In Baku last November, parties to the COP29 United Nations climate summit failed to put in place enough climate finance to keep global average warming below the 1.5 °C limit established in the 2015 Paris agreement.
High-income countries (HICs) agreed only to “take the lead” in directing at least US$300 billion to low- and middle-income countries (LMICs) each year by 2035. Their own contributions were left unspecified and could be drawn from a variety of sources. Meanwhile, the Baku agreement calls on “all actors” to scale up this total financing to at least $1.3 trillion annually.
Although these headline numbers seem to be broadly similar to those that were proposed by climate-finance experts (including some of us1) before the COP29 meeting, in reality this fudged scattershot approach falls far short of what’s needed — in terms of timing and quality.
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Ideally, climate finance should be given in the form of public grants, or equivalents. That way, recipients don’t need to find money from elsewhere to repay loans, and the finance can be used as ‘catalytic capital’ to attract private finance that can be co-invested in renewables for LMICs. Grants can also be spent on ending the use of fossil fuels early. The broad mix of public and private, bilateral and multilateral sources allowed by COP29 is inefficient. To decarbonize the world in time, climate finance should be provided at full scale this year, instead of being delayed to 2035, specialists say (see go.nature.com/3r5dxfy).
Another big stumbling block in Baku was the requirement for unanimity among the parties. For example, the Arab Group of negotiators refused to accept any text that targeted specific sectors, including fossil fuels — even though these are the main source of emissions that climate finance is intended to abate.
Without access to climate finance at scale, LMICs cannot afford to decarbonize. And time is running out. To have even a 50% chance of holding to the Paris agreement’s 1.5 °C limit, the world has a remaining budget of only around 180 gigatonnes (Gt) of carbon dioxide (see go.nature.com/4bv5mme). This is projected to be depleted by 2035 (assuming a linear rate of decline starting from estimated annual emissions of about 40 Gt in 2025) or as soon as 2029 (assuming current emissions levels continue). Exceeding this limit makes crossing planetary tipping points more likely, including collapses of ice sheets, ocean currents, coral reefs and permafrost, threatening the lives and livelihoods of billions of people.
Solar panels in Indonesia. The nation will receive US$20 billion to decarbonize over the next few years under a Just Energy Transition Partnership.Credit: Marc Romanelli/Getty
Immediate action is needed to phase out and replace fossil fuels, as well as to scale up CO2-removal technologies and protect and restore carbon uptake in nature. If these measures are conducted simultaneously and at scale to reach net-zero emissions by 2050, and negative emissions thereafter, only then can global warming be limited to a 1.5 °C increase or remain close to it2. This year offers a unique chance to act, because countries are required to update their declared national emissions-reduction contributions to the Paris agreement during 2025.
Here, we call on nations to find an immediate solution. Taking inspiration from the idea of ‘climate clubs’ — agreements among economically self-interested nations to cut emissions through aligned policies — we propose that coalitions of willing HICs form ‘climate finance clubs’ in their own self interests3. These clubs would finance decarbonization in LMICs, sidestepping the need for a global agreement, which inevitably results in a watered-down deal.
Benefits for all
Why should countries want to pay others to act? It is in their own economic interests to reduce global emissions quickly — and, from the planet’s perspective, it doesn’t matter whether those emissions are emitted domestically or elsewhere.
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For instance, in the past 6 months, climate-related damages from hurricanes Helene and Milton in the United States, floods in Valencia in Spain and wildfires in Los Angeles, California, are estimated to exceed $500 billion. That’s already more than the annual level of climate finance that HICs currently provide (around $100 billion a year) and more than they pledged at COP29 for 2035. Such costs will only escalate until global emissions are curbed.
Groups of HICs must put in place the beginnings of a climate finance framework for LMICs this year. They should offer such countries grants that complement, not offset, their own rapid decarbonization efforts.
To avoid expensive and socially unacceptable climate impacts, the only thing that matters is that emissions are reduced extremely fast, globally. To be most effective, investments should be given with the highest priority to LMICs that commit in their 2025 Paris update to credible emission reductions — those that are consistent with keeping the world within 1.5 °C of pre-industrial average temperatures. Such countries can make bolder decarbonization pledges that are conditional on receiving climate finance. As recipients decarbonize their economies, they also benefit from lower exposure to domestic climate damages and air pollution, which in turn reduces their adaptation needs.
An offshore wind farm in Vietnam.Credit: Linh Pham/Bloomberg via Getty
There are already coalitions of HICs willing to provide climate finance — even if the United States does not participate. For example, the European Union, along with other HICs and multilateral development banks, have offered climate finance through Just Energy Transition Partnerships (JETPs) to Indonesia ($20 billion) and Vietnam ($15 billion) — of which half was from private sources. Offers were also made to South Africa ($8.5 billion) and Senegal ($2.7 billion). Such deals can be expanded to other LMICs, especially ones that are large emitters, including Colombia, Kazakhstan, Nigeria, Mexico, Thailand and India, which together would quickly add up to a significant proportion of avoided emissions. But adjustments are needed to avoid shortcomings.
So far, JETPs have offered mainly loans instead of grants — in Indonesia, for example, only 2% of JETP funds were grants. Yet loans add to LMICs’ debts and don’t provide capital to catalyse private-sector investments in renewables, or give incentives for closing fossil-fuel infrastructures early. Plans to phase out coal in South Africa, for example, have stalled without sufficient grants and a clear strategy, raising concerns over energy security as well as slowing the transition.
The climate finance club needs to do things differently. First, it should offer larger sums than JETPs do now. It should give all the public funding in grant-equivalent form, and make receipt conditional on a credible implementation plan and on accountability of fossil-fuel phase-out and renewables phase-in.
Solid returns
To illustrate how a climate finance club might work (focusing on phasing out and replacing fossil fuels), we have examined the economic case for a group of nations that have the financial capacity and the incentive to support LMIC decarbonization. The group excludes the United States but includes the other G7 countries as well as the European Union, Norway, Switzerland, Australia and South Korea (see Supplementary information). We also excluded China and high-income Gulf states as recipients, given their ability to finance their own transition. This reduced climate-finance needs to about $500 billion per year.
