What’s the Difference Between Climate Finance and Carbon Finance?

The Paris Agreement, an international agreement within the UN Framework Convention on Climate Change (UNFCCC), accounts for both climate and carbon finance. Through this agreement, developed countries resolved to enhance the mobilization and provision of finance, including public and grant-based funds, as well as technology and capacity-building support to enable ambitious climate action. Climate finance transactions, which support climate change mitigation and adaptation activities in developing countries, are accounted for under Article 9 of the agreement.

Transactions under carbon finance, on the other hand, are governed by Article 6 of the Paris Agreement, which provides a centralized accounting mechanism for the international transfer of carbon credits. In a carbon market, countries, as well as non-state actors, can transact emission reduction credits. In essence, the right to pollute becomes tradable, which creates a financial incentive to curb emissions. As emission reduction targets become more ambitious, participating market players are pressured to invest in cleaner technologies and innovate their processes to reduce overall GHG outputs.