The Canadian government recently renewed its international climate finance commitments with the spring economic update in April. Given recent major cuts to development aid in Canada and internationally, this news brought relief to climate researchers and advocates.
Canada’s climate finance aims to support climate action in lower-income countries. The five-year funding package includes $3 billion to Global Affairs and just under $168 million to Environment and Climate Change Canada.
It also proposes $2 billion in capital to Canada’s development bank, FinDev Canada. An additional $732 million is committed to FinDev over three years starting in 2028 for concessional finance — below market rate finance provided by major financial institutions or governments. Canadian climate finance programs often aim to mobilize additional private finance through the use of these public funds.
Headlines after COP conferences often highlight big climate finance pledges. But behind the large numbers lies a complicated mix of financial instruments. Many of these instruments require Global South countries to repay government and private sector investors with interest.
Different types of funding shape what projects are possible, who benefits from any successes and who bears the burden of any failures.
What is climate finance?
The United Nations Framework Convention on Climate Change defines climate finance as a mix of grants and loans from public, private or other sources, targeted at climate change action. With trillions of dollars needed globally, climate finance is integral to international climate negotiations.
Global South countries have long said that the Global North has a responsibility to provide this funding. This is partially a matter of feasibility, as these countries face higher borrowing costs and limited public resources.
But it’s also a matter of historical responsibility. Many countries that industrialized earlier have produced the most emissions. So they have a responsibility to help poorer nations cover the costs of managing climate change.
Mobilizing private investment
THE CANADIAN PRESS/Spencer Colby
Since the 2015 Paris Agreement, multilateral institutions like the Organization for Economic Co-operation and Development and the World Bank have prioritized private-sector climate investment. They argue that public funds alone are not enough to fund climate action.
States and development banks use a variety of methods to try and attract private investors. Most of these tools attempt to make investment in renewable energy or other infrastructure less risky by mixing private and public funding through “blended finance.”
For example, a government might agree to take on the risk of a lost investment through models where they agree to forgo repayment when returns are poor so that private sector investors are protected. A similar model is the power purchase agreement, where a government agrees to buy a fixed amount of energy from a project and thereby guarantees a minimum profit for private investors.
The results of this strategy are mixed. The World Bank reported a near 200 per cent increase in private capital flows to projects targeting climate change in 2023. However, the World Bank’s 2024 International Debt Report also reveals shortcomings. World Bank and IMF efforts to mobilize private finance have largely failed to attract enough funds. Many Global South countries are now stuck either supporting struggling projects or repaying the debt used to fund their construction.
Academic studies, including our own, echo these concerns. Debt-based climate finance can reinforce global inequality by ensuring revenues from successful climate projects flow from the Global South to the Global North.
The focus on attracting private funds can also result in privatized critical infrastructure that increases costs for the public. While privatizing infrastructure can temporarily reduce demand on public budgets, poorly written contracts can lock governments into paying for underused infrastructure and lead to the neglect of other long-term infrastructure investments.
How does Canada’s climate finance measure up?
Canada’s approach to climate finance is similar to other wealthy nations but falls short in two significant ways. First, it is insufficient. Despite high per-capita emissions and a large energy and gas sector, Canada does not contribute its fair share. This leaves developing countries without the financial resources to deal with climate change.
Second, Canada continues to rely on loans and blended finance. Between 2021 and 2026, Canada’s funding mechanisms were 40 per cent grants and contributions, and 60 per cent loans.
The newly announced climate finance funding does not signal a break from this. It aims to mobilize $3 in private funding for every $1 of public funding through FinDev. With evidence showing this strategy has limited efficacy, and a lack of concrete details on methods, these climate finance goals may not be realistic.
Climate finance is essential for the green energy transition. Yet Canada’s renewed commitment ignores a decade of evidence showing the limited success of de-risking private investment. To maximize the impact of public funds, Canada should explore policy alternatives, such as direct public infrastructure investments, global carbon taxes and targeted debt relief.
