Global climate finance crossed the US$2 trillion mark in 2024 and grew further to over US$2.3 trillion in 2025, despite political headwinds. The driver? Plummeting clean-energy costs that pull investments all but automatically. The latest geopolitical uncertainties help, too. A lot.

Renewables and technologies like geothermal power are predictable where oil and gas are not. Solar panels, in particular, have now been the cheapest source of new electricity for years, and they are getting cheaper still. Battery costs have dropped roughly 90 percent in a decade. Electric vehicles are fundamentally better than what came before. There is no turning back from electrifying transport and decarbonizing the power sector. Wind and solar together generated more power than coal worldwide for the first time in 2025.

The trend is clear, and both basic physics and scale economics are pushing prices ever further in the right direction.

The challenge is clear, too. While oil, coal and gas are commodities where generating more power or heat means purchasing ever more commodities in jittery global markets, solar, batteries and also, for example, geothermal power are technologies. (Yes, many of these technologies require rare earth or so-called ‘critical’ minerals, but the volumes and physical footprint involved are orders of magnitude smaller than those of the fossil fuel economy.)

Climate technologies share two core characteristics. For one, they can only get better and cheaper over time. Equally important, they pose an oft-significant upfront financing challenge, while the cost of operating them is often close to zero. That is where public policies and public funds still have a significant role to play.

De-risking investments to lower costs

One key role for public climate finance is to help de-risk capital investments. While conventional hydrothermal systems are being deployed worldwide, with Iceland and Kenya leading the list of countries where geothermal power already plays a significant role, new technologies like enhanced geothermal systems (EGS), closed-loop systems and superhot geothermal still need to climb the learning curve and slide down the cost curve.

Another important role is to de-risk international investments. The vast majority of private capital flows to a handful of middle-income and wealthy economies. In many others – from small island states, Sub-Saharan Africa, to parts of Latin America and much of South and Southeast Asia – private investment remains a trickle.

The reason is straightforward: capital costs. A solar project in Germany can access financing at 2–3 percent. The same project in Nigeria faces rates of 15 percent or more. The technology is identical. The sun shines brighter in Lagos. But the cost of capital can double or triple the final price of a kilowatt-hour, turning the cheapest energy source on the planet into an unaffordable one.

Not as charity, but as leverage

This is where public climate finance must play its most critical role – not as charity, but as leverage. Every dollar of concessional public finance, deployed wisely, can de-risk private investment and unlock multiples of itself. The tools exist: guarantees, first-loss tranches, currency-hedging facilities, blended-finance structures.

The third and perhaps most important role for public climate finance is to help the most vulnerable to adapt to the climate changes already baked in. The rich will adapt all by themselves. It is the world’s poor who will suffer the most, even though they contributed the least to the problem.

The United Nations Environment Programme’s (UNEP) latest Adaptation Gap Report puts developing-country financing needs at well over US$300 billion per year by 2035, higher than the total climate finance pledge at COP29 in Baku. Current international public adaptation flows? Barely over US$25 billion, a twelvefold shortfall. Unlike mitigation investments, which generate returns through cheaper energy, adaptation spending often resembles pure public goods: seawalls, early-warning systems, drought-resistant crops. These are not projects that attract private equity. They require public money.

Though here, too, is some hope that small policy levers can have outsize impacts, including in the search for synergies between mitigation and adaptation. Early mitigation yields double dividends in the form of lower mitigation costs later on and vastly lower adaptation costs.

Better insulated homes, for example, address both mitigation and adaptation. Insulating homes with low-carbon building materials adds yet another step in the right direction. Public policy and public finance can and must help that process. The sooner the funds flow for both mitigation and adaptation, the lower the total costs for all involved. Once again, it is the cost of capital that poses the biggest hurdle. More efficient homes are cheaper to operate. The challenge is to finance the initial investment.

Multilateral development banks hold the key

Multilateral development banks hold the key. The World Bank, regional development banks and institutions like the OPEC Fund can absorb risks that private investors will not, using their preferred-creditor status to crowd in capital at scale. There are plenty of creative ideas to do so. What’s needed is the urgency of implementation and of going from creative and innovative to replicable and standard practice that makes it deployable at scale.

The technologies are ready. The economics are favorable. The institutions, imperfect as they are, exist. What the future of climate finance requires is not a new invention but an old one: the political will to match the scale of the problem. In a world where Germans are installing solar panels as garden fences because they are almost as cheap as wood, while having the additional advantage of keeping the dog in and the car charged, the real question is how to get out of our own way and let scalable technologies replace outmoded infrastructure and modes of thinking. The money is there. The task is to make sure it flows where it is needed most.

Gernot Wagner is a climate economist at Columbia Business School, New York, where he is Faculty Director of the Climate Knowledge Initiative.

Originally published in: OPEC Fund 50th Anniversary Book (Vienna, Austria; July 2026): pp. 165-7.

Gernot Wagner

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