Themes

Financing

The challenge

As part of the preparatory work for COP29 and COP30, countries will be updating their Nationally Determined Contributions (NDCs) and Long-Term Strategies (LTS) to align their objectives with the Paris Agreement. Governments will be making crucial decisions on their climate transition pathways, mitigation and adaptation strategies and investment decisions. A key challenge is to understand the possible financing options and their respective effect on the economy.

Concurrently, countries are navigating through myriad economic challenges, including repercussions from the COVID-19 pandemic, supply-chain disruptions, mounting debt distress, persistently high inflation, and economic stagnation. These factors combined require robust financing policies that are not only financially sound but also facilitate an equitable low-carbon transition.

The stakes are high and neglecting climate action will make countries more vulnerable to future climate shocks. However, implementation of necessary measures, regulations and investments need to deal with the macroeconomic realities of budget constraints, fiscal rules, inflation, and exchange rate volatility that have the potential to increase debt and restricting the fiscal space. Without a sound understanding of the macroeconomic landscape, it will be difficult for both the public and the private sector to deploy all the required investments for a successful low-carbon transition.

In this context, the initial demand assessment of C3A highlighted that policymakers appreciate the necessity of accounting for the diverse economic processes and drivers that the transition entails in designing and in deploying sound and equitable financing policies.

Finding the right financing strategies for a resilient low carbon transition, amplified by the uncertainties of a rapidly evolving international macroeconomic landscape, has been recognized by Ministries of Finance as a key challenge requiring a comprehensive set of analytical frameworks. Various climate-macro-financial models are being developed in countries, universities and development institutions that can potentially assist Ministries of Finance in formulating robust policies.

Our objectives

We aim at informing the advancement of climate-finance diagnostic tools, transition financing strategies and policy as well as regulatory financing options.

The Hub brings together an extensive array of existing macroeconomic toolkits complemented by co-development of new and customized innovative tools and scenarios. Within the Hub, a significant effort is underway to compile and collate detailed climate-macro-financial databases.

In the next two years, the Hub is committed to the deployment of a range of demand-driven Decision Support Tools (DSTs). This initiative will be undertaken in close collaboration with MoFs, leveraging the collective expertise of the C3A knowledge network, as well as global and regional institutional partners.

Focus areas

Three categories of work are developed for supporting Ministries of Finance in their transition finance strategies after an initial demand assessment phase:

First, understanding the existing financing gaps estimated in the literature based on international engagements as well as investment needs, and emphasizing the underlying imbalances, both in terms of geographical distribution and purpose of the investments (adaptation/mitigation/nature).
Second, reviewing the array of risks faced by the agents called to drive the low-carbon transition and nature-related investments (public players, foreign or domestic stakeholders, non-governmental organizations) and the instruments that have been put forward to mitigate those micro- and macro- risks.
Third, laying out some of the key political economy factors that may help determine appropriate combination of financing instruments depending on the macroeconomic context and the countries’ structural and institutional features.

The core of this topic involves understanding how different transition finance options can give strong sustainable results when accompanied by a mix of structural policies that tackle the roots of countries’ economic, social and environmental vulnerabilities, as well as its specific political economy.