The most serious constraint on climate finance in developing countries today is not simply a shortage of capital, but a persistent mismatch between how finance is structured and how climate action is pursued.
Public investments that reduce environmental risk, enhance economic resilience and deliver long-term development outcomes are underway across many low- and middle-income countries. Yet because they do not conform to narrow ‘mitigation’ or ‘adaptation’ classifications, these interventions remain outside the scope of most international climate finance. This reflects a deeper systemic issue: undervaluing economic transitions that are central to effective climate responses in developing economies.
This disconnect is evident in Jharia, a coal-dependent district in eastern India, where the government is implementing a long-term hazard mitigation programme to extinguish underground fires, stabilise land and relocate at-risk communities. The approximately £511m (or $692m) Jharia Master Plan, approved by India’s cabinet in June 2023, is not formally designated as a climate finance project, nor is it linked to carbon markets, despite its potential to reduce fugitive emissions and reshape spatial governance.
The plan falls through the gaps of existing climate finance frameworks because it straddles risk management, mitigation and adaptation in ways the current system is not designed to accommodate.
Jharia’s experience is not an outlier. Across a number of developing countries, resilience outcomes are being generated through domestic policy and public investment strategies that originate within development planning rather than environmental programming. However, the prevailing climate finance discourse continues to frame developing countries in terms of what they lack – capital, technology and regulatory capacity – rather than recognising the systems they are building in response to their own priorities.
What the numbers say
In Kenya, over 326,000 farmers supported through public initiatives have adopted improved agricultural practices, leading to an average 41% increase in yields across key value chains, according to the World Bank’s Climate-Smart Agriculture Project.
In Ethiopia, the national agricultural research system has developed rust-resistant wheat varieties that have delivered productivity gains of up to 40% in targeted areas. These efforts are institutionally led, fiscally embedded and adapted to local contexts. They directly reduce climate vulnerability but are not typically eligible for climate finance.
In Rwanda, the national Green Fund (FONERWA) has supported the development of local financial instruments aligned with climate goals. A green bond issued by Prime Energy Plc in 2023 raised £5.5m on the Rwanda Stock Exchange, demonstrating that even relatively shallow capital markets can mobilise long-term finance for climate-aligned infrastructure. Meanwhile, countries such as South Africa, Colombia and Mexico have introduced carbon pricing and environmental fiscal reforms that are now embedded within national revenue systems. These are not pilot projects – they are fiscal and regulatory shifts driven by domestic policy choices.
Financing as innovation, not just support
Yet these forms of institutional innovation remain largely unrecognised within mainstream climate finance frameworks. The World Bank’s 2020 report on coal mine closure emphasised that successful transition strategies require more than compensation or site remediation. They rely on coordinated land use, labour market strategies and institutional capacity. Where such components are missing, closure programmes tend to underperform. Where they are present, as in Jharia, their potential remains unrecognised by financial mechanisms that continue to prioritise narrowly defined mitigation activities.
Jharia remains an active coal mining region. Its challenge lies in the management of accumulated risk and structural distortion. The master plan includes social infrastructure, resettlement, skills development and land-use management – measures that collectively signal a shift in how the state is managing environmental risk. The programme is funded through public expenditure and led by national and state institutions. Yet its climate impact remains invisible in formal reporting. Methane and carbon dioxide released from underground fires are not accounted for in India’s national emissions inventory. Nor are avoided emissions from suppression efforts quantified or monetised.
This omission has fiscal and institutional consequences. Without recognised carbon accounting, the intervention cannot access carbon markets, nor can it attract outcome-based or performance-linked finance. A substantial public programme remains disconnected from the financial tools that could reinforce its long-term objectives. This is not simply a missed opportunity for revenue – it reflects a structural problem within the international system, which continues to reward technical interventions while undervaluing governance-based solutions.
Integrated approaches
Multilateral development banks have, in recent years, advocated for more integrated approaches to just transition. Some institutions have begun to pilot mechanisms that reward outcomes across labour, land use and energy governance. But these mechanisms remain limited in scale, often designed as demonstration projects. The operating logic of climate finance remains heavily tilted towards siloed mitigation projects, which sidelines integrated programmes like Jharia’s.
The impact of this approach is evident in global finance patterns. The Climate Policy Initiative’s 2023 Global Landscape of Climate Finance notes that less than 20% of total climate finance reaches low- and lower-middle-income countries, despite their acute exposure to climate risk. Where finance is available, disbursement is often constrained by fragmented donor governance and rigid project templates that fail to accommodate cross-sector strategies.
Jharia demonstrates that meaningful public investment need not originate in climate ministries or development banks. It also shows that emissions reduction and resilience can be achieved through public administration, land governance and institutional reform. Recognising and scaling such approaches will require a shift in how climate finance is designed and evaluated. That includes developing methodologies for quantifying avoided emissions in unconventional settings, funding mechanisms that reflect the time profiles of institutional reform and a greater focus on how public institutions shape outcomes.
There are early signs of this shift. Several countries are consolidating fragmented investments into national transition frameworks. Others are experimenting with devolved finance and performance-based disbursement. Yet the dominant climate finance architecture still treats mitigation, adaptation and just transition as distinct tracks. This makes it difficult to fund interventions that operate horizontally – across institutions, over time, and through non-technical channels.
Jharia is not a mitigation project in the conventional sense. It is a governance-led response to cumulative risk. Carbon credits will not extinguish its fires, but ignoring the mitigation value of those efforts perpetuates the gap between national action and international recognition. If climate finance is to support transitions that are durable and inclusive, it must evolve to accommodate precisely these kinds of interventions: institutionally grounded, locally designed and systemically significant.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, Senior Non-Resident Adviser at the Bank of England, Senior Adviser of the International Forum for Sovereign Wealth Funds, and Distinguished Fellow at the Observer Research Foundation America.
OMFIF’s Sustainable Policy Institute Journal, which explores how financial institutions navigate climate risk, publishes on 15 July.
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