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An ‘equal effort’ approach to assessing the North–South climate finance gap

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  • Bowen, Alex
  • Campiglio, Emanuele
  • Herreras Martinez, Sara

Abstract

This study employs a number of Integrated Assessment Models to determine what the optimal financial transfers between high-income and developing economies would be if climate mitigation effort, measured as mitigation costs as a share of gross domestic product, were to be divided equally across regions through a global carbon market. We find these to be larger than both current and planned international climate finance flows. Four out of six models imply that a North–South annual financial transfer of around US$400 billion is required by 2050, while the other two models imply larger sums, up to $2 trillion. However, the outlook for multi-country carbon markets is not encouraging at the moment. We thus review some potential sources of funds that might be used to fill the climate finance gap, including public aid, private investment, development banks, and special climate-related facilities. We find the shortcomings of public climate finance appear particularly hard to overcome, and argue that expanding private finance, either in the form of Foreign Direct Investment or through the issuance of ‘green bonds’, appears to be a more promising direction. Policy relevance Climate change is a profoundly asymmetric development issue, as countries at lower stages of development are likely to suffer disproportionate climate damages and mitigation costs. High-income countries have agreed to mobilise $100 billion a year by 2020 ‘to address the needs of developing countries’. However, scaling up climate finance has been slow and, more importantly, targets have not been chosen on the basis of a ‘scientific’ assessment. This article presents a novel, model-based analysis of the ‘equal effort’ inter-regional climate finance that could provide useful insights to policy makers in future negotiations. The gap identified by comparing models’ projections to current and planned financial flows is large but not prohibitive. In particular, private investment appears to be the most likely channel to fill the gap, although various public policies need to be implemented to improve the risk/return profile of low-carbon investment opportunities.

Suggested Citation

  • Bowen, Alex & Campiglio, Emanuele & Herreras Martinez, Sara, 2017. "An ‘equal effort’ approach to assessing the North–South climate finance gap," LSE Research Online Documents on Economics 64108, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:64108
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    References listed on IDEAS

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    1. Hallegatte, Stephane & Fay, Marianne & Vogt-Schilb, Adrien, 2013. "Green industrial policies : when and how," Policy Research Working Paper Series 6677, The World Bank.
    2. Alex Bowen, 2011. "Raising finance to support developing country action: some economic considerations," GRI Working Papers 36, Grantham Research Institute on Climate Change and the Environment.
    3. Alex Bowen, 2011. "Raising climate finance to support developing country action: some economic considerations," Climate Policy, Taylor & Francis Journals, vol. 11(3), pages 1020-1036, May.
    4. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. Ulrike Kornek & Jan Christoph Steckel & Kai Lessmann & Ottmar Edenhofer, 2017. "The climate rent curse: new challenges for burden sharing," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 17(6), pages 855-882, December.

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    More about this item

    Keywords

    carbon market; climate finance; equitable development; integrated assessment models; North-South flows;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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