How finance gaps under the Paris Agreement are affecting climate transition in the global south

Paris Agreement ambitions and the centrality of climate finance

Nearly a decade after the Paris Agreement, which targets 1.5°C, was adopted, the average global temperature is on a trajectory toward around 2.5–2.9°C of warming by the end of the century, reflecting a significant implementation gap. A key driver is the funding shortfall for developing economies, which require substantial investment to pursue low-carbon and climate-resilient development pathways. While the Paris framework emphasises aligning financial flows and supporting developing countries, finance commitments have not matched the scale or urgency required in the Global South.

Article 2.1(c), which calls for aligning financial flows with low-emission and climate-resilient pathways, has shown limited progress. Investment remains misaligned despite sufficient global capital. According to an IPCC report, around US $10 trillion is available globally, yet allocation remains inefficient. Similarly, progress on Article 9, guided by the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC), which recognises that developed countries should take greater responsibility based on their historical emissions and financial capacity, has been uneven. The US $100 billion annual climate finance commitment was achieved only in 2022 and remains contested in scale and effectiveness. Article 11, which focuses on building capacity in developing countries to access and deploy finance, continues to face institutional and technical constraints that limit implementation.

Complication: Challenges and structural gaps

Despite the Paris Agreement’s financial architecture, gaps persist between commitments and implementation. While the framework aims to align financial flows, support developing countries, and strengthen capacity, progress has been uneven. Climate finance flows remain insufficient, and institutional limitations constrain effective deployment.
The following challenges highlight the disconnect between ambition and delivery, particularly in the Global South.

Vague definitions and scope disputes

The language of Article 2.1(c) does not clearly define the scale, nature, or obligations associated with making finance flows consistent with low-emission and climate-resilient development. Therefore, overemphasis on article 2.1(c) dilutes the importance of article 9. It allows developed countries to highlight private investment mobilisation and financial market alignment as indicators of progress, even when direct public and concessional finance remain inadequate, diluting the importance of Article 9 commitments.

Over-reliance on loans rather than grants

A major structural issue is the reliance on debt-based finance. A large share of climate finance is delivered as loans, increasing sovereign debt burdens for fiscally constrained countries. Global South economies (excluding China) require around US $2.7 trillion annually by 2030, far exceeding current financial flows. This creates risks of a “green debt trap,” where countries must finance climate action alongside development priorities while managing rising debt, potentially deepening existing debt vulnerabilities.

Delayed and contested delivery of the US $100 billion commitment

The delay in achieving the US $100 billion target has posed challenges for maintaining trust in the Paris framework. Concerns persist regarding the composition of flows, particularly the dominance of mitigation over adaptation finance. Negotiations for the New Collective Quantified Goal (NCQG) aim to replace this with a US $300 billion annual target after 2025, though this remains contested, with developing countries calling for significantly higher targets aligned with actual needs.

High cost of capital and structural investment risks in the Global South
High financing costs continue to affect renewable energy and resilience projects in developing economies. These costs are driven by structural risks, currency volatility, and underdeveloped financial markets. Weak project pipelines and limited technology deployment further deter private investment, restricting access to mechanisms like the Green Climate Fund (GCF), especially for Small Island Developing States (SIDS) and Least Developed Countries (LDCs).

Policy conditionalities and sovereignty concern

Developing countries are increasingly concerned about policy conditions attached to climate finance. As financial institutions emphasise “Paris alignment” and sustainable finance taxonomies, access to finance may be tied to domestic reforms or regulatory changes. While intended to support climate goals, these conditions may constrain national policy space and impose externally defined pathways, raising concerns about sovereignty, policy autonomy, and equitable participation. This is relevant for economies relying on concessional finance from multilateral institutions, where funding approvals may be tied to governance reforms or regulatory adjustments.

Solution: Evolving mechanisms and targeted strategies

Addressing these structural complications requires more than increasing finance volumes; it demands reforms in how finance is mobilised, managed, and delivered. Bridging the gap between ambition and implementation will require strengthening the Paris Agreement’s financial provisions while recognising differentiated capacities and development needs. Coordinated efforts between developed and developing countries are essential to design forward-looking and effective financial strategies.

Scaling climate finance towards the US $1.3 trillion annual mobilisation goal

Bridging the finance gap requires a significant scale-up in financial flows. Recent COP discussions propose increasing the target to US $1.3 trillion annually by 2035, reflecting mitigation, adaptation, and resilience needs. Achieving this will require coordinated efforts from multilateral development banks (MDBs), private capital mobilisation, and concessional public finance. Improving access through streamlined approvals, stronger project preparation, and enhanced capacity-building will be essential. A scaled-up framework can address financing constraints while reinforcing the credibility of the Paris Agreement.

Prioritising strategic climate investment across high-impact sectors

Improving the allocation and quality of finance is as critical as increasing volume. Strategic investment across sectors such as clean energy and sustainable agriculture, for adaptation and just transitions can enhance effectiveness while aligning with development priorities. Global clean energy investment requires around US $2.3 trillion, yet remains concentrated in developed economies, highlighting the need for redistribution. Similarly, adaptation finance needs for developing countries are around US $300 billion annually, far exceeding current flows. Targeted sectoral investment can close mitigation and adaptation gaps while supporting priorities such as energy access, food security, and equitable transitions.

Blended finance and de-risking

Blended finance and de-risking instruments are critical for mobilising private capital. By improving project bankability and lowering risks, MDBs and development institutions can reduce financing costs. The Climate Investment Funds (CIF) have mobilised over US $69 billion in co-financing against US $12 billion in concessional funding. Similarly, the Scaling Solar programme by the International Finance Corporation (IFC) has used guarantees and concessional finance to attract private investors and deliver low solar tariffs in emerging markets. These examples demonstrate how concessional finance can crowd in private investment and mitigate risks that deter capital flows to the Global South.

Strengthening institutional capacity and transparency in climate finance

In line with Article 11, strengthening institutional capacity is essential for accessing and deploying climate finance effectively. Enhancing project preparation, governance systems, and domestic financial frameworks can improve access to funding and create bankable projects. At the same time, improving transparency and accountability is critical to building trust. Mechanisms like the Enhanced Transparency Framework (ETF) aim to strengthen reporting and monitoring. Harmonising definitions and linking finance flows to NDCs can ensure measurable outcomes and more effective deployment.

Conclusion: Turning Paris commitments into transition outcomes

Climate change in the global south is not merely a technical problem, but an economic one as well. It is strongly connected with the principles of equity and differentiation that the Paris Agreement is based on. Article 2.1(c) demonstrates a hope of how the financial architecture in the world should be transformed, but its effectiveness rests on the ability to bridge the gaps between the aspiration and the action. By setting up the NCQG and utilising instruments such as inclusive green finance, the international community can make sure that no nation is left behind. Finally, investment is the steering wheel to a low-carbon world, and it is only in such a straight and above-board process that the global south can transform these climate aspirations into a reality.

References

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