Will Wealthy Nations Finally Bridge the Climate Finance Gap with AI and Carbon Markets?
Imagine offering nothing more than a glass of water to a thirsty person during a drought, while enjoying an unlimited supply yourself. This analogy captures how the world’s wealthiest nations have responded to the climate crisis—with token gestures vastly disproportionate to both their capacity and responsibility.
Despite an estimated annual need of $6.5 trillion to combat climate change, wealthy nations—the biggest polluters—have pledged a mere $300 billion, with little clarity on financial flows, allocation mechanisms, or accountability. According to the 2022 OECD report, developed countries contributed $115.9 billion, surpassing their $100 billion target for the first time since 2009. However, 80 per cent of this funding came from public sources such as bilateral aid, climate-related export credit multilateral contributions from development banks, and government-backed loans, with 69 per cent ($63.6 billion) provided as concessional and non-concessional loans.
Climate change cost the planet $16 million per hour from 2000 to 2019, a figure that continues to rise. The reliance on loans for climate financing is unsustainable, adding to the debt burdens of vulnerable nations already struggling with the impacts of a crisis they did little to create.
Not a zero-sum game
Given this reality, how can wealthy nations, responsible for nearly half of historical CO₂ emissions, meet their climate finance obligations while reducing reliance on debt-driven mechanisms? The rising cost of debt servicing increases the demand for foreign currency to repay debts, depleting reserves and leading to currency depreciation. This in turn can raise import costs, fuel inflation and heighten economic, social and political instability. If the countries face debt distress or defaults it could trigger financial instability and disrupt global supply chains. So, can a more effective approach—one that combines firm commitments, technological accountability, and systemic policy shifts—bridge the growing gap between climate needs and available funds.
In developed countries, economic, political, and behavioural factors heavily influence global climate finance flows. Rising inflation, sluggish consumer spending, geopolitical tensions, and public resistance to higher taxes for international projects hinder meaningful commitments. The perception of climate finance as a zero-sum game further discourages nations from allocating adequate funds.
Also Read | Our planet’s future hinges on seeing sustainability as a win-win for all
Compounding the problem is the imbalance between mitigation and adaptation funding. Mitigation projects, which offer measurable global benefits, receive 90.3 per cent of climate finance, while adaptation efforts—crucial for localised resilience—receive only 7.2 per cent. Adaptation projects suffer from poor tracking, discontinuity, and limited private-sector engagement. Calls to double adaptation funding are growing, but achieving this without increasing the debt burden of developing nations remains a major challenge.
Recent funding freezes underscore the volatility of climate finance. The Trump administration’s decision to halt $70 million in funding for Colombia’s environment and conservation projects under USAID highlights how political shifts can undermine global commitments. Similarly, the funding freeze for the MIA programme, (a project funded by the Global Environment Facility) which combats large-scale deforestation in the Amazon, threatens not just environmental projects but also peace and humanitarian assistance. The USAID contributed $2.6 billion toward climate change mitigation from 2011 to 2021 and recently committed additional funds at COP29. These included $11.8 million for climate adaptation, $9.3 million for climate financing in Africa’s agriculture sector, and $10.8 million to empower women in responding to the climate crisis. If the US stalls or withdraws funding, these initiatives face severe setbacks.
The freeze on the Global Environment Facility’s MIA programme, which combats deforestation in the Amazon, threatens both environmental projects and humanitarian assistance. Here, a bird’s eye view of tropical rainforest deforestation in Brazil.
| Photo Credit:
Getty Images/iStockphoto
The impact of funding rollbacks extends far beyond the US countries such as Syria, the Central African Republic, Afghanistan, Burundi, Somalia, South Sudan, Mozambique, Niger, Liberia, Yemen, and Malawi—nations rich in natural resources but highly vulnerable to climate change—stand to lose critical support.
In 2023, overseas development assistance reached a record high of $223.3 billion. Any reduction in funding could severely impact the economies of countries in need. Chronic underfunding and recent US rollbacks reinforce the need to hold wealthy nations accountable while exploring innovative solutions.
Closing the climate funding gap requires a fundamental restructuring of financial instruments, technological innovation, and global carbon pricing mechanisms. Voluntary carbon markets and emissions trading systems (cap-and-trade) have existed for years, but their potential remains underutilised due to regulatory loopholes, price disparities, and weak enforcement. The European Union’s Emissions Trading System has successfully generated funds for renewable energy projects through carbon permit auctions. However, global carbon pricing remains inconsistent: three-fourths of global emissions escape taxation due to policy exemptions, inadequate monitoring, and resistance from carbon-intensive industries.
Potential solutions
A global carbon floor price could set minimum pricing thresholds across economic groups. High-income nations would pay a standardised minimum price per metric tonne of CO₂, while middle-income nations would follow a structured, lower pricing tier. This approach would reduce carbon leakage, where industries relocate to regions with weaker climate policies. Expanding carbon pricing to heavy-emitting sectors such as steel, cement, construction, and shipping would further drive industries toward cleaner alternatives.
AI-driven carbon tracking must become integral to carbon pricing mechanisms. Satellite-based emissions monitoring can provide real-time industrial pollution data, while machine learning algorithms can detect and flag potential carbon credit fraud. Blockchain technology could enhance transparency in carbon credit trading, preventing greenwashing and increasing investor confidence. By integrating advanced verification systems, carbon pricing mechanisms can expand their reach, improve enforcement, and ensure accurate taxation, thereby increasing climate finance flows.
One of the biggest barriers to meaningful climate action remains fossil fuel subsidies. In 2021 alone, explicit fossil fuel subsidies reached $577 billion, while implicit subsidies (unpriced externalities) ran into trillions—far exceeding the $300 billion pledged for climate finance at COP summits. These subsidies artificially lower fossil fuel costs, entrenching dependence on carbon-intensive energy and diverting funds that could support climate initiatives.
A fundamental reimagining
A structured, gradual phase-out of fossil fuel subsidies is essential, with resources redirected to clean energy and climate adaptation projects in developing nations. These redirected subsidies can be converted into bilateral climate grants and used to attract private-sector investments in mitigation and adaptation. Such an approach would de-risk climate initiatives, making them more viable for investors while granting developing nations greater access to grants and reducing reliance on debt-financed solutions.
Also Read | India’s climate strategy: Balancing growth with green commitments
The climate crisis demands more than tokenism. It requires a fundamental reimagining of how climate finance is sourced, distributed, and sustained. Climate projects must be designed to remain self-sustaining post-intervention. Creating local value chains could achieve this goal. Traditionally viewed through a profit-driven lens, value chains can now serve as engines of sustainable development. For example, integrating renewable energy with local agriculture can create micro-manufacturing setups linked to Farmer Producer Organisations, fostering livelihoods, increasing incomes, and enabling reinvestment within local economies.
Stricter regulations are needed to counter corporate greenwashing in developed nations and ensure real emissions reductions. To prevent political interference in climate financing, oversight from institutions such as the World Bank, International Monetary Fund, and United Nations bodies is crucial.
Above all, wealthy nations must fulfil their moral and financial responsibility for their historical emissions. They must provide grant-based funding or a mix of grants and debt instruments designed to ease financial burdens in developing nations. The stakes have never been higher. As the climate crisis intensifies, the developed world must lead by example through meaningful investments in climate action. Only through accountability, innovation, and global collaboration can we ensure a liveable planet.
Faraz Rupaniisan economics researcher at the WOTR Centre for Resilience Studies.
Imagine offering nothing more than a glass of water to a thirsty person during a drought, while enjoying an unlimited supply yourself. This analogy captures how the world’s wealthiest nations have responded to the climate crisis—with token gestures vastly disproportionate to both their capacity and responsibility.
Despite an estimated annual need of $6.5 trillion to combat climate change, wealthy nations—the biggest polluters—have pledged a mere $300 billion, with little clarity on financial flows, allocation mechanisms, or accountability. According to the 2022 OECD report, developed countries contributed $115.9 billion, surpassing their $100 billion target for the first time since 2009. However, 80 per cent of this funding came from public sources such as bilateral aid, climate-related export credit multilateral contributions from development banks, and government-backed loans, with 69 per cent ($63.6 billion) provided as concessional and non-concessional loans.
Climate change cost the planet $16 million per hour from 2000 to 2019, a figure that continues to rise. The reliance on loans for climate financing is unsustainable, adding to the debt burdens of vulnerable nations already struggling with the impacts of a crisis they did little to create.
Not a zero-sum game
Given this reality, how can wealthy nations, responsible for nearly half of historical CO₂ emissions, meet their climate finance obligations while reducing reliance on debt-driven mechanisms? The rising cost of debt servicing increases the demand for foreign currency to repay debts, depleting reserves and leading to currency depreciation. This in turn can raise import costs, fuel inflation and heighten economic, social and political instability. If the countries face debt distress or defaults it could trigger financial instability and disrupt global supply chains. So, can a more effective approach—one that combines firm commitments, technological accountability, and systemic policy shifts—bridge the growing gap between climate needs and available funds.
In developed countries, economic, political, and behavioural factors heavily influence global climate finance flows. Rising inflation, sluggish consumer spending, geopolitical tensions, and public resistance to higher taxes for international projects hinder meaningful commitments. The perception of climate finance as a zero-sum game further discourages nations from allocating adequate funds.
Also Read | Our planet’s future hinges on seeing sustainability as a win-win for all
Compounding the problem is the imbalance between mitigation and adaptation funding. Mitigation projects, which offer measurable global benefits, receive 90.3 per cent of climate finance, while adaptation efforts—crucial for localised resilience—receive only 7.2 per cent. Adaptation projects suffer from poor tracking, discontinuity, and limited private-sector engagement. Calls to double adaptation funding are growing, but achieving this without increasing the debt burden of developing nations remains a major challenge.
Recent funding freezes underscore the volatility of climate finance. The Trump administration’s decision to halt $70 million in funding for Colombia’s environment and conservation projects under USAID highlights how political shifts can undermine global commitments. Similarly, the funding freeze for the MIA programme, (a project funded by the Global Environment Facility) which combats large-scale deforestation in the Amazon, threatens not just environmental projects but also peace and humanitarian assistance. The USAID contributed $2.6 billion toward climate change mitigation from 2011 to 2021 and recently committed additional funds at COP29. These included $11.8 million for climate adaptation, $9.3 million for climate financing in Africa’s agriculture sector, and $10.8 million to empower women in responding to the climate crisis. If the US stalls or withdraws funding, these initiatives face severe setbacks.
The freeze on the Global Environment Facility’s MIA programme, which combats deforestation in the Amazon, threatens both environmental projects and humanitarian assistance. Here, a bird’s eye view of tropical rainforest deforestation in Brazil.
| Photo Credit:
Getty Images/iStockphoto
The impact of funding rollbacks extends far beyond the US countries such as Syria, the Central African Republic, Afghanistan, Burundi, Somalia, South Sudan, Mozambique, Niger, Liberia, Yemen, and Malawi—nations rich in natural resources but highly vulnerable to climate change—stand to lose critical support.
In 2023, overseas development assistance reached a record high of $223.3 billion. Any reduction in funding could severely impact the economies of countries in need. Chronic underfunding and recent US rollbacks reinforce the need to hold wealthy nations accountable while exploring innovative solutions.
Closing the climate funding gap requires a fundamental restructuring of financial instruments, technological innovation, and global carbon pricing mechanisms. Voluntary carbon markets and emissions trading systems (cap-and-trade) have existed for years, but their potential remains underutilised due to regulatory loopholes, price disparities, and weak enforcement. The European Union’s Emissions Trading System has successfully generated funds for renewable energy projects through carbon permit auctions. However, global carbon pricing remains inconsistent: three-fourths of global emissions escape taxation due to policy exemptions, inadequate monitoring, and resistance from carbon-intensive industries.
Potential solutions
A global carbon floor price could set minimum pricing thresholds across economic groups. High-income nations would pay a standardised minimum price per metric tonne of CO₂, while middle-income nations would follow a structured, lower pricing tier. This approach would reduce carbon leakage, where industries relocate to regions with weaker climate policies. Expanding carbon pricing to heavy-emitting sectors such as steel, cement, construction, and shipping would further drive industries toward cleaner alternatives.
AI-driven carbon tracking must become integral to carbon pricing mechanisms. Satellite-based emissions monitoring can provide real-time industrial pollution data, while machine learning algorithms can detect and flag potential carbon credit fraud. Blockchain technology could enhance transparency in carbon credit trading, preventing greenwashing and increasing investor confidence. By integrating advanced verification systems, carbon pricing mechanisms can expand their reach, improve enforcement, and ensure accurate taxation, thereby increasing climate finance flows.
One of the biggest barriers to meaningful climate action remains fossil fuel subsidies. In 2021 alone, explicit fossil fuel subsidies reached $577 billion, while implicit subsidies (unpriced externalities) ran into trillions—far exceeding the $300 billion pledged for climate finance at COP summits. These subsidies artificially lower fossil fuel costs, entrenching dependence on carbon-intensive energy and diverting funds that could support climate initiatives.
A fundamental reimagining
A structured, gradual phase-out of fossil fuel subsidies is essential, with resources redirected to clean energy and climate adaptation projects in developing nations. These redirected subsidies can be converted into bilateral climate grants and used to attract private-sector investments in mitigation and adaptation. Such an approach would de-risk climate initiatives, making them more viable for investors while granting developing nations greater access to grants and reducing reliance on debt-financed solutions.
Also Read | India’s climate strategy: Balancing growth with green commitments
The climate crisis demands more than tokenism. It requires a fundamental reimagining of how climate finance is sourced, distributed, and sustained. Climate projects must be designed to remain self-sustaining post-intervention. Creating local value chains could achieve this goal. Traditionally viewed through a profit-driven lens, value chains can now serve as engines of sustainable development. For example, integrating renewable energy with local agriculture can create micro-manufacturing setups linked to Farmer Producer Organisations, fostering livelihoods, increasing incomes, and enabling reinvestment within local economies.
Stricter regulations are needed to counter corporate greenwashing in developed nations and ensure real emissions reductions. To prevent political interference in climate financing, oversight from institutions such as the World Bank, International Monetary Fund, and United Nations bodies is crucial.
Above all, wealthy nations must fulfil their moral and financial responsibility for their historical emissions. They must provide grant-based funding or a mix of grants and debt instruments designed to ease financial burdens in developing nations. The stakes have never been higher. As the climate crisis intensifies, the developed world must lead by example through meaningful investments in climate action. Only through accountability, innovation, and global collaboration can we ensure a liveable planet.
Faraz Rupaniisan economics researcher at the WOTR Centre for Resilience Studies.
