Key reasons to read this article:
- A record that comes with a price: Climate finance has hit a new high, but much of this will have to be repaid.
- The countries caught in the middle: Those grappling with the greatest climate risks are also grappling with mounting debt.
- The bankability problem: What happens when adaptation projects have to prove they can pay for themselves?
- A shift with consequences: As grants give way to loans, who decides which climate projects are funded and which aren’t?
Developed countries provided a record US$ 136.7 billion in climate finance in 2024, exceeding the US$ 100 billion goal for a third consecutive year, but 67% of public climate finance came in the form of loans that will have to be paid back. Furthermore, low-income countries received only 7% of the total funds, while lower-middle-income countries and upper-middle-income countries enjoyed the lion’s share, according to OECD data.
This reflects the quiet reordering of climate finance: away from grants, toward lending. It raises a question the sector has been slow to confront. Are the countries least responsible for the climate crisis being required to borrow their way through it?
The imbalance is already measurable. The 58 least developed countries and small island states in IIED’s analysis spent US$59 billion servicing debt in 2022 against US$28 billion received in climate finance with 25 being in debt distress or at high risk of it.
The drivers are becoming increasingly familiar: shrinking aid budgets, pressure to leverage scarce public money, and greater reliance on multilateral development banks and private capital. Less examined is what this actually does to the projects themselves, to the governments bearing the loans, and to the organizations delivering the work.
Tunisia evidences the pattern on a national scale. Responsible for 0.07% of global emissions, it needs US$29 billion between 2026 and 2035 to protect its water supply, farmland, coastline and public health. Very little of that will arrive in the form of grants.
The bankability test
Grants come with conditions. Debt adds one more proviso that adaptation was never intended to satisfy: a project must demonstrate the ability to generate revenues by itself.
“Debt requires a bankability test for work that was never meant to pass one,” Fadi Bou Ali, a sustainable finance specialist working at the intersection of capital markets and climate solutions, told DevelopmentAid. “The projects that are funded are those that generate cash flow or save costs, like water utilities with fees, irrigation, and urban drainage linked to taxable property, while early warning systems, land-use planning, watershed and rangeland management, and extension services are left out, not because they are less effective but because no one can be charged for them.”
Scale compounds the distortion. “The fixed costs of a structured loan mean one US$200 million project is approved while 50 smaller community projects do not, no matter what their benefits,” Bou Ali explained. The same logic also shapes the design of a project: “Coastal protection focuses on the port and hotel instead of the vulnerable settlement. Protection ends up focusing on asset value rather than actual risk.”
Fifteen years of instrument innovation has not changed this. Adaptation finance moved from US$33.6 billion in 2023 to US$34.7 billion in 2024, while the UNEP anticipates that developing countries’ needs will be more than US$310 billion a year by 2035, roughly 12 times current international public flows. “That is not a transition period,” Bou Ali commented. “That is a result.”
The gap is not only between what countries need and what they receive. There is also a gap between the type of adaptation that communities actually need and the type of projects that can satisfy the financial conditions attached to a loan.
Grants for planning, loans for concrete, nothing for upkeep
Within a national system, there is a discernible pattern. Amel Jrad, a hydrobiologist who spent three decades in Tunisia’s environmental institutions and previously headed the Tunis International Centre for Environmental Technologies, described a financing lifecycle that fractures in two places.
Firstly, she explained, funders set eligibility criteria that must align with national climate policy and the country’s Nationally Determined Contribution. The more difficult proviso comes later. “The grants that are provided are confined to the initial planning,” Jrad told DevelopmentAid. “When you reach the point of completing the project and financing all its components, that is when the difficulties begin.” At that stage, governments have to resort to their own budgets or to lenders.
For Tunisia, the arithmetic is clear. “Tunisia’s adaptation projects are large investments: water management, the reuse of treated wastewater, coastal erosion, health,” she said. “Financing of that kind has to be loans. It cannot be grants.” Water alone accounts for US$10.7 billion of the adaptation bill.
What follows is the challenge that practitioners experience almost immediately. “Even after a project is built and every stage is complete, most countries fall into the problem of financing maintenance,” Jrad said. This is not a marginal oversight. Operation and upkeep, she noted, “in most projects do not have funding of their own,” yet they are what gives a project “durability” once the ribbon has been cut.
That financial burden falls on budgets that are already stretched. Tunisia’s public debt stood at 82.2% of GDP in 2025, up from 67.8% prior to the pandemic, and close to 93% of tax revenues are absorbed by wages, debt interest and subsidies. Its national climate action plan assumes 60 to 65% of climate financing will come from private investment and public-private partnerships, an expectation resting on the same bankability logic that Bou Ali describes.
Who will fill the gap?
The providers who are emerging are frequently considered to be answer to that question. Moustafa Bayoumi, who leads the Centre for Climate Diplomacy at the Anwar Gargash Diplomatic Academy in Abu Dhabi, is cautious. “Climate finance flows from the Gulf Cooperation Council and other emerging economies are real and growing,” he told DevelopmentAid. “That said, most contributions come as loans rather than grants. The main reason is that none of these countries have climate finance obligations under the UNFCCC, in contrast to Western countries, many of which have yet to fulfil their obligations.” The main voluntary exceptions he could identify were the UAE’s contribution to the Loss and Damage fund and Qatar’s to the Adaptation Fund.
The imbalance runs deeper than just the funding itself. “Mitigation finance is much higher than adaptation finance, and countries in the region in general have struggled to tap into adaptation finance,” Bayoumi said. The OECD data bears this out: adaptation accounted for around a quarter of total climate finance in 2023 and 2024, while mitigation absorbed nearly two-thirds.
For an indebted country, a new funding source may therefore not mean better terms. “It would probably only change the creditor,” Bayoumi said. He pointed instead to debt-for-adaptation swaps, which “so far have had a positive impact in other regions”.