Raising finance to support developing country action: some economic considerations

This article explores the principles that should guide efforts to raise finance for climate action in developing countries. The main conclusions are that, first, there is an important role for private finance, which would be facilitated by having pervasive and broadly uniform emissions pricing around the world. Second, public finance is warranted by a range of market – and policy – failures associated with climate change and its mitigation. Third, raising tax revenues may be preferable to borrowing as a means of raising public finance, although the economics is not clear-cut. Public finance theory advocates taxing ‘bads,’ of which a number have escaped the tax base so far. But it discourages hypothecation of specific revenue streams to particular uses. Fourth, how much could or should be raised by the many specific proposals for finance for climate action in developing countries is often uncertain. So is how multiple schemes would interact. Several schemes could depress carbon prices. Earmarking is often assumed to be justified despite the arguments to the contrary. Fifth, two sets of proposals do particularly well judged against this analysis: (i) expanding the scale and scope of the CDM (ii) expanding the use of international financial institutions’ balance sheets.