Climate Finance in the Age of Green Growth

By Yongfu Huang and Jingjing He

The climate change crisis and development needs of the world’s poor require us to acknowledge the necessity and urgency for both continued growth at the current pace, and rapid greening of this growth strategy. But are the contradictory aims of growth and environmental protection irredeemably incompatible?

The recent history of economic growth has largely been achieved at the expense of the environment. Thus, serious environmental problems such as ecosystem disturbance, climate change, water and air pollution, and the sea level rise, can be seen as the unintended consequences of the development process. The threat of human-induced climate change poses a serious question to humanity: how can the world achieve well-rounded human development in the future without degrading our environment?



Do we need to trade off our environment for development?

Compared to developed nations, developing countries are much more vulnerable to the effects of climate change due to their low capacity to adapt and their disproportionate dependency on natural resources for welfare. As pointed out by Roberst and Parks (2006), developing countries actually suffer “a double injustice”; environmental degradation and climate change will impinge on the poor countries hardest, at the same time, they are required to be “part of the solution” by cutting Green House Gas (GHG) emissions at the expense of their economic development.

However, an economic slowdown in developing countries can jeopardise their ability to address pressing problems such as poverty, lack of health care, high unemployment and gender inequality. Environmental degradation can only intensify these existing development problems. On the other hand, if growth continues on the “business as usual” development path, it is likely to exaggerate existing development problems, and compromise the wellbeing of present and future generations. At first glance it looks like whichever path developing countries choose they will not be able to attain all their central development goals.

Bowen (2012) argues that since environmental degradation will harm human productivity and welfare, the traditional economic growth pattern cannot be sustainable, and will eventually be self-defeating. As pointed out by Jänicke (2011), the resource-intensive model of growth of the past fails not only because of the lack of cheap raw materials, but also because of the earth’s limited capacity to absorb carbon emissions and waste.


Green Growth?

Contrary to conventional intuition, economic growth and environmental conservation are not necessarily conflicting goals, but can even be seen as complementary aims. On the one hand, environmental conservation plays an essential role in sustaining economic development. With sound protection and management, natural capital can actually yield considerable economic dividends for low-income nations, especially countries dependent on agricultural production for livelihood (Purvis, 2003). Hallegatte et al. (2011) argue that the main direct contributions of environmental protection to economic growth are through the increased inputs of natural capital which lead to a greater economic return.

On the other hand, economic development can provide a solid material foundation for environmental protection efforts, enabling governments to take a better care of their ecosystems, and equip them financially and technologically for the fight against climate change. Green growth aimed to achieve a harmony between economic growth and environmental sustainability is just what the world needs to obtain long-term and well-rounded development.

Green growth can be defined as “fostering economic growth and development, while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies” (Hallegate et al., 2011). As a different kind of growth that stays within the limits of the Earth’s natural systems, green growth marks a revolutionary conceptual and material transition from the traditional resource-intensive growth model to an eco-friendly growth model. It is about growing cleaner and greener, but not slower, simultaneously taking into account both short-term economic growth and long-term environmental sustainability.

The ever-worsening environmental crisis has sent a serious alert to the global community regarding the urgency of embarking on the green growth development path before it is too late. By maximizing the synergies between economic development and environmental protection, the idea of green growth emphasizes that strategic environmental policies can not only foster environmental sustainability at a low cost, but also have the potential to sustain long-term economic growth (Toman, 2012). In other words, strategic climate policies should not be framed as a choice between the environment and economic development, but rather as a way to achieve the harmony between both dimensions.


A Role for Climate Finance?

Green growth has been more and more recognised as a central theme of the development agenda, and many emerging economies have in fact put green growth as their primary national development objective 1(Howes and Wyrwoll, 2012). To achieve it, we need a transformation towards a new set of policies, institutions and behaviours. However, many developing countries simply lack adequate financial and technological resources to follow such an eco-friendly trajectory. This is where climate finance can play a key role in helping developing countries to realise the transition to the green economy. As wisely pointed out by Barrett and Toman (2010), for any international climate regime to be successful, there needs to be financial incentives for the parties to join in. It is fair to say that finance is at the root of all the world’s climate change problems.

As summarized by the UN Secretary-General Ban Ki-moon, “Climate financing is one of the most important aspects of the world’s efforts to address the climate change challenge. It is critical to catalysing efforts in developing countries to strengthen climate resilience, curb greenhouse gas emissions and support sustainable development.” At the UNFCCC Copenhagen conference in 2009, developed countries expressed their strong political will to fight against climate change, which committed themselves to a target of jointly mobilizing 100 billion “new and additional” US dollars yearly by 2020 to assist the developing countries with their pursuit of green growth (UN, 2010). However, the committed funding from the developed countries is not sufficient to support mitigation and adaptation activities in developing nations. Climate funding will need to come from a variety of sources, public and private, bilateral and multilateral, including alternative sources of capital flows, the scaling up of existing sources and increased private flows.

Climate finance refers to climate specific capital flows aimed to boost low-carbon and climate-resilient development… the success of green growth development depends on the quantity and type of available finance supporting climate mitigation and adaptation activities.

Climate finance, which is a critical ingredient of the global response to climate change, refers to climate specific capital flows aimed to boost low-carbon and climate-resilient development (Buchner et al., 2011). Given the key role of climate finance, there is no exaggerating that the success of green growth development depends on the quantity and type of available finance supporting climate mitigation and adaptation activities. Among the major sources of climate finance for developing countries are the UNFCCC climate funds2, carbon market finance (e.g. CDM), official development aid (ODA) and private capital investment (Paris and Wang, 2010)3 . In terms of type, climate finance can be categorized into public concessional (e.g. ODA), public non-concessional, and private capital; and in terms of intermediaries, there are two types of climate capital flows, namely, bilateral and multilateral (Buchner et al., 2011). The CDM and foreign aid are two major forms of climate finance, which will be discussed in more details in the following sections.


CDM, an Innovative Solution towards Green Growth?

Clean Development Mechanism (CDM) is one of the major contributors to carbon market finance. The adoption of the Kyoto Protocol in 1997 marked a milestone in the global efforts of curbing GHG emissions and boosting sustainable development. Under the Kyoto, there are three market-based mechanisms, namely, Emissions Trading (ET), Joint Implementation (JI) and CDM. CDM is the only flexibility mechanism which involves developing countries in the world’s GHG abatement activities and incorporates sustainable development objective into emission reduction efforts4 . This mechanism itself is an innovation which contributes to carbon pricing and commodification process and achieves the synergies between global emission reduction targets and local sustainable development objectives (Olhoff et al., 2004). More specifically, it is the first global environmental offset instrument of its kind, providing financial incentives for developed countries to invest in low-carbon projects in developing countries which help to induce the host countries onto a low-carbon development path, and contribute to the stabilization of the global atmospheric GHG emissions.

The CDM encourages Annex I countries to invest in low-cost emission-reduction projects in developing countries in return for tradable certified emission reductions credits (CERs) to help meet their national emission mitigation targets for the Kyoto compliance. CDM was set up with two objectives. One goal is to promote the global GHG emission reductions at a low cost. The other goal is to facilitate the hosting countries’ sustainable development thanks to the direct financial investment by and the low-carbon technological transfer from developed countries.

As an important step towards a long-term international climate change protocol, the Durban conference managed to extend the current Kyoto Protocol with another five-year period, which effectively avoids the much-feared scenario of having no legal-binding international agreement after 2012. However, this achievement is overshadowed by the worries that the current Kyoto Protocol is fundamentally flawed with its flexibility mechanisms such as CDM failing to live up to its twin objectives.

In the literature, so far opinions have differed widely regarding the impacts of CDM on reducing hosting countries’ carbon emissions, with some research arguing that CDM has failed to bring about real and additional GHG emission reductions (e.g. Rosendahl and Strand, 2009; Schneider, 2007) and other work lending considerable evidences to the positive impacts of CDM on emission abatement (e.g. Sutter and Parreno, 2007; Huang and Barker, 2011). In terms of CDM’s other goal of sustainable development, views are also divided. On the one end of the spectrum are the positive opinions of CDM’s sustainability benefits (e.g. Austin et al., 1999). On the other end of the spectrum, there are arguments that CDM’s focus on low-cost GHG emission reductions might to some degree compromise developing countries’ sustainability development (Ellis et al., 2007; Olsen, 2007; Paulsson, 2009).

Huang et al. (2012a, 2012b) offer their attempts to unveil the myth of whether CDM can achieve the twin goals. Based upon robust econometric analysis, Huang et al. (2012a) demonstrates that CDM projects as a whole have brought “real” and “additional” emission reductions to the host countries. In its sister paper (Huang et al., 2012b), evidence is found that CDM projects are conducive to host countries’ sustainable development.

Despite its limitations, CDM is the only existing mechanism that offers an innovative solution to the challenge of how to incorporate sustainable development considerations into emission mitigation activities.

Despite its limitations, CDM is the only existing carbon market mechanism that offers an innovative solution to the challenge of how to incorporate sustainable development considerations into emission mitigation activities. It is just that kind of mechanism providing such financial gains for the involving parties. By attracting foreign financial and technological resources to help address the host nations’ development concerns, CDM plays a positive role in encouraging developing countries to participate in the world’s GHG abatement efforts and boosting the host countries’ sustainable development. Although there is still a lot of room for improvement, CDM should have its well-deserved place in any future post-Kyoto climate finance regime.


Foreign aid, a Reflection of International Efforts to Boost Green Growth?

Climate change, one of the most challenging issues facing human beings, requires unified and urgent global actions. Foreign aid for the development of green growth is a plausible solution that not only helps developing countries but is also in the interests of developed countries themselves. Foreign aid is especially important in promoting green technology transfers from developed nations to developing nations, to help establish a green-growth-enabling framework in developing countries and to enhance capacity building in the low-income communities to raise awareness and capacity of local people to pursue a low-carbon growth path.

Some of the lessons gained from the existing research on how to increase aid’s effectiveness are (Paris and Wang, 2010): 1) Ownership. It is important that in the foreign aid projects, developing countries can also exercise effective leadership over their green growth development policies, and co-ordinate aid activities along with donors. 2) Alignment. Donor countries should base their overall support on partner developing countries’ climate change policies, institutions and national development plans. 3) Harmonisation. It highlights that donors’ actions should be more harmonised and transparent. 4) Mutual Accountability. It is an important lesson that both donors and recipients should be accountable for aid interventions.

Little is known regarding how effective the existing foreign aid is in terms of supporting developing countries’ transition to a low-carbon development and how to boost the effectiveness of future foreign aid projects. Much evidence-based research is needed in this field.

Despite millions of input of foreign aid aimed at enhancing developing countries’ green growth, little is known regarding how effective the existing foreign aid is in terms of supporting developing countries’ transition to a low-carbon development and how to boost the effectiveness of future foreign aid projects. Much robust and evidence-based research is needed in this field5.

In summary, human beings’ battle against climate change requires enormous efforts and determination, and climate finance plays a key role in catalysing the efforts to support climate change mitigation and adaptation activities. The current range of available funds and potential of climate capital flows imply that a combination of sources are needed to address the tough task of financing for climate actions, which includes strengthening the existing funding sources, exploring alternative finance and encouraging private capital flows. It is also not an easy task to allocate the raised climate finance wisely, which requires a balanced allocation between adaptation and mitigation, between different developing nations and between different climate related purposes. However, as one of the most essential facets of global efforts to tackle climate change crisis, climate finance represents a wise investment to build a cleaner, greener and more sustainable future for us all, and will play an essential role in spurring green growth in developing countries.

About the Authors

Yongfu Huang is a Development Economist at UNU-WIDER and Lead Author for the Fifth Assessment Report (AR5) of Intergovernmental Panel on Climate Change (IPCC) working on ‘Cross-cutting finance and investment issues’.

Jingjing He is a postdoctoral researcher at the Institute of International Law of the Chinese Academy of Social Sciences, working in the areas of international climate regime, international environmental law, governance and capacity building.


1. Austin, D. et al., 1999. How much sustainable development can we expect from the Clean Development Mechanism? Washington, D.C.: World Resources Institute.

2. Barrett, S. &Toman, M., 2010. Contrasting future paths for an evolving global climate regime. Global Policy, 1(1), pp.64–74.

3. Bowen, A., 2012. Green growth, green jobs and labour markets. The World Bank Policy Research Working Paper 5990.

4. Buchner, B. et al., 2011. The landscape of climate finance. A Climate Policy Initiative Report.

5. Ellis, J. et al., 2007. CDM: Taking stock and looking forward. Energy Policy, 35(1), pp.15–28.

6. Habito, C.F., 2010. Patterns of inclusive growth in developing Asia: Insights from an enhanced growth-poverty elasticity analysis. ADBI Working Paper 145.

7. Hallegatte, S. et al., 2011. From growth to green growth–a framework. World Bank Policy Research Working Paper 5872.

8. Howes, S. &Wyrwoll, P., 2012. Climate change mitigation and green growth in developing Asia. ADBI Working Paper No. 369.

9. Huang, Y. & Barker, T., 2011. The Clean Development Mechanism and low carbon development: A panel data analysis. Energy Economics, forthcoming.

10. Huang, Y., He, J. & Tarp, F., 2012a. Is the Clean Development Mechanism effective for emission reductions? UNU-WIDER Working Paper 2012/73.

11. Huang, Y., He, J. & Tarp, F., 2012b. Is the Clean Development Mechanism promoting sustainable development? UNU-WIDER Working Paper 2012/72.

12. Jänicke, M., 2012. Green growth: From a growing eco-industry to economic sustainability. Energy Policy, 48(0), pp.13–21.

13. Olhoff, A. et al., 2004. CDM: Sustainable development impacts. The UNEP Risø Centre Project CD4CDM Report.
14. Olsen, K.H., 2007. The Clean Development Mechanism’s contribution to sustainable development: A review of the literature. Climatic Change, 84(1), pp.59–73.
15. Paris, R. & Wang, S., 2010. Development perspectives for a post-Copenhagen climate financing architecture. A Development Assistance Committee (DAC) Report.

16. Paulsson, E., 2009. A review of the CDM literature: From fine-tuning to critical scrutiny? International Environmental Agreements: Politics, Law and Economics, 9(1), pp.63–80.

17. Purvis, N., 2003. Greening U.S. foreign aid through the millennium challenge account. The Brookings Institution Policy Brief 119.

18. Roberts, J.T. & Parks, B., 2006.A Climate of Injustice: Global Inequality, North-South Politics, and Climate Policy, The MIT Press.

19. Rosendahl, K.E. & Strand, J., 2009. Simple model frameworks for explaining inefficiency of the Clean Development Mechanism. World Bank Policy Research Working Paper WPS 4931.

20. Schneider, L., 2007. Is the CDM fulfilling its environmental and sustainable development objectives? An evaluation of the CDM and options for improvement. WWF Report.

21. Sutter, C. &Parreño, J.C., 2007. Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of officially registered CDM projects. Climatic Change, 84(1), pp.75–90.

22. Toman, M., 2012. Green Growth: An exploratory review. World Bank Policy Research Working Paper 6067.

23. United Nations, 2010. Report of the Secretary-General’s High-Level Advisory Group on Climate Change Financing. UN Report.

24. UNFCCC, 2011. Benefits of the Clean Development Mechanism 2011. UNFCCC Annual Report.


1. Examples include China and India.

2. Among the existing UNFCCC funding mechanisms are the Global Environment Facility (GEF) Trust fund, supporting mitigation activities, as well as the Special Climate Change Fund (SCCF) and Least Developed Countries Fund (LDCF), both of which support adaptation activities, capacity-building and green technology transfer (Paris and Wang, 2010).

3. In the literature there is no standard way of categorizing climate finance. For example, some research groups climate finance into four categories: public sources, development bank instruments, carbon market finance and private capital (UN, 2010).

4. CDM embodies the principle of the “common but differentiated responsibilities”.

5. Among the limited existing research on aid’s effectiveness is one of the UNU-WIDER’s work programmes that studies the effectiveness of foreign aid for environmental protection and green growth. The on-going research includes “Can foreign aid stimulate sustainability?”, “Does foreign aid fuel inclusive growth?” with the output to be released in due course (

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.