Scaling Climate Finance in a Broken System

Will international financial architecture reform take center stage?

By Lara Merling and Moira Birss

Each year, governments gather under the United Nations Framework Convention on Climate Change (UNFCCC) at the Conference of the Parties (COP) to negotiate collective responses to climate change, including how action in developing countries will be financed.

The recently concluded COP30 in Brazil has been widely framed as an “implementation COP,” a moment where political commitments were expected to translate into delivery. Among the most prominent developments was the formal launch of the Baku-to-Belém Roadmap (the Roadmap), a process intended to scale up climate finance to at least $1.3 trillion per year by 2035 for developing countries. The Roadmap signals growing political recognition that climate action cannot advance at the required scale without much larger, more predictable financial flows, and it has helped bring long-standing finance debates to the center of the UN climate agenda.

This renewed focus follows an underwhelming outcome on climate finance at COP29 in Baku, where governments adopted a new collective quantified goal with a floor of just $300 billion per year by 2035, far below what developing countries have consistently identified as necessary. At COP30, the adoption of the Roadmap was an important acknowledgment that existing finance commitments fall far short of what climate action in developing countries requires. By naming the scale of the challenge and bringing issues like debt, fiscal constraints, and access to finance into the conversation, it helped legitimize concerns that have long been raised but often sidelined.

At the same time, the Roadmap stops short of engaging with the structural features of the global financial system that shape how finance is actually delivered. The central problem is not simply a shortage of climate finance, but the entrenched inequities within the international financial architecture that shape the terms and conditions on which different countries access finance.

Initiatives such as the Tropical Forest Finance Facility (TFFF), launched at COP30, sidestep engagement on these issues and instead turn to so-called “innovations” that aim to direct public resources to efforts around attracting private capital. The Brazilian government announced the TFFF as an initiative to provide direct funding to countries for tropical forest conservation, arguing that the program shifts from the market logic that values tropical forests for their ability to produce commodities and “ecological services.” But the fund’s design undermines this goal, as it relies on a model that subsidizes private returns and uses debt repayments and funds coming from the countries it is meant to support. Not only that, but without very strict investment guidelines, the Fund may also rely on financial flows from the same corporations engaged in the resource extraction that drives tropical deforestation.

As detailed in our recent work on green industrial policy and the international financial architecture, transformative climate action depends on more than mobilizing funds at the margins. What is required is a development strategy capable of delivering structural transformation at scale. Green industrial policy offers such a pathway. It combines public investment, strategic coordination, and long-term planning to build productive capacity, shift economies away from extractive models, and align climate action with jobs, equity, and development.

But green industrial policy cannot function in isolation from global finance. It depends on three conditions that the current financial architecture systematically undermines: long-term, predictable, and affordable public finance; policy space to deploy industrial strategies; and macro-financial stability that protects investment over time.

Under today’s system, achieving these conditions is extraordinarily difficult.

Countries in the Global South operate within an international financial architecture shaped by currency hierarchies, volatile capital flows, debt-dependent financing, and conditional access to liquidity. Exposure to global financial cycles means that changes in interest rates, risk sentiment, or monetary policy in advanced economies can trigger sudden capital outflows, currency pressures, and rising borrowing costs elsewhere. These shocks routinely derail public investment plans, even when domestic fundamentals have not changed.

When crises hit, most countries lack access to fast, unconditional liquidity. Instead, they are pushed toward IMF programs to stabilize markets and regain access to external finance. IMF support continues to act as a gatekeeper, signaling creditworthiness to investors, but at the cost of fiscal tightening and policy constraints. Austerity measures shrink public investment precisely when green industrial policy requires expansion, locking countries into cycles of debt adjustment rather than recovery and transformation.

These debt dynamics are closely intertwined with extractive development pathways and environmental harm. The pressure to meet debt service obligations diverts public resources away from sustainable land use, climate mitigation, and long-term investment. Empirical evidence shows that IMF programs are, on average, associated with higher rates of deforestation, reflecting incentives to intensify natural resource extraction to generate foreign exchange. At the same time, lower-income countries now spend several times more on debt payments than on responding to climate change, with debt service consuming a large share of public revenues, especially in the poorest countries. Climate shocks further compound these pressures, as countries are often forced to take on new debt to rebuild infrastructure when promised climate finance and loss-and-damage support fail to materialize.

Public development and climate finance does little to counter these pressures. Access is often tied, formally or informally, to alignment with market-led policy frameworks designed to reassure private investors. Even where conditions are not explicitly stated, countries that pursue state-led strategies, public ownership, or coordinated planning are treated as higher-risk environments. As a result, public resources are not used to build long-term state capacity or finance the foundational investments that could crowd in productive private activity. Instead, they are often directed toward de-risking projects and subsidizing the expected returns of private investors, even if this carries negative consequences for social or environmental goals.

Argentina provides an example. Seeking to ramp up soybean production for export—a process overseen by the World Bank—the country dismantled all of its agricultural regulatory bodies, including the national forest conservation agency. But because soybean production is a major deforestation driver in biodiverse Argentina, this actively undermined national and global efforts to mitigate climate change and biodiversity loss. Compounding this, climate-driven droughts in recent years have ironically made it harder for Argentina to earn the soybean export income needed to pay off its debts.

COP30 acknowledged some of the financial constraints, including the role of debt in limiting climate action and the need to create space for climate investment. Yet, the Roadmap put forth stops short of proposing debt relief, liquidity reform, or changes to the rules that govern access to finance. As a result, any new finance schemes risk being layered onto a system that severely limits the fiscal and policy space of many countries in the South. If the Roadmap is to become transformational rather than symbolic, it must be embedded within a broader agenda of international financial architecture reform.

This means shifting the focus from mobilization alone to the conditions under which finance is delivered. Expanding access to unconditional international liquidity is central, whether through more regular and equitable issuance of special drawing rights, broader access to central bank swap lines, or strengthened regional financing arrangements. Without reliable liquidity backstops, countries will continue to prioritize short-term stabilization over long-term climate investment.

Debt rules must also be rethought. Climate finance delivered as debt deepens fiscal vulnerability and constrains future policy space. Meaningful reform requires mechanisms for debt restructuring, relief, and standstills that recognize climate vulnerability and development needs, rather than treating debt sustainability as a narrow market confidence metric.

Equally important is restoring policy autonomy. Countries must be able to deploy green industrial policy without being penalized by credit rating agencies, investment agreements, or conditional lending practices. This requires reforming how public finance institutions assess risk and success, shifting away from market conformity toward developmental outcomes.

Climate finance is finally being recognized as central to serious climate action on the requisite scale. But without structural reform of the international financial architecture—the outlines for which we sketch out in our recent report—new targets and roadmaps will struggle to translate into real-world transformation. The challenge now is not only to scale finance, but to change the system through which it flows. Only then can green industrial policy deliver the just, large-scale transition that climate goals demand.

Colombia provides an example of how to start. True to campaign promises, President Gustavo Petro’s government has not issued any new licenses for fossil fuel exploration. Meanwhile, his administration has rapidly begun implementing community-scale and community-run renewable energy production projects across the country, with a focus on underserved communities. At the same time, Petro has also called on Global North countries to agree to debt-for-mitigation swaps to fund these efforts, alongside large-scale renewable energy production and decarbonization initiatives. No lender country has yet to agree, however, and so Colombia’s just transition efforts are unlikely to reach the scale of Petro’s ambitions.

This experience underscores a central conclusion of our report. Because the international financial architecture is deeply interconnected, advancing transformative green industrial policy cannot rely on isolated national efforts alone. As our report highlights, this requires “embedding financial reforms within a larger political project that reclaims public power, centers policy autonomy, and repositions finance as a tool, not a master.”