An introduction to Climate Finance & Carbon Credit

What is Climate Finance?

The word "climate finance" has a broad and restricted definition. It refers to an organisation that
uses financial institutions or technology to promote environmental sustainability, such as
creating or installing new solar panels or other renewable energy sources. In its most restrictive
sense, climate financing refers to transferring funds from industrialised to developing countries
following international accords such as the 2016 Paris Agreement.

How does Climate Finance work?

The prolonged progression of patterns in the world's climate is referred to as climate change.
Human actions, such as using non-renewable resources like fossil fuels, are usually linked to
these shifts. When these energy sources are consumed, they contribute to global warming by
rising greenhouse gas levels in the atmosphere. Individuals and governments may use climate
money to aid in the battle against climate change. Climate finance refers to any sort of money
used to combat climate change in its broadest meaning. Financing is often obtained at the local,
national, or international level and comes from various public and private sources.

Importance of Climate Finance

Climate financing is becoming increasingly important globally as nations and businesses become
more aware of the risks and possibilities linked with climate change. For example, the United
Nations Environment Programme (UNEP) announced in September 2019 that worldwide
expenditures on renewable energy technology topped $2.5 trillion between 2010 and 2019,
approximately quadrupling global renewable energy capacity.

Several financial institutions and technology played a critical role in supporting this transition in
global energy infrastructure. Examples of how finance plays a crucial role in this process include
the use of:

● Banks and other mediators transfer capital internationally.

● Financial markets to price energy commodities.

● Derivative markets to hedge and trade risks associated with energy costs.

● Stock exchanges and investment vehicles to promote investment in renewable

energy enterprises.

Climate financing comprises all of these operations, which are expected to pick up steam in the
coming years. As previously stated, the phrase also has a more limited connotation. In this sense,
it refers to how industrialised countries should assist developing countries in making the
transition to cleaner energy sources and other technologies. These debates are typically
acrimonious, if not outright hostile, and they raise a bevvy of morally problematic issues.

Examples of Climate Finance

Let's look at an example of how climate finance works in practice. Developed countries, such as
those in North America and Europe, frequently insist that developing countries, such as those in
Asia or Sub-Saharan Africa, avoid building new coal-fired power plants. On the other side, these
developing nations sometimes argue that this demand is hypocritical because developed
countries could reach their current level of development by exploiting coal and other cheap fossil
fuels during their eras of industrialisation.

As a result, many people think that industrialised nations owe developing countries support by
investing in more ecologically-friendly energy sources like wind, solar, and hydroelectric power.
Of course, when it comes to determining the precise definition of a developing country, the
discussion gets much more complicated. Should the US pay subsidies to China, for example,
because its per capita income is still far lower than that of the US? Considering China's fast
progress in recent years, many Americans will find this politically unpalatable.

The topic of whether initiatives should be considered eligible for support under climate finance
programmes may be complex in political discussions about climate finance. Some belief, for
example, that money for child education should be provided because it will lower population
increase and assist in cutting emissions. On the other hand, others may choose to limit climate
finance initiatives to projects that have a clear and immediate link to climate change, such as the
installation of renewable energy sources.

Because large-scale expenditures are necessary to considerably cut emissions, climate finance is
required for mitigation. Climate finance is also critical for adaptation, as enormous financial
resources are required to adjust to the adverse effects of climate change and mitigate its
consequences.

What does Carbon Trading mean?

The buying and selling of credits that allow a firm or other entity to emit a particular quantity of
carbon dioxide are known as carbon trading. Governments approve carbon credits and carbon
trading to gradually reduce total carbon emissions and mitigate their role in climate change. The
term "carbon trading" is also used to refer to carbon emissions trading.

Carbon trading, also known as carbon emissions trading, is the purchase and sale of credits that
allow corporations or other parties to emit a set quantity of carbon dioxide through the use of a
marketplace.
Is it possible to sell Carbon?

While the philosophical matter has been debated, the reality remains that Carbon is traded on
various markets—some global, some national, and others state or local, such as California's cap-
and-trade system.

What is A Carbon Credit?

A carbon credit is a permit that permits the holder to emit a set quantity of CO2 or other
greenhouse gases. One credit entitles one tonne of carbon dioxide released into the atmosphere.

How does Carbon credit works?

The carbon credit is one component of a "cap-and-trade" scheme. Polluting companies are given
credits to continue polluting up to a certain point. This restriction is decreased regularly.
Meanwhile, the corporation may sell any credits that are no longer needed to another company
that requires them. As a result, private enterprises are encouraged twice as much to cut
greenhouse gas emissions. If they exceed the cap, they will be punished first. Second, they can
profit by reselling or preserving part of their emissions permits.

Importance of Carbon Credit

Carbon credits' ultimate purpose is to limit greenhouse gas emissions into the environment. As
previously stated, a carbon credit is equal to one tonne of CO2. According to the Environmental
Defence Fund, in terms of carbon dioxide emissions, that's the equivalent of a 2,400-mile
journey. Companies or countries are given a set amount of credits, which they can sell to help
balance global emissions. The goal is to gradually restrict the number of credits available,
motivating businesses to develop new strategies to minimise greenhouse gas emissions.