Navigating the Straits: Pull Financing for Climate and Development Outcomes

An increasing share of official development assistance is being used for climate-related activities. This trend is continuing despite the lack of comprehensive cost-effectiveness evidence to guide spending decisions and continuing concerns that few applications are effective or efficient mechanisms for either climate or development outcomes. This represents both a waste of scarce resources and a missed opportunity. This paper proposes that a well-designed pull financing mechanism, which identifies specific problems for which it will pay a pre-specified price for solutions that can scale up, has the potential to navigate these problems. When they work, a pull instrument can solve problems at scale at low cost by incentivizing private innovators to produce a socially beneficial product that people want to buy and use. However, the design challenges associated with them are not trivial: firstly, the identification and selection of technologies or problems for which the pull financing facility would be a sufficiently large portion of the market to shift incentives for innovators or producers (for technologies that exist but have not been taken up widely yet); and secondly, the ability to design contracts that incentivize socially beneficial innovation that are bought and used. This paper sets out the case for pull financing for climate and development activities, the challenges that need to be addressed to do it well, criteria for judging potential applications of pull financing and an initial indication of some sectors to which pull financing may be applied.