A recent technical note by C3A reviews the financing needs of Ministries of Finance for a climate- and nature-aligned development strategy, and the widely used financial instruments employed to this end.
The note explores micro and macro risks that can hinder effective financing and investment in the low-carbon transition and suggests approaches to design country-specific financing policy mixes that MoFs can draw on.
- Existing estimates of financing gaps for the low-carbon transition range from US$6–10 trillion annually.
- Current climate finance is unbalanced, with the bulk of financing benefiting the Global North and going toward mitigation rather than adaptation or nature-related financing.
- Risks facing investors called upon to drive the low-carbon transition and nature-related investments, which include technology or project risk at the micro level and country or policy risks, exchange rate risks, and risk of fiscal conditions impeding raising finance at the macro or institutional level, can hamper effective investment by inducing finance rationing.
Guarantee mechanisms, direct subsidies for investments, and regulatory reforms are designed to combat this rationing. Successful interventions require an understanding of transmission channels from financing strategies to macroeconomic variables, consideration of country-specific political economy, and accompanying structural policies.
Keywords
financial instrumentsfinancing gapsfiscal impactspolicy riskrisk assessment
