Climate Finance

Summary

The finance of climate mitigation and adaptation in developing countries represents a key challenge in the negotiations on a post-2012 international climate agreement. Finance mechanisms are important because stabilizing the climate will require significant emissions reductions in both the developed and the developing worlds, and therefore large-scale investments in energy infrastructure. The current state of climate finance has been criticized for its insufficient scale, relatively low share of private-sector investment, and insufficient institutional framework. This policy brief presents options for improving and expanding climate finance. These options include:

(1) reforming the Clean Development Mechanism (CDM) offset market to leverage large-scale foreign direct investment in emission-reducing activities in developing countries, most importantly in technology transfer;

(2) allocating emissions allowances in an international cap-and-trade scheme such that developing countries are (partly) compensated for their emission reductions;

(3) establishing an international greenhouse gas charge or other mechanism in major developing countries that creates domestic streams of revenue;

(4) reforming energy subsidies to free funds for government expenditure for climate mitigation and adaptation;

(5) employing export credit agencies to leverage foreign direct investment in climate-related activities;

(6) increasing bilateral and multilateral official development assistance for climate-related projects; and

(7) providing large-scale financing for incremental costs contingent on implementation of emissionreduction policies in developing countries.