Climate financing is one of the key issues in climate change negotiation. It refers to finance flow that catalyzes low-carbon and climate-resilient development. Developed countries have promised to establish the Green Climate Fund, which will transfer $100 billion by 2020 to developing countries for climate adaptation and mitigation, in accordance with agreements during the Cancun Climate Change Conference. However, many uncertainties remain regarding climate financing, such as sources, amount and instruments. The influence of climate financing on global climate change and the economy is another uncertainty, which should be evaluated with an integrated assessment model.
Since it remains unclear who will take responsibility for financing, we assume the following mechanism. Developed countries establish a special fund for climate financing, and financial flows to receiving countries are used entirely for mitigation. Therefore, reduction of excess emissions by climate financing in developing countries can be estimated by marginal emission reduction. The financing module is incorporated into the multi-regional climate policy assessment model MRICES (Multi-Regional dynamic Integrated model of Climate and Economy with GDP Spillovers). This model divides the world into six regions: the United States (US), Japan, European Union (EU), China, former Soviet Union (FSU), and the rest of the world (ROW). The US, EU and Japan are financing sources, whereas China and the ROW are finance receivers. In addition to the BAU (business-as-usual) scenario, a scenario with the Green Climate Fund operational by 2020 and a scenario with continuously increasing financing after 2020 are set, to evaluate the influence of climate financing on climate protection and global economic development.
When only the climate funds presented in the Cancun agreements are implemented by 2020, it is found that these can only reduce CO₂ emissions by 5.02 GtC and 7.96 GtC in China and ROW, respectively, lowering global temperature 0.01℃ by 2100. The contribution to climate change mitigation is negligible, so a long-term climate financing program is necessary to substantially control global temperature rise. Therefore, it is assumed that there will be further climate financing, increasing 0.5% annually after 2020. Results show 62.74 GtC and 100.42 GtC of reduced emissions in China and ROW, respectively, lowering global temperature 0.18℃ by 2100. This proves that continuous financial support is beneficial for controlling rising global temperatures.
From the viewpoint of economic efficiency, developing countries always benefit from financial transfers. Developed countries suffer GDP loss at the beginning of such transfers, but these turn into GDP gains over time. The economic benefit is seven times greater than the GDP loss. Furthermore, global welfare can also be improved by climate finance transfers. Since China's economy has been developing rapidly, it is controversial whether climate financing should be transferred to that country. Compared with the scenario in which China receives no financing, model results show that not only will global temperatures be lowered by 2100, but global utility will also be enhanced by 2100 when part of the financing is transferred to China. This indicates the important role of China in international climate financing, because of the country's potential for greater marginal emission reduction than in the rest of the world.
Climate financing is an effective and efficient mechanism for global climate protection. A positive outcome can be achieved for both developed and developing countries by implementing climate financing programs. To optimize allocation of climate financing, transferring moderate finances to China is a good idea for global climate protection.