The Paris Agreement requires developing countries, like other nations, to take wide-ranging action to mitigate climate change. In order to finance large scale mitigation action, development banks blend climate finance with resources from international carbon markets. A team of experts is developing and analysing a range of solutions on behalf of the World Bank.
Action to mitigate climate change costs money. Many developing countries and emerging economies depend on international cooperation to reduce greenhouse gas emissions effectively. The Paris Agreement essentially sets out two mechanisms to finance these measures: climate finance and international carbon markets.
Where climate finance is concerned, developed countries provide financial support to less-developed countries. The latter are then able to reduce their emissions and to set these reductions off against their own emission reduction targets (or “Nationally Determined Contribution” – NDC). Although the international carbon markets outlined in Art. 6 of the Paris Agreement also support mitigation measures in the host country, the reductions or “mitigation outcomes” that are achieved are transferred internationally via these markets, and set off only against the target (NDC) in the acquiring country.
To finance comprehensive climate protection programmes, development banks are endeavouring to blend international climate finance with carbon markets. How might the resulting reductions in emissions be shared between the two instruments? This questions is at the heart of a discussion paper drawn up on behalf of the World Bank. Led by INFRAS Managing Partner Jürg Füssler, in the paper a number of climate experts analyse a range of options, and formulate potential solutions in the context of the Transformative Carbon Asset Facility (TCAF).
Proportional attribution, i.e. the allocation of outcomes in proportion to the net financial contribution (or “grant value”), is the most efficient economic incentive to promote greenhouse gas reduction measures. This approach also ensures environmental integrity of the international transfer. It means that the use of carbon markets does not lead to an increase in emissions globally.
One of the principal objectives of this World Bank-commissioned discussion paper is to stimulate international debate on this issue. More of INFRAS's current work on the Paris Agreement can be found here: 1) possible approaches, 2) cooperation mechanisms.