policy implications stand out:

1. As developed countries seek to close the climate finance gap, they should actively consider using national climate funds as delivery vehicles. These funds have built track records of implementing climate change projects. Despite having the legal and administrative arrangements to effectively manage international assistance, many of these funds have been underutilized.
2. The GCF should increase the use of NCFs to implement climate programs and projects. Country ownership is a crucial part of the GCF programming process and the GCF board needs to translate country ownership into greater support for national level entities and encourage scaling up direct access as a programming modality.
3. Host governments of NCFs should improve data accessibility and transparency. Consistent and timely information about NCFs would help to instill greater credibility and inspire more confidence from fund contributors.
4. Host governments also need to update the legal and administrative arrangements of the NCFs so that the funds have the capabilities to support climate policy objectives. Climate policy commitments of host governments have significantly deepened since the establishment of these NCFs. For example, most of the NCFs were designed to help build capacity of sectoral ministries. As climate policy has become more comprehensive, the NCFs should have the tools to engage with a larger set of actors.

Climate finance is a critical part of unlocking a more ambitious path forward on climate change. As countries seek to implement their enhanced climate pledges, they will need to make full use of all of the instruments at their disposal. NCFs are emerging are important building blocks in the climate finance architecture and they can help to accelerate the scale of implementation, while building on nationally-owned plans and policies.