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1、Bridging the Gap:How to Finance the Net-Zero TransitionW H I T E P A P E RJ A N U A R Y 2 0 2 5Images:Getty ImagesDisclaimer This document is published by the World Economic Forum as a contribution to a project,insight area or interaction.The findings,interpretations and conclusions expressed herein

2、 are a result of a collaborative process facilitated and endorsed by the World Economic Forum but whose results do not necessarily represent the views of the World Economic Forum,nor the entirety of its Members,Partners or other stakeholders.2025 World Economic Forum.All rights reserved.No part of t

3、his publication may be reproduced or transmitted in any form or by any means,including photocopying and recording,or by any information storage and retrieval system.ContentsForewordExecutive summary1 Defining the climate finance gap1.1 The climate finance gap in numbers1.2 What are the drivers of th

4、e climate finance gap?1.3 Developed versus developing countries:an enduring gap in fortunes1.4 Key sectors2 Mechanisms for change2.1 Strategic policy levers for effectively mobilizing transition finance2.2 Market instruments2.3 Hybrid mechanisms3 Case studies from Europe and the US3.1 European Green

5、 Deal3.2 European Union Emissions Trading System(EU-ETS)3.3 Carbon Border Adjustment Mechanism(CBAM)3.4 US Inflation Reduction Act(IRA)4 Bridging the climate finance gap:the big picture4.1 Principles for the design of market instruments to address the climate finance gapConclusionContributorsEndnote

6、s34556691313161922222324252627293031Bridging the Gap:How to Finance the Net-Zero Transition2ForewordThe financing of a lower-carbon economy is one of the defining challenges of our era.As Bill Gates argues,the energy transition will demand over$3.5 trillion in annual investments for decades.It is a

7、challenge of unprecedented scale,requiring us not only to reimagine global supply chains and financial systems but to ensure that the frameworks underpinning them are coherent,adaptable and equitable.This paper offers a timely exploration of the transition finance gap,a critical fault line in global

8、 efforts to meet climate goals.The gap is not simply one of capital and business case,but also of public policy and frameworks,as this paper makes clear.One example:while the European Union(EU)has sought to establish leadership in defining what constitutes“green”,its green taxonomy illustrates both

9、the ambition and the pitfalls of such an endeavour.The EUs approach,however well-intentioned,has often been bogged down in detail and a quest for exhaustive universality.This has resulted in a framework that is,by turns,too binary,too rigid and too complex to serve as a practical guide for investors

10、 and financiers.The authors of this white paper realize only too keenly that solutions need to work not just on paper,but in the real world.As the paper emphasizes,frameworks must reflect shades of progress,capturing both the risks and opportunities that come with moving from“brown”to“green”.The pro

11、vocative ideas in this paper challenge us to rethink a range of policy frameworks.They call for richer,more dynamic systems that can adapt to the evolving science,business case,markets and investor needs.The role of private capital is central to bridging the climate finance gap.Public funding,while

12、vital,cannot meet the scale of the challenge alone.Unlocking private sector engagement will require de-risking mechanisms and a regulatory environment that is clear,consistent and credible.This is particularly true in developing economies,where the barriers to investment high capital costs,political

13、 uncertainty and inadequate project pipelines are most acute.Development banks will need to use all their capacities operational,financial and technical to maximize the total amount of financing towards climate and development goals.“Crowding in”private finance at the scale needed will require much

14、greater and more effective use of guarantees,risk insurance and blended finance.What this paper ultimately calls for is boldness not only in ambition but in experimentation.We need the“persistent experimentation”,as exemplified by Franklin Roosevelts New Deal,to find what works across jurisdictions,

15、sectors and contexts.Transition finance,after all,is not just a technical and business challenge but a profoundly human one,requiring us to align economic incentives with societal values.I will not endorse every conclusion drawn here,but I find the arguments intriguing.This paper invites us to engag

16、e deeply with the complexities of the climate finance gap and to rethink how we define success in this space.It does not claim to have all the answers,but it offers a framework for asking the right questions questions that will define the future of our economies,our planet and our shared aspirations

17、.Huw van Steenis Partner and Vice Chair,Oliver Wyman;Member,World Economic Forum Global Future Council on Resilient Financial SystemsBridging the Gap:How to Finance the Net-Zero Transition January 2025Bridging the Gap:How to Finance the Net-Zero Transition3Executive summaryThis white paper addresses

18、 the funding gap in the transition to net zero.It aims to define the climate finance gap and explore its drivers,including the fragmentation in both climate policy-making and the global financial services sector.It explores how the gap affects developing and developed countries differently and the r

19、ole of“common but differentiated responsibilities and respective capabilities”in potentially ameliorating the developing-developed country divide.Additional factors contributing to the climate finance gap include insufficient public funding,limited private sector engagement,high costs of capital in

20、developing economies,political and regulatory uncertainty,inadequate project pipelines and the complexity of climate finance mechanisms and initiatives.The paper reviews the financial and economic mechanisms for addressing the funding gap.It specifically considers:Use of strategic policy levers to e

21、ffectively mobilize transition finance.Market-based instruments to address the negative externality effects of climate change and eliminate the market failure it engenders.Hybrid mechanisms that combine non-market and market principles to mobilize finance.Furthermore,it discusses specific flagship h

22、ybrid instruments from the European Union(EU),including the European Green Deal,EU Emissions Trading Scheme(EU-ETS)and the Carbon Border Adjustment Mechanism(CBAM),as well as the US Inflation Reduction Act.It describes and critically reviews the essential elements of these mechanisms,outlining the c

23、hallenges they may face in achieving their stated objectives.Against the backdrop of this analysis,the report concludes by outlining a set of principles for the design of instruments to address the climate finance gap.It argues for policy-makers to exploit the expansion in economic,financial and oth

24、er data generation in an increasingly digital world to craft innovative instruments that eliminate risk factors impeding the flow of critical capital to low-carbon innovation and climate projects.It further advances an ambitious agenda that establishes coherence,clarity,fairness and appeal at the he

25、art of climate change policy instruments design.Gbenga Ibikunle Professor and Chair of Finance,The University of Edinburgh;Founding Director,Edinburgh Centre for Financial Innovations,United KingdomBridging the Gap:How to Finance the Net-Zero Transition4Defining the climate finance gap1Annual invest

26、ment in the low-carbon transition needs to multiply seven-fold by 2030,if the world is to stand a chance of steering the climate towards a Paris-aligned pathway.The sixth assessment report of the Intergovernmental Panel on Climate Change(IPCC),1 published in 2023,provides a comprehensive assessment

27、of the current state of knowledge on climate change and its impacts.Most importantly,it emphasizes human activity such as the burning of fossil fuels,land-use changes and industrial processes as a significant driver of climate change and anticipates global surface temperatures will reach 1.5C above

28、pre-industrial levels between 2030 and 2035 in nearly all scenarios.In 2024,global surface temperatures temporarily exceeded 1.5C above pre-industrial levels,2 underscoring the need for urgent and sustained action on greenhouse gas(GHG)emissions reduction across all sectors of the global economy.How

29、ever,global action on the scale required to address the challenge requires several trillions of dollars in annual investments.The current level of global investment in climate-related initiatives falls significantly short,creating a substantial financing gap that impedes progress towards meeting cli

30、mate targets and mitigating climate change impacts.To bridge this gap,it is crucial to mobilize diverse sources of public and private finance by deploying effective policy frameworks and innovative financial and market instruments.International cooperation and support are critical in addressing the

31、finance needs of developing countries that are most vulnerable to climate change.Securing adequate funding for mitigation,adaptation and resilience not only advances climate action but also contributes to achieving the United Nations(UN)Sustainable Development Goals(SDGs)and to fostering equity more

32、 broadly.The climate finance gap for both mitigation and adaptation is considerable.According to the Climate Policy Initiative(CPI),annual climate finance requirements are projected to rise to$9 trillion by 2030 and exceed$10 trillion annually from 2031 to 2050.3 Mitigation finance alone must surpas

33、s$8.4 trillion per year by 2030,yet only$1.2 trillion was invested in 2021/2022.4On the adaptation front,financing reached a record annual value of$63 billion in 2021/2022,a 29%increase from$49 billion in 2019/2020.The great majority(98%)of this funding came from public sources.Development finance i

34、nstitutions(DFIs)were major contributors,accounting for 86%of the total.5 Despite this progress,the Adaptation Gap Report 2023,published by the UN Environment Programme(UNEP),6 identifies an annual adaptation finance gap of between$215 billion and$387 billion,just for developing countries this decad

35、e,and estimates that these countries require between 10 and 18 times the total global public finance currently flowing into adaptation.Developing countries,with funding requirements in excess of$2.4 trillion per year by 2030,7 face unprecedented challenges in mobilizing climate finance.According to

36、UN Trade and Development,8 an estimated$1 trillion needs to originate from sources external to these countries.Current flows of both climate and non-climate finance to developing countries continue to remain insufficient to meet their developmental needs,with total foreign direct investment(FDI)havi

37、ng fallen by 12%to$1.3 trillion in 2022.1.1 The climate finance gap in numbersAnnual climate finance requirements are projected to rise to$9 trillion by 2030 and exceed$10trillionannually from 2031 to 2050 yet only$1.26 trillion was invested in 2021/2022.Bridging the Gap:How to Finance the Net-Zero

38、Transition5Developed countries fulfilled their pledge to mobilize$100 billion in climate finance for developing nations in 2022.9 Nevertheless,the scale of the financing required for mitigation and adaption efforts,limited government budgets and competing priorities imply that public funding alone i

39、s inadequate for addressing climate change challenges in middle-and low-income countries.Enhanced public financing mechanisms are crucial,but so is the engagement of the private sector.Unfortunately,private investors often hesitate to commit capital to climate projects due to perceived risks,uncerta

40、inty regarding returns and insufficient policy support.10 This reluctance is compounded by high capital costs,political and regulatory unpredictability and the complex landscape of climate finance,which includes inadequate project pipelines and fragmented financial systems.11,12 Nevertheless,investo

41、rs prioritizing short-term returns over long-term sustainability goals remain,perhaps,the most significant impediment to investments in climate-friendly projects,including innovative or unproven yet promising technologies.To make long-term commitments,investors require stable and predictable policie

42、s,which are often lacking in many developing countries and regions.Pervasive institutional weaknesses in some developing countries can lead to higher perceived risk,thus deterring private sector investment in otherwise impactful climate-related projects.Although this is not an issue plaguing only de

43、veloping countries,the effects in this context are more acute when considered in tandem with other socio-economic challenges they may face.In addition,while many developing countries have broad targets in their Nationally Determined Contributions(NDCs),they lack specific plans and detailed energy tr

44、ansition strategies to achieve them.Absence of clarity in national plans and stable regulatory frameworks make it difficult to attract international investment and secure long-term private sector engagement.Private investors willing to engage in projects with higher risk profiles require higher rate

45、s of return and this could ultimately make such projects unviable when assessed using conventional mean-variance optimization assessment methods.For emerging economies with other and arguably more pressing priorities,this almost certainly limits the availability of funds for both mitigation and adap

46、tation initiatives,exacerbating the challenge of attracting sufficient investment to address climate change where the need is greatest.The challenges posed by these issues are reflected in the shortage of well-conceived and bankable projects that can attract investment.Reports suggest that many proj

47、ects lack necessary feasibility studies,technical assessments or clear business models,making it difficult even for donor organizations to commit funds.13,14,15 There is a dearth of the institutional capacity and technical expertise required to design and implement bankable climate projects in some

48、developing countries.Even when commitments for provision of financial assistance,technology transfer and capacity-building support from donor organizations are a near-certainty,16,17 the lack of proficiency in project preparation and knowledge of how to access and utilize climate finance remain conc

49、erns.Furthermore,the disjointed global financial system arising from geopolitical constraints and lack of coordination among funding sources creates inefficiencies,particularly for developing countries.Lack of coordination among multiple potential funding sources can cause difficulty in mobilizing a

50、nd deploying funds effectively,resulting in underinvestment.This fragmented climate finance landscape also suffers from a lack of standardized metrics and methodologies for measuring and reporting financial flows,introducing unhelpful opacity and unaccountability.This complexity,combined with insuff

51、icient expertise to navigate the landscape,can constrain private sector investment and impede the effective leveraging of resources.181.2 What are the drivers of the climate finance gap?There is a dearth of the institutional capacity and technical expertise required to design and implement bankable

52、climate projects in some developing countries.The climate finance gap between developed and developing countries is striking.Developed nations benefitted from 44%of the total tracked capital in 2021-22 while emerging markets and developing economies(EMDEs),excluding China,received only 14%,according

53、 to the Climate Policy Initiatives Long-Term Climate Risk Index.Although the investment in EMDEs has increased sharply in recent years,the 10 most climate change-vulnerable developing countries received just$23 billion between 2000 and 2019,less than 2%of the total capital outlay.19 1.3 Developed ve

54、rsus developing countries:an enduring gap in fortunesBridging the Gap:How to Finance the Net-Zero Transition6This persistent disparity highlights a broader investment gap for sustainable development in developing countries,which collectively require approximately$3-4 trillion per annum in climate-re

55、lated funding by 2030 to meet the UNs Sustainable Development Goals.20,21 A substantial portion of this requirement,approximately$2 trillion,is expected to be sourced domestically,with the remaining$1-2 trillion expected to be sourced from external financing,including international aid,FDI and loans

56、 from multilateral development banks(MDBs).22EMDEs and least developed countries(LDCs)face extraordinary challenges due to limited financial resources,while heightened vulnerability to the effects of climate change is yet another contributory factor to the plethora of obstacles to their development.

57、Higher cost of capital(often five to 10 times greater than in developed countries)23 is an unwelcome consequence of the negative externality that is climate change.Public finance,particularly through grants and concessional loans provided by MDBs,can play a crucial role in mitigating the perceived r

58、isks acting as a barrier to much-needed private sector investment.By spending on de-risking measures,MDBs can help lower the required rate of return on projects,thus making them more attractive to private investors.This blended approach is essential for scaling-up sustainable projects in EMDEs and L

59、DCs,especially given that the development priorities of these countries often centre around more immediate needs such as poverty alleviation,infrastructure development and energy access24,25 which often conflict with the contemplation or introduction of stringent net-zero compliant policies.This und

60、erscores the need for a balanced approach that integrates climate action with long-term economic growth,not at the expense of countries aspirations for development.For instance,economic development in many developing countries is undermined by energy poverty,with significant portions of their popula

61、tions lacking access to electricity and clean cooking fuels,26 vital elements for economic expansion.Hence,fossil fuel resource-rich developing countries,such as Nigeria and Angola,would appear more inclined to address this issue by exploiting their natural resources and existing technologies,where

62、they already have expertise.Nevertheless,technology transfer to these countries can help them better exploit their natural resources,such as solar power and tidal capacity,to generate renewable forms of energy.Since energy generation efforts in developed countries are predominantly focused on transi

63、tioning carbon-intensive infrastructure to low-carbon contexts(such as the decommissioning of North Sea oil infrastructure to facilitate offshore wind power generation in the UK),technology transfer can focus on repurposing existing infrastructure in developing countries.International cooperation an

64、d dialogue are vital for addressing the imbalance between developed and developing country climate finance and ensuring that developing countries achieve their climate goals without compromising their development objectives.Cooperation need not only centre on the provision of financial aid;it should

65、 also involve the sharing of knowledge and technology,which are crucial for building local capacity and resilience.27,28 Developed nations benefitted from 44%of the total tracked capital in 2021-22 while emerging markets and developing economies(EMDEs),excluding China,received only 14%.Bridging the

66、Gap:How to Finance the Net-Zero Transition7To this end,beneficiary countries must establish strong policy and regulatory environments,which are essential for the provision of clear market signals and for supporting the deployment of emerging technologies.29 The sharing of knowledge does not imply a

67、disregard for the differences in developing and developed country contexts crucially,the implementation of strategies will need to take into account the specific needs and contexts of individual countries.Nevertheless,tailored strategies to increase external support and strong international cooperat

68、ion are necessary to ensure that all countries can effectively participate in and benefit from the global transition to a sustainable,low-carbon future.Mobilizing private climate finance in LDCs faces significant challenges,including data gaps,lack of carbon pricing,macro-financial risks and a gener

69、ally high-risk investment environment.These regions often lack detailed data,particularly outside the renewable energy and transport sectors,making it difficult to accurately assess financing needs and hindering private investment.30 The absence of efficient and liquid carbon pricing mechanisms31,32

70、 and business models for infrastructure projects further discourages investment,as investors rely on these tools to predict potential returns.33 Macro-financial risks,such as concerns over debt sustainability,currency liquidity and market volatility additionally exacerbate these challenges,making it

71、 more difficult to attract both domestic and foreign private capital.34 This is concerning given the critical role private capital can play in addressing climate change.Private sector involvement is necessary to complement public sector funding and scale-up investments in sustainable infrastructure

72、and technologies.35,36 Collaborations between public authorities and MDBs can lead to the establishment of well-functioning joint initiatives through capacity building,consequently enhancing the effectiveness of climate finance projects and ensuring that investments are directed towards high-impact

73、areas.37 Customized capacity-building initiatives play a crucial role in cultivating conducive environments for investment,particularly by strengthening policy frameworks and providing technical assistance.38,39 Innovative financing mechanisms,such as guarantees and blended finance vehicles,can de-r

74、isk investments.Here,reinforcing the partnerships between MDBs working with LDCs and the private sector can improve the effectiveness of LDCs in mobilizing private investments,aligning MDB financing strategies with the needs and risk profiles of private investors.40Common but differentiated responsi

75、bilities and respective capabilitiesBOX 1Common but differentiated responsibilities and respective capabilities(CBDR-RC)is a fundamental principle in global climate policy,asserting that while all nations must address climate change,their responsibilities vary based on historical emissions and curre

76、nt economic capacities.41 This principle is vital for fairness,as it recognizes the greater responsibility of developed countries to lead mitigation efforts while supporting developing nations to meaningfully contribute to the task.42 In essence,equity within CBDR-RC requires wealthier nations to pr

77、ovide financial and technological assistance,helping poorer countries meet climate goals without hindering their development.43,44 This requires international cooperation.Developing countries need significant assistance to contribute meaningfully to the global transition to net zero.Hence,in the abs

78、ence of effective cooperation,the global response to climate change risks being insufficient and uneven.45,46However,implementing CBDR-RC faces significant challenges,including disagreements over the differentiation of responsibilities,the adequacy of support from developed countries and the complex

79、ity of monitoring and accountability mechanisms.47,48 National interests and capacities further complicate an effective application of the principle.49CBDR-RC is directly linked to Nationally Determined Contributions(NDCs)under the Paris Agreement,since it allows countries to set climate targets ali

80、gned with their unique circumstances.Beyond the principle of CBDR-RC,structured frameworks such as the Green Climate Fund(GCF),adaptation funding initiatives,Article 6 mechanisms and other instruments under the Paris Agreement are strategically designed to facilitate the flow of resources from devel

81、oped to developing countries,effectively operationalizing the commitments of CBDR-RC.50,51 These frameworks provide essential financial and technological support,helping developing nations to enhance their NDCs and contribute more effectively to global climate goals.However,challenges persist in ter

82、ms of political will,adequacy of funding and the efficiency of disbursement and implementation,which impact the overall effectiveness of the frameworks.52,53 Therefore,while CBDR-RC remains essential for stimulating global cooperation it continues to be a source of discord among nation groups,and it

83、s status as an independent legal principle is a subject of debate.For example,international maritime treaty instruments under the aegis of the International Maritime Organization(IMO)require that all ships be treated equally irrespective of flags(i.e.institutionalizing a principle of equal treatment

84、).Developed countries are keen to respect this principle as it pertains to the sector and argue that regulations that apply to the limiting of emissions in international shipping should be enforceable.Developing countries,however,take the opposing view and demand that the CBDR-RC principle be faithf

85、ully applied.This is symptomatic of the existence of conflicting viewpoints regarding whether CBDR-RC is an independent legally enforceable principle or not and the issue continues to plague international rulemaking.Bridging the Gap:How to Finance the Net-Zero Transition8The decarbonization of key s

86、ectors transport,energy,buildings,industry and agriculture is essential for achieving global climate goals and requires extensive financial investment and strategic innovation(see Table 1).Although all sectors of the economy demand attention with regards to decarbonization efforts,the needs of these

87、 sectors are more complex.Each sector faces unique challenges:for example,the high cost of electric vehicle(EV)infrastructure in the transport sector,or the substantial capital required for the energy sector to transition to renewables.While significant capital investments are essential,equally impo

88、rtant are robust policies,innovative technologies and equitable approaches that ensure the benefits of decarbonization are broadly shared.Blended finance will play a decisive role in mitigating investment risks,particularly in EMDEs and LDCs,while policy instruments,such as quantity and price incent

89、ive-based market instruments,can stimulate low-carbon innovation investment in developed and large emerging economies.1.4 Key sectorsSectorActual investmentAnnual investment by 2030Annual investment by 2050Transport$95.9 billion(2019-20)$2.5 trillion$3.2 trillionEnergy$1.74 trillion(2023)$4.5-5.7 tr

90、illion$125 trillion(cumulative)Buildings&infrastructure$14.2 billion(2019-20)$731 billionIndustrial$10.2 billion(2019-20)$320-540 billionAgriculture,forestry and other land use$6.5 billion(2021-22)$130 billionTABLE 1Actual investment vs.investment needed to transition key sectors towards a Paris-ali

91、gned pathwaySource:Climate Policy Initiative(CPI).54Transport sectorThe CPI55,56 estimates that greening the transport sector demands an annual investment of$2.5 trillion by 2030,rising to$3.2 trillion by 2050.These investments are essential for transitioning to EVs,developing EV infrastructure and

92、promoting alternative fuels for other forms of transport,including freight.However,the high upfront costs associated with EVs,and the necessary infrastructure,pose significant challenges,especially in emerging markets where disposable income is typically low.57,58 Blended finance instruments that im

93、prove the risk-return profile of transport projects could play a pivotal role in addressing these challenges by leveraging public and private capital to mitigate investment risks.Greening the transport sector demands an annual investment of$2.5 trillion by 2030,rising to$3.2trillionby 2050.Bridging

94、the Gap:How to Finance the Net-Zero Transition9Low-carbon technologies,such as high-frequency chargers and hydrogen refuelling infrastructure,which are vital for the widespread adoption of EVs and other clean fuel technologies,could be beneficiaries.59Equity considerations are paramount in this tran

95、sition.Ensuring that low-income communities can access affordable,low-emission transport options is essential for a just and inclusive transition.This involves providing subsidies and/or incentives for EV purchase(as in China and Norway)and developing green public transport systems that are both eff

96、icient and affordable(as in the Netherlands and Sweden).Equity-focused policies can help prevent the exacerbation of social inequalities,ensuring that all demographic groups benefit from improved air quality and GHG reduction.Achieving market tipping points for low-carbon transport solutions,where t

97、hey become competitive with high-carbon alternatives,is essential for driving private sector investment.60 This would involve creating a favourable regulatory environment,financial incentives and enabling infrastructure for innovators.Public policy must induce the market to favour green innovation b

98、y setting ambitious emission standards,offering tax incentives for green technologies and investing in enabling public transport infrastructure.Additionally,consumer behaviour and demand-side options,such as promoting public transport,efficient urban planning and digitization,remain vital for reduci

99、ng emissions and driving the transition to sustainable transport systems.61Energy sectorEstimates of the cumulative capital that the energy sector needs to achieve the Paris climate goals exceed$125 trillion by 2050,62 with annual investments of$4.5 to$5.7 trillion by 2030.The International Energy A

100、gency(IEA)estimates that in 2023,global investments in clean energy reached approximately$1.74 trillion,reflecting a growing commitment to renewable technologies.However,these investments fall significantly short of the estimated$2.7 trillion needed to be on track to meet Paris goals.63,64 The discr

101、epancy underscores the difficulty of meeting global climate objectives,particularly as$1.05 trillion was simultaneously invested in new fossil fuel projects over the same period.65This indicates a persistent investment in high-carbon infrastructure and the need for emphasizing a stronger shift towar

102、ds renewables.Managing consumer behaviour and demand-side strategies are an essential part of this shift.Policies can encourage energy conservation such as the adoption of energy-efficient appliances and smart grid technologies and significantly lower energy demand.Key policy frameworks include elim

103、inating fossil fuel subsidies,implementing carbon pricing to address the market failure implications of climate change as a negative externality and establishing renewable energy mandates.The result would be consumer adoption of clean energy technologies,such as EVs and solar panels,that can acceler

104、ate the sectors transition.Decarbonization of the energy sector offers significant long-term benefits,including reduced GHG emissions,improved air quality and energy security.The path forward involves a comprehensive approach that includes technological innovation,robust international partnerships a

105、nd,most importantly,public engagement.Policy-makers must engage in meaningful consultation with consumer groups and take due consideration of the effects of policies on the most vulnerable in society all core elements of climate policy-making.These issues are addressed in Chapter 4.Buildings and inf

106、rastructureDecarbonizing the building sector is core to meeting global climate targets and requires an estimated$731 billion annually through to 2050.66 This investment must focus on energy efficiency improvements,retrofitting existing structures and integrating renewable energy sources within the b

107、uilt environment.The sectors energy consumption,particularly for heating and cooling,contributes significantly to GHG emissions.67 However,despite the potential for substantial economic benefits,decarbonization of built infrastructure often presents limited financial attraction to private investors

108、as standalone projects,necessitating the deployment of innovative financing mechanisms to further de-risk them.Policy can play an important role in changing this paradigm by updating rules for the built environment,an approach that has been introduced with success in the EU.For instance,energy perfo

109、rmance standards and building codes have been fundamental in setting benchmarks for energy efficiency in new and existing buildings;this has made investment by energy service companies(ESCOs)financially attractive due to legislation increasing demand for buildings that comply with performance standa

110、rds.Carbon pricing also helps to internalize the environmental costs of carbon emissions,thus making energy-efficient solutions more competitive.Additionally,incentives for adopting renewable energy technologies,such as tax credits or rebates for installing solar panels and heat pumps,can drive cons

111、umer uptake and investment in clean technologies.Governments can also implement mandatory retrofitting policies for existing buildings,requiring upgrades to meet modern efficiency standards.$1.74trillionglobal investment in clean energy in 2023.$2.7trillioninvestment needed to be on track to meet Pa

112、ris goals.$1.05trillionglobal investment in new fossil fuel projects in 2023.Decarbonizing the building sector is core to meeting global climate targets and requires an estimated$731billionannually through to 2050.Bridging the Gap:How to Finance the Net-Zero Transition10For EMDEs and LDCs,the decarb

113、onization of buildings presents unique challenges and opportunities,because these countries often face significant financial and technological barriers,as well as difficulties around the implementation of rules such as lack of stringent building codes and energy performance standards which complicat

114、e efforts to improve building efficiency.Public awareness campaigns and educational initiatives focused on the economic benefits of energy conservation at the household level can help shift consumer behaviour towards the adoption of energy-efficient appliances,renewable heating technologies and the

115、use of smart technologies for energy use management.Addressing the unique needs of EMDEs also requires a focus on equitable solutions that consider the socio-economic realities of these regions.The support of MDBs and other international institutions is crucial for overcoming the initial cost barrie

116、rs associated with energy-efficient technologies and renewable energy integration.For example,MDBs can provide long-term technical assistance to help local governments develop and implement robust building codes and standards,as well as assist in the design of financial instruments that attract priv

117、ate investment into the building sector.These can involve the funding of departments of technical experts working with and within relevant governmental departments and non-governmental entities.Industrial sectorDecarbonizing the industrial sector requires between$320 and$540 billion annually through

118、 to 2050.68,69 Finance is essential for deploying cutting-edge technologies and optimizing industrial processes,especially in“hard-to-abate”industries such as aluminium,aviation,cement and concrete,chemicals,shipping,steel and trucking that require tailored approaches.70 These industries are signifi

119、cant contributors to global GHG emissions and implementing innovative solutions such as carbon capture,utilization and storage(CCUS),green hydrogen and enhanced energy efficiency measures are crucial to decarbonizing industrial processes.71The World Resources Institute highlights critical strategies

120、 for these transitions,including reducing demand for high-emission materials such as steel and cement,electrifying industrial processes and minimizing methane emissions from the oil and gas sector.72 Meanwhile,the World Economic Forums First Movers Coalition is leading the way in setting targets and

121、 highlighting breakthrough technologies to decarbonize these sectors.In countries where financial systems are less developed and investment risks are perceived as being higher,blended finance is emerging as a crucial tool for mobilizing the necessary capital for industrial decarbonization.73 As a hy

122、brid instrument that leverages public funds to attract private investment,blended finance typically works by offering de-risking mechanisms such as political risk insurance,guarantees from MDBs,concessional loans and strong regulatory frameworks that ensure stability and transparency.74 These measur

123、es are essential in mitigating risks associated with investing in nascent technologies and infrastructure required for a low-carbon transition.Additionally,creating an enabling environment through policy frameworks that include carbon pricing,energy efficiency standards and renewable energy mandates

124、 is important for guiding consumers and other economic agents towards sustainable practices.75 These policies not only incentivize the adoption of low-carbon technologies but also provide a predictable and supportive regulatory landscape that encourages long-term investment.76 Potential breakthrough

125、 technologies such as CCUS and green hydrogen can play a pivotal role in reducing emissions in hard-to-abate industries,despite being economically unfeasible and challenging to implement in other contexts.CCUS technology can capture up to 90%of CO2 emissions from industrial sources,while green hydro

126、gen,produced using renewable energy,offers a viable alternative to fossil fuels in high-temperature industrial processes.77 The UK government is investing in CCUS to capture and sequestrate emissions from industrial processes such as hydrogen production and energy generation from natural gas and bio

127、mass.However,despite their potential,commercializing these technologies is difficult because of high upfront capital costs,technological immaturity and financing gaps.78 The UK governments approach to CCUS is instructive:following an initial investment of$28.5 billion,the government expects to attra

128、ct around$10.5 billion in additional investment from the private sector.The challenges are even more pronounced in EMDEs and LDCs,where infrastructure,capacity development and public funding are often lacking.Overcoming these hurdles requires a multi-faceted approach involving substantial financial

129、investments,robust policy support,international cooperation and innovation in technology and business models.79,80Agriculture,forestry and other land useThe agriculture,forestry and other land use(AFOLU)sector is a significant contributor to global GHG emissions,accounting for around 22%of total glo

130、bal emissions.81 This sector is critical to both emissions reduction and carbon sequestration efforts.AFOLU has substantial potential for mitigating climate change,particularly through practices such as reforestation,afforestation and improved land management strategies that can enhance forests and

131、soils capacity to absorb CO2 and act as critical carbon sinks.Decarbonizing the industrial sector requires between$320 and$540billionannually from 2021 to 2050.Bridging the Gap:How to Finance the Net-Zero Transition11However,as with other sectors,the financial requirement for decarbonizing this sect

132、or is equally substantial.Estimates suggest cashflow requirements of up to$130 billion annually by 2030.82 This is far higher than the average investment level in 2021-22,estimated at$6.5 billion.83 The gap in funding is more acutely felt in EMDEs,where the problem is compounded by financial barrier

133、s and heightened risks fuelled by unstable markets and regulatory uncertainty.Hybrid finance mechanisms can de-risk investment opportunities in the AFOLU sector and help attract private capital.84 Instruments such as concessional loans,guarantees from MDBs and crop insurance offer options for reduci

134、ng the perceived risks associated with long-term,high-risk projects.85,86 Incentivizing sustainable practices in the sector may call for the implementation of a range of policy and market-based instruments,such as carbon pricing and associated stringent and enforceable regulatory frameworks.87 For e

135、xample,some carbon pricing instruments can be adapted to make it economically viable for landowners to adopt practices that increase carbon sequestration.Emissions trading schemes can provide financial incentives for reducing emissions,thus encouraging investment in low-carbon technologies and susta

136、inable land-use practices.88 Additionally,eco-labelling and certification schemes along with public engagement campaigns can drive consumer demand for sustainably produced goods,further incentivizing producers to adopt environmentally friendly practices.The AFOLU sector offers significant opportunit

137、ies for technological innovation.Breakthrough technologies such as precision agriculture,which utilizes data analytics and satellite technology to optimize farming practices,can significantly reduce emissions.89,90 Advanced biotechnologies,including genetically modified crops that require less water

138、 and fertilizer,can contribute to emissions reductions.91 In forestry,technologies such as drones and remote sensing can improve monitoring and management,helping to optimize forest growth for carbon sequestration and prevent illegal logging.92Integrating climate goals into agricultural and land-use

139、 policies is critical for aligning the sector with broader decarbonization strategies.This integration involves ensuring that food production systems are sustainable and resilient to climate impacts,thereby supporting long-term food security.93 Community engagement remains an important aspect of pol

140、icy initiatives in this sector,as involving local stakeholders in decision-making processes enhances their effectiveness and sustainability.Incorporating traditional knowledge and practices into modern land management strategies can also improve outcomes and ensure cultural appropriateness.94Bridgin

141、g the Gap:How to Finance the Net-Zero Transition12Mechanisms for change2Mechanisms to mobilize finance for the climate transition range from policy interventions to market-based measures,with hybrid public-private approaches offering a potent blend of the two.Concessional finance and incentivesOffer

142、ing capital at below-market rates or under more favourable conditions can mitigate investment risks and enhance the attractiveness of climate-related projects in EMDEs and LDCs.Doing so not only encourages private sector engagement in critical areas such as renewable energy and climate adaptation,bu

143、t also ensures that essential initiatives can advance despite financial limitations.In practical terms,this involves extending low interest rates and longer repayment periods,thus making it more likely that conventional discounted cashflow analysis will yield competitive net present value estimates

144、and internal rates of return for climate projects.By making projects more financially attractive,additional funding can be generated for climate-related initiatives.The strategic application of incentives such as tax breaks and subsidies can stimulate growth and innovation in sectors with significan

145、t climate impacts,including energy and transport.In this way,investments encouraged by the strategic application of concessions align with broader development goals,supporting economic growth while advancing environmental sustainability.Concessional finance lowers overall capital costs and mitigates

146、 financial risk.As a result,it is well-suited to advancing sustainability initiatives with long-term environmental and social benefits but requiring significant upfront investment.By providing more advantageous terms for climate projects than the market offers for competing alternatives,concessional

147、 finance directs timely capital into sectors vital for achieving sustainable development and climate resilience.2.1 Strategic policy levers for effectively mobilizing transition financeBridging the Gap:How to Finance the Net-Zero Transition13Examples of concessional finance include:Green Climate Fun

148、d(GCF)Climate Investment Funds(CIF)World Banks International Development Association(IDA)More concessional finance is required,particularly in emerging and developing countries.At COP29 in Baku,MDBs announced plans to play a pivotal role in mobilizing concessional finance,estimating that by 2030,the

149、y could collectively provide$120 billion annually for climate financing in low-and middle-income countries(of which$42 billion would be dedicated to adaptation)and$50 billion annually for high-income countries,while aiming to catalyse an additional$65 billion annually from the private sector across

150、all regions.95 Subsidies and grantsSubsidies and grants can lower the cost of capital for sustainable projects,making them more attractive to private investors and accelerating the adoption of low-carbon technologies.By targeting early-stage innovations and sectors with significant barriers to entry

151、,these tools can help overcome market inefficiencies,thereby driving the transition to a sustainable economy.96 However,subsidies and grants can also create market distortions by encouraging dependence on financial support,which can lead to inefficiencies and reduced incentives for innovation.Additi

152、onally,poorly designed subsidies and grant programmes may yield unintended outcomes,potentially diverting resources away from more impactful climate and sustainability initiatives97 and entrenching economically ruinous rent-seeking behaviour.This implies that,while access to incentives is critical f

153、or the net-zero transition,the long-term financial and economic viability of beneficiary firms must remain the core factor in the provision of financial support.Thus,factors such as effective lobbying should not play a role in deciding who benefits from incentives.In EMDEs and LDCs,these challenges

154、are often exacerbated by weaker institutional frameworks and limited financial resources,making it harder to design and implement effective subsidy and grant programmes.98 Therefore,subsidies and grants,as with all strategic policy instruments,must be carefully designed to address local needs and al

155、ign with regional technical capacities.Focus should also be on building technical capacity to aid constructive implementation.Examples of impactful subsidy and grant programmes include:Caribbean Catastrophe Risk Insurance Facility,a multi-country risk pool providing technical assistance funded by gr

156、ants alongside climate-related insurance products.Chinas EV subsidies,which have positioned it as a global leader in EV adoption and production.Brazil Investment Plan(BIP),which addresses drivers of deforestation and forest degradation.Indias Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiya

157、n(PM-KUSUM)Scheme,aimed at ensuring energy security for farmers.Subsidy and grant financing for the transition to a sustainable future reflects both substantial public sector investment and ongoing challenges related to attracting private sector financing.Governments around the world provide a combi

158、ned average of$30 billion annually in grants for climate mitigation,with$26 billion allocated to transport subsidies;however,there has been a decline in grant financing for adaptation.99 Paradoxically,fossil fuel subsidies remain high,with$1.3 trillion in explicit subsidies and a further$5.7 trillio

159、n in implicit subsidies recorded in 2022 alone.100 This highlights the difficulty in shifting financial support from fossil fuels to sustainable initiatives,although the scientific evidence on the negative effects of fossil fuel on our world has never been more incontrovertible.101Regulatory reforms

160、By crafting policies that incentivize green investments,enhance transparency and set clear environmental standards,governments can create an environment that attracts capital and drives innovation.Strategic regulatory reforms are particularly relevant to encouraging growth in transition finance as t

161、hey can provide the necessary framework to ensure that climate financing initiatives are sustainable and impactful.The policy realm in many developed economies is replete with regulatory and policy levers that are essential in driving the transition towards sustainability,each targeting key areas to

162、 align economic activities with environmental goals.When these measures are well-implemented,they can help address the fundamental issues driving the gap,such as market failure.Fossil fuel subsidies remain high,with$1.3 trillion in explicit subsidies and a further$5.7trillionin implicit subsidies re

163、corded in 2022 alone.Bridging the Gap:How to Finance the Net-Zero Transition14Some examples of climate-focused regulation include financial disclosure requirements (mandating companies to disclose climate-related financial risks)and green finance regulations and taxonomies(establishing standards for

164、 sustainable investment instruments).Both these sets of regulations encourage transparency and accountability,help investors understand the environmental risks in their portfolios and thus facilitate informed decision-making.Energy efficiency standards,tax incentives and mandatory risk assessments a

165、re some of the other relevant regulatory routes that can help reduce the transition finance gap,conserve resources and promote a more sustainable economic model.Implementing regulatory mechanisms poses distinct challenges in both developed and developing countries.In developed nations,the main compl

166、exity lies in overcoming entrenched interests,regulatory inertia and the integration of new policies into existing frameworks without causing significant economic disruption.102,103 Meanwhile,developing countries face obstacles such as limited institutional capacity,insufficient financial resources

167、and the need to balance growth with sustainability.104 The disparity in technical expertise and infrastructure further complicates the uniform application of much needed regulations,often leading to uneven progress in global sustainability efforts.105 These challenges can be overcome by fostering in

168、ternational cooperation,enhancing capacity-building efforts,securing adequate financial resources and tailoring regulatory frameworks to local contexts.106,107 The integration of robust regulatory frameworks is essential for a global shift towards a low-carbon global economy.By enforcing financial d

169、isclosures,streamlining processes,incentivizing green investments and strengthening environmental regulations,policy-makers can effectively mobilize the necessary resources to achieve climate goals.These strategic levers not only guide investments but also ensure that the transition to a sustainable

170、 future is equitable,efficient and aligned with the broader objectives of environmental preservation and economic resilience.Yet regulatory interventions in themselves are only a first step to bridging the transition finance gap and addressing the externality imposed by climate change.As an example,

171、the United Kingdom financial services regulator,the Financial Conduct Authority(FCA),introduced a rule aimed at enhancing climate-related disclosures by premium listed companies in January 2021 and has recently concluded consultations on additional proposals to strengthen disclosure.Crucially,these

172、rules will facilitate reporting on the emission intensity of companies value chains,which in turn signals their exposure to climate risks and,theoretically,impacts their cost of capital.The inability of asset managers,banks,investors and consumers to obtain information on these risks as part of the

173、global financial system constitutes a negative externality that drives emission-intensive activities and climate change.The FCAs rules and others similar to it will only go so far towards addressing the issue,but without the emergence of a private sector-led agenda to improve disclosure regimes and

174、generate accessible data,the information required for efficient climate risk-resilient asset allocation and consumer consumption decisions will continue to elude stakeholders.Bridging the Gap:How to Finance the Net-Zero Transition15The market-led nature of the global economy suggests that market ins

175、truments are a critical component in plugging the transition finance gap.Market instruments include the following:Sustainable debt Tradable certificate schemes Performance-based financing mechanisms Sustainable investment fundsThese instruments offer a means of incentivizing sustainable practices an

176、d directing capital towards environmentally beneficial projects.They have been shown to be effective as economic instruments that can help drive innovative responses to environmental challenges while preserving economic benefits that might otherwise be sacrificed under a command-and-control approach

177、.For example,Stavins108 estimates that the US Acid Rain programme implemented in 1995 led to$250 million in annual savings in contrast to the command-and-control alternative,while Carlson et al.109 report that the programme allowed for annual estimated savings of about$1 billion in comparison to sav

178、ings that the direct regulation alternative would have afforded.This welfare effect was achieved while also recording a decline in sulphur dioxide emissions by US electricity producers of more than 35%to 10.2 million tonnes in 2005.Thus,by integrating market mechanisms into global and local strategi

179、es,the complexities of climate finance can be addressed,making it more accessible and effective for a broad range of stakeholders.Incentive-based market instrumentsIncentive-based instruments include the following:Carbon taxes Cap-and-trade systems Baseline-and-credit schemesThese instruments are de

180、signed to change behaviour.In the context of climate change,they create conditions that encourage consumers to substitute away from emission-intensive products.Theoretically,the broad economic and behavioural changes driven by these instruments could be realized by applying them to either producers

181、or consumers at any stage of the value chain.However,incentive-based tools like cap-and-trade are predominantly used at the producer level,where producers must participate in the trading of permits or allowances.Regulating producers is practical because they are better placed to bear the costs of tr

182、ading emission permits in a cap-and-trade scheme.Furthermore,governments can more easily enforce regulations on hundreds or thousands of companies rather than millions of individuals.Thus,in an incentive-based system the cost of compliance is expected to be passed through to consumers.Specifically,w

183、hat consumers pay for products is driven by the emission-intensity of the products.Naturally,consumers will limit their consumption of the more emission-intensive products or,in extreme cases substitute away from emission-intensive products altogether,assuming there are alternatives.Internal combust

184、ion engines and EVs are a good example.Incentive-based regimes simply require consumers to react to pricing,thereby not adding extra cognitive load to their decision-making.Moreover,since consumers can express their preferences,these tools theoretically enable the system to find the most efficient m

185、ethod to reach targeted emission levels without dictating specific changes in consumption behaviour.Following the adoption of the Kyoto Protocol in 1997,cap-and-trade schemes such as the EU Emissions Trading Scheme(EU-ETS)and baseline-and-credit schemes such as the Clean Development Mechanism(CDM)an

186、d Joint Implementation(JI)emerged as the core market instruments for driving emission reduction(see Figure 1).Incentive-based instruments such as the CDM,JI and EU-ETS operate using tradeable certificates,permits and allowances.Examples include renewable energy certificates(RECs),issued for renewabl

187、e electricity produced,and carbon credits,allowances and permits,which are traded as“permissions to pollute”.Implementing tradeable certificate schemes requires stringent regulatory measures to ensure certificate integrity,prevent fraud and manage market supply and demand.This underscores the need f

188、or a clear monitoring,reporting and verification(MRV)process to ensure the schemes effectiveness and credibility.2.2 Market instrumentsBridging the Gap:How to Finance the Net-Zero Transition16Emissions trading instrumentsFIGURE 1Policy creates obligation to surrender permits1234Policy limits number

189、of permits in circulation by setting an economy-wide capPolicy allows the trading of permits among firms in the economyExchanges facilitate the trading of permits as financial instrumentsTimeBaseline-and-creditCap-and-tradeEmission permitsGreenhouse gas emissionsGreenhouse gas emissionsFirmBAFirmACa

190、p set on the total amount of GHGs that can be emitted per firmFirm B(which has emitted more than its cap)buys permits to compensate from Firm A(which has emitted less than its cap)Independent auditor verifies and certifies emission reductions.Permits corresponding to reductions are issued3Emissions

191、from the implementation of project are monitored(project emissions)2Establish the level of emissions in a business-as-usual scenario(baseline emissions)1Can be linked by trading issued permits in cap-and-trade schemeSource:Carbon Markets,University of Edinburgh Business School.Policy-makers must add

192、ress potential issues such as double counting and maintain a balance between supply and demand that supports policy aims.Specifically,events such as the oversupply-induced decline in the price of carbon financial instruments(CFIs)traded in the EUs signature cap-and-trade scheme,the EU-ETS,in 2006,ca

193、n be avoided by establishing clear rules for issuing,trading and retiring certificates,as well as through the development of reliable tracking systems.Additionally,integrating the schemes with other policies and ensuring stakeholder participation can enhance their effectiveness in promoting sustaina

194、bility goals.110 However,while cap-and-trade and baseline-and-credit schemes often become intertwined organically,leading to the exchange of credits across schemes,integrating them with other schemes often presents challenges.Too many policies to address the same overarching challenge can be detrime

195、ntal to the success of the individual policy instruments.A case in point is the situation in Europe,a continent that has no shortage of policies aimed at engendering a low-carbon economy.A review of energy efficiency initiatives and instruments conducted by Ibikunle and Okereke111 found that the UK

196、and Germany each have approximately 100 different instruments that are often duplicated and ineffectively implemented.Bridging the Gap:How to Finance the Net-Zero Transition17Negative energy pricing is one of the unintended consequences of many of the initiatives designed to boost renewable energy g

197、eneration.Substantial declines in emissions from energy generation also depress CFI prices on EU-ETS platforms,thus potentially rendering the EUs flagship climate change instrument ineffective.The EU-ETS is only effective if its price signals are high enough to drive low-carbon innovation and discou

198、rage emissions production.Consequently,there needs to be an emphasis on policy coherence in the development of climate change policy instruments.The EU-ETS is discussed at greater length in Chapter 3.2.Sustainable debt instrumentsAccording to the Climate Bonds Initiative,the sustainable debt market

199、reached a cumulative size of$4.4 trillion in 2023.Sustainable debt instruments include the following:Green bonds:these have thrived due to increasing climate commitments and growing investor demand for sustainable assets.112 Green bonds were the largest category in 2023,at$2.8 trillion in issuance.S

200、ocial bonds:these have also gained in prominence,particularly in the context of the post-pandemic drive to address socio-economic disparities.113 Social bond issuance totalled$821 billion in 2023.Sustainability bonds:these offer a comprehensive approach,funding projects with dual environmental and s

201、ocial benefits.They incentivize issuers to meet specific sustainability targets,reflecting a trend towards outcome-driven finance.Sustainability bond issuance totalled$768 billion in 2023.Despite the strong growth observed in the sustainable debt market,2023 saw substantial declines in some instrume

202、nts.Sustainability bond issuance fell by 31%and development bank issuance declined by 71%,reflecting market challenges amid global economic uncertainty.114 However,emerging markets continued to demonstrate resilience,with new issuers such as Saudi Arabia entering the social bond market.115 Sovereign

203、 issuances,especially from Mexico and Thailand,played significant roles,while the Latin America and Caribbean region led in sustainability bonds issuances in 2023.116 Nevertheless,the overall plunge in issuances underscores challenges faced in raising climate financing in the presence of inflationar

204、y pressures and highlights the need for stronger market incentives and policies to maintain growth.Improving broader economic conditions,comprehensive policy and regulatory frameworks,standardization and transparency will be needed to sustain the markets growth,maintain investor confidence and marke

205、t integrity and address other challenges ahead.117,118 Performance-based finance mechanismsPerformance-based financing mechanisms enhance accountability by directly tying financial rewards and compensation to the achievement of defined and measurable outcomes,funding recipients incentivized to meet

206、environmental or other targets.Existing performance-based instruments leverage market principles to promote renewable energy,sustainable practices and environmental conservation.Instruments such as power purchase agreements(PPAs)and investment tax credits provide financial incentives linked to measu

207、rable outcomes,encouraging efficiency,innovation and investment across various sectors.Collectively,they demonstrate how performance-based approaches can align financial incentives with sustainability goals.Performance-based incentives have been successfully implemented to promote renewable energy a

208、nd sustainable projects.For example:Germanys market premium scheme under the Renewable Energy Sources Act(EEG)provides renewable energy producers with a performance-based premium,incentivizing them to compete to optimize energy generation in line with market demand.India utilizes solar PPAs with per

209、formance-based incentives to drive the scale-up of solar energy.In the US,California and other states offer performance-based incentives within renewable portfolio standards,rewarding generators for renewable energy output.South Africas Renewable Energy Independent Power Producer Procurement Program

210、me(REIPPPP)ties financial rewards to energy output,to enhance competition and efficiency in the renewables sector.Chile and Brazil have implemented auction systems where developers bid to supply renewable energy,reducing costs and increasing investment in renewables.119 These examples indicate how p

211、erformance-based finance can play a transformative role by directing capital towards projects that deliver measurable environmental or social outcomes,thereby enhancing the impact of limited financial The sustainable debt market reached a cumulative size of$4.4trillionin 2023.Bridging the Gap:How to

212、 Finance the Net-Zero Transition18resources.120 However,successful implementation is dependent on effective MRV regimes,an area where some EMDEs and LDCs face challenges.Capacity building that accounts for the unique conditions of these economies can help and MDBs and international donor agencies ar

213、e well-placed to offer such support.Sustainable investment fundsSustainable investment funds are a central element for financing the global transition to a low-carbon,climate-resilient future.By integrating environmental,social and governance(ESG)criteria into investments,capital can be directed tow

214、ards projects promising both financial returns and positive environmental impacts,thus addressing investment gaps in critical sectors such as renewable energy and transportation.As the average investor seeks mean-variance optimization,by focusing on environmental and social goals,sustainable investm

215、ent funds offer investment opportunities to a growing segment of responsible and value-driven investors.Providing a vehicle for aggregating the capital for this non-negligible proportion of the investing class,the funds can drive the adoption of green technologies and best practice,thus promoting br

216、oader market transformation.The scale of sustainable investment funds is growing,with trillions of dollars under management,driven by initiatives such as Europes Sustainable Finance Disclosure Regulation(SFDR)and the alignment by the Glasgow Financial Alliance for Net Zero(GFANZ)of$130 trillion in a

217、ssets with net-zero pathways by 2050.121 These efforts target both institutional and retail investors to mobilize capital towards sustainable projects,particularly in regions with critical needs.However,scaling-up the funds presents challenges,such as the lack of standardized impact measurement fram

218、eworks.The success of sustainable investment funds depends on strong regulatory frameworks to ensure transparency and prevent greenwashing.Initiatives such as SFDR can enhance market clarity and investor confidence.Despite some progress in this direction,overcoming this issue requires global coopera

219、tion in an increasingly multipolar world.For EMDEs and LDCs,higher investment risks due to political instability and underdeveloped financial markets constitute a further obstacle.122,123 This creates challenges for adaptation financing in the developing world,as projects in many LDCs which often la

220、ck clear revenue streams are unlikely to attract private investment.Public and donor funding thus almost always becomes the only source of investment for these countries.124 Hybrid transition finance mechanisms blend policy with market strategies to mobilize capital for climate action.By leveraging

221、the strengths of both public and private sectors,hybrid mechanisms can bridge the gap between public policy objectives and the financial returns sought by private investors.As such,they could potentially become the most consequential stream of finance in the drive to accelerate the global transition

222、 to a low-carbon economy.Mechanisms such as blended finance,public-private partnerships(see Figure 2),feed-in tariffs(FiTs),“feebates”,insurance and risk-sharing tools are emerging as indispensable elements in mobilizing transition finance.2.3 Hybrid mechanismsBridging the Gap:How to Finance the Net

223、-Zero Transition19Example of a public-private partnership(PPP)FIGURE 2Source:Global Commission on Adaptation.UsersDevelopment finance institutions(DFIs)BanksLendersProject company(private sector)ConcessionaireSponsorsInvestorsShareholdersHost government(public partner)InitiatorSuppliersEquipment/mat

224、erialGeneral contractorsDesign&constructionOperator&maintenance contractorOperations&maintenanceBlended financeBlended finance combines public and private capital to de-risk projects and attract private sector participation.According to OnePlanetLab,125 it mobilizes an estimated$15 billion annually.

225、The strategic capital leverage potential of blended finance instruments is particularly vital in supporting climate adaptation and mitigation efforts in EMDEs and LDCs,where high risk perception routinely deters investment.Therefore,improving investment viability by utilizing concessional funds for

226、first-loss absorption or guarantees can enhance the risk-return profile of climate-related projects,making projects in sectors such as energy,which are vital to EMDE and LDC development goals,more attractive to private investors.Public-private partnerships(PPPs)PPPs facilitate collaboration between

227、governments and private entities by combining public oversight with private sector efficiency and innovation,to facilitate risk-sharing,resource optimization and enhanced project viability.This approach is especially tailored to capital-intensive initiatives such as clean energy and sustainable infr

228、astructure.With government budgets feeling the strain of unprecedented spending in the wake of the Covid-19 pandemic,the risk sharing and resource optimization elements of PPPs help bridge the gaps in public funding of socially-relevant climate projects and offer the opportunity to reduce the financ

229、ial burden on governments.Bridging the Gap:How to Finance the Net-Zero Transition20Image credit style 2:Location or name hereFeed-in tariffs(FiTs)FiTs provide long-term payment guarantees to renewable energy producers,encouraging investment in clean energy technologies.FiTs guarantee a fixed,above-m

230、arket price for electricity supplied to the grid over a specified period,offering investors stable returns and reducing investment risks,especially for renewable energy projects with high upfront costs.They have been globally implemented with demonstrable success,leading to substantial growth in ren

231、ewable energy capacity,particularly in developed and large emerging economies.Germany,China and India are excellent examples of countries that have used FiTs to drive clean energy investment and technological innovation.However,implementing them in emerging markets that are prone to financial and re

232、gulatory constraints remains a challenge.126,127 Furthermore,integrating FiTs with existing policies and infrastructure requires robust institutional frameworks and technical expertise,which may be limited in some developing country contexts.128FeebatesFeebates impose fees on high-emission products

233、and provide rebates for low-emission alternatives,thereby financially incentivizing sustainable choices by consumers.Such choices constitute a signal to producers to invest in low-emission outputs,so feebates stimulate innovation by incentivizing the development and adoption of low-emission products

234、.They can be designed to be revenue-neutral by using collected fees and taxes on emission-intensive products to fund the rebates on low-emission alternatives.The flexibility and adaptability of feebates imply that the mechanisms can be tailored to various sectors,including the following:Automobile i

235、ndustry:higher registration fees on high-emission vehicles;rebates for low-emission or electric vehicles.Energy efficiency:higher rates for inefficient appliances;rebates for energy-efficient appliances.Building codes:fees for non-compliant,energy-inefficient buildings;incentives for highly efficien

236、t buildings.Agriculture:fees on high water-consuming irrigation systems;rebates for the deployment of water-saving technologies.Waste management:fees on excess waste generation;rebates for recycling and composting initiatives.These examples illustrate the versatility and effectiveness of feebates ac

237、ross various sectors in promoting sustainable practices.By making environmentally friendly choices more economically attractive,consumers are more likely to choose low-emission vehicles,energy-efficient appliances and sustainable building practices.This shift in consumer behaviour not only reduces e

238、nvironmental impact but also encourages manufacturers and service providers to innovate and offer more sustainable options,further reinforcing the cycle of sustainable development.129 Insurance and risk-sharing Lastly,insurance and risk-sharing mechanisms mitigate financial risks associated with cli

239、mate-related investments,making it easier for private investors to support sustainable projects.The inability to mitigate investment risks is a significant barrier to investments in climate projects and instruments that reduce perceived risks in such projects are therefore crucial in enhancing their

240、 viability and attractiveness to private investors.130 The provision of a safety net,which boosts private sector engagement and investor confidence,is particularly important for financing in high-risk markets and contexts,including emerging economies and innovative technologies.131 Examples of insur

241、ance and risk-sharing mechanisms include the following:Political risk insurance Credit guarantees First-loss guarantees Currency hedging Revenue guaranteesEach mechanism is often tailored to mitigate specific investment risks,such as political instability,borrower defaults,currency fluctuations or i

242、nitial project losses.Multi-sovereign guarantees,which involve multiple countries backing a guarantee fund,are especially useful structures that can help achieve higher leverage ratios and attract more private capital by spreading risk across several sovereign entities.132,133,134 Bridging the Gap:H

243、ow to Finance the Net-Zero Transition21Case studies from Europe and the US3Europe has chosen a more market-focused approach driven by regulations to promote its climate goals while the US government has opted for policy incentives.However,both have attracted criticism for being overly protectionist.

244、The European Green Deal aims to make Europe climate-neutral by 2050.135 The European Climate Law,passed in 2021,sets legally binding targets for achieving climate neutrality by 2050 and reducing emissions by at least 55%by 2030 compared to 1990 levels for all EU member states.This establishes a firm

245、 framework for accountability and intermediate targets to ensure continuous progress and adherence to common but differentiated responsibilities and respective capabilities(CBDR-RC).Its comprehensive scope integrates climate action across all sectors,aims to align with international agreements and p

246、romotes innovation.Additionally,the law emphasizes mechanisms for public participation and socio-economic considerations,with a view to ensuring a fair and inclusive transition to a sustainable long-term future.136The European Green Deal provides the strategic framework and comprehensive policy init

247、iatives to achieve the goals set by the European Climate Law,encompassing a wide range of strategies,policies and interventions across multiple sectors.It aims to promotes economic growth,job creation and social inclusion.137 It exists alongside the Fit for 55 policy,introduced in 2021 a comprehensi

248、ve set of proposals aimed at achieving the EUs legally binding emission reduction targets across sectors.138 The transition to a low-carbon economy offers new opportunities for investment,innovation and green jobs across all sectors.Hence the mechanisms driving this change aim to restore the EUs bio

249、diversity,decarbonize industrial systems,transition food systems to resilient and sustainable models,shift to circular systems of production and consumption,and implement EU forest and deforestation strategies.139 Several incentive-based market instruments and funding mechanisms,some of which pre-da

250、te the Green Deal,are employed to operationalize it,including the EU-ETS,ETS2,140 NextGenerationEU Recovery Plan,141 Multiannual Financial Framework(MFF)2021-2027,142 and the Just Transition Mechanism.1433.1 European Green DealThe European Climate Law,passed in 2021,sets legally binding targets for

251、achieving climate neutrality by 2050 and reducing emissions by at least 55%by 2030.Bridging the Gap:How to Finance the Net-Zero Transition22The EU-ETS was established as the primary policy tool to fulfil the EUs commitments under the Kyoto Protocol.Launched in 2005,it has expanded to become the larg

252、est carbon market globally based on the volume of emission allowances traded.By 2009,the system represented 96.46%of all global allowance transactions.While the scheme is no longer as dominant as it was with the coming onstream of other cap-and-trade schemes,such as Chinas ETS(now the worlds largest

253、 in terms of emissions covered),it remains the dominant driver of global carbon pricing.In 2022,12.5 billion tonnes of emission allowances with a value of$958 billion were traded on EU-ETS platforms.In its first two years,between 2021 and 2023,Chinas ETS recorded a cumulative trading value of 239.9

254、million tonnes of emission allowances valued at$1.5 billion.The EU-ETS covers around 40%of the EUs GHG emissions.144 The scheme sets a cap on the total amount of emissions that can be emitted by power plants,industrial facilities and aircraft operators covered by the system.The cap is reduced annual

255、ly in line with the EUs climate targets,using the so-called linear reduction factor.This is currently 4.3%and will increase to 4.4%from 2028 to 2030.Regulated entities can trade emission allowances within this cap,providing a financial incentive to reduce emissions.The EU-ETS significantly contribut

256、es to reducing emissions in the EU:from 2005 to 2023 it helped reduce emissions from European power and industry plants by approximately 47%.145Recent developments have expanded its scope and ambition.The cap on emissions has been tightened to achieve a 62%reduction in covered emissions by 2030 comp

257、ared to 2005 levels.146 The scheme now includes maritime transport emissions starting in 2024 and will cover road transport and buildings under a new separate system,the ETS2,which will become operational in 2027.147 ETS2 aims to further reduce emissions by 42%by 2030 compared to 2005 levels,focusin

258、g on emissions from fuel combustion in buildings,road transport and small industrial sectors.148 These expansions reflect the EUs ambition to achieve climate neutrality by 2050 and the comprehensive nature of the blocs carbon pricing mechanisms.3.2 European Union Emissions Trading System(EU-ETS)From

259、 2005 to 2023,the EUs Emissions Trading System helped reduce emissions from European power and industry plants by approximately47%Deploying EU-ETS revenuesBOX 2The EU has set up three funding programmes to deploy the revenue generated through the auctioning of allowances in the EU-ETS:Innovation Fun

260、d:one of the worlds largest financing programmes dedicated to deploying innovative,net-zero technologies,particularly in the energy and industrial sectors.It is funded with the auctioning of around 530 million EU allowances(estimated at 40 billion).149 One EU allowance(EUA)gives the holder the right

261、 to emit one tonne of CO2e.Modernization Fund:more targeted,focusing on modernizing energy systems in lower-income EU member states.With a projected total budget of 57 billion from 2021 to 2030,150 it is financed through the auctioning of 2%of the total EUAs issued from 2021 to 2030,with an addition

262、al 2.5%from 2024 to 2030.151Social Climate Fund:established to ensure that addressing climate change is inclusive by mitigating the social impact of the EU-ETSs expansion,particularly on vulnerable households,micro-enterprises and transport users.152Bridging the Gap:How to Finance the Net-Zero Trans

263、ition23CBAM could increase the cost of delivered steel to the EU by about 56%and 49%for India and China,respectively,by 2034Climate change as an unusual externality demands collective,global action.Hence,when the global community fails to act collectively,taking meaningful action individually can pu

264、t a country or region at a significant economic disadvantage through carbon leakage.Specifically,businesses from countries with no or lax emission constraints,all other things being equal,may benefit from trading internationally at lower costs in comparison to those from countries or blocs taking me

265、aningful action on reducing emissions,such as the EU.The EUs Carbon Border Adjustment Mechanism(CBAM)is the EUs response to this challenge.It is a policy tool designed to address carbon leakage by imposing a carbon price on imports from countries with climate policies less stringent than those of th

266、e EU.It combines both regulatory and market-based elements to level the playing field for EU businesses that must comply with EU-ETS regulations while encouraging global adoption of more ambitious climate measures.CBAM started in 2023 with a transitional phase focusing on reporting requirements.Impl

267、ementation,including financial penalties,is expected by 2026 and full implementation by 2034.153The revenue generated from CBAM,which will be based on EU-ETS prices,could be substantial,with potential uses for funding both mitigation and adaptation efforts within and outside the EU.154 Specifically,

268、these revenues could be allocated to support the transition to low-carbon technologies,fund climate resilience projects or contribute to global climate finance,particularly aiding developing countries under the principle of CBDR-RC.155 The implementation of the CBAM faces several critiques and chall

269、enges,both within the EU and internationally.One of the primary concerns for European producers is the potential increase in production costs due to the need to account for the carbon content of imports.156 This could,perversely,put some European producers at a competitive disadvantage relative to p

270、roducers in countries with more lenient carbon regulations.Additionally,the administrative complexities associated with CBAM such as the precise calculation of the carbon content in imported goods and navigating intricate reporting requirements could impose further financial and logistical burdens o

271、n businesses.157,158 Internationally,the CBAM has been criticised for its potential to exacerbate trade tensions,particularly with countries that view the mechanism as a form of protectionism.Critics argue that CBAM could be perceived as a unilateral EU measure and lead to retaliatory trade measures

272、 from other countries.159 Additionally,there are concerns about the compatibility of CBAM with World Trade Organization(WTO)rules,particularly regarding non-discrimination principles.160,161 The mechanism could be seen as a violation of WTO agreements if it is perceived to unfairly target imports fr

273、om specific countries or disrupts free trade.Wood Mackenzie,a data analytics company,estimates that CBAM could increase the cost of delivered steel to the EU by about 56%and 49%for India and China,respectively,by 2034.162CBAM also raises various sectoral concerns,especially for industries that are h

274、eavily reliant on carbon-intensive processes.Key sectors targeted by CBAM,including steel,aluminium,cement and fertilizers,are particularly anxious about the increased costs associated with compliance.163 These industries already face MRV challenges under the EU-ETS,and the additional burden of the

275、CBAM could further strain their competitiveness in global markets.For instance,CBAM will increase production costs in the steel and aluminium sectors,potentially making them less competitive against producers from countries with more lax environmental regulations when trading with a third country.16

276、4 Moreover,the cement industry has raised concerns regarding the accuracy and fairness of carbon content calculations,which are crucial for determining the carbon price on imports.165 There is also apprehension about how CBAM will interact with existing measures such as the EU-ETS,which already impo

277、ses non-negligible costs on these sectors.166 The sector lobbies argue that without adequate protection or compensation,such as free allowances or rebates,CBAM could inadvertently lead to more carbon leakage,where production shifts to countries with less stringent climate policies,undermining the EU

278、s environmental goals.While these concerns are valid,there is also the potential that the sheer size of the EUs single market will lead to the blocs emergence as the principal climate policy-maker through the implementation of CBAM.Carbon content will become a vital component of international trade,

279、forcing producers to reflect the abatement costs of GHG emissions in their prices.As the cost grows,higher-emitting producers will find the EU a less economically attractive trading destination,167 thus providing an opportunity for low-emitting producers to capitalize and compete for market share.In

280、 the long run,as EU demand for low-emitting products rises,high emitters will be incentivized to decarbonize their products.CBAM thus holds some promise as an instrument for addressing the unusual externality that is the core driver of the climate finance gap.3.3 Carbon Border Adjustment Mechanism(C

281、BAM)Bridging the Gap:How to Finance the Net-Zero Transition24The Inflation Reduction Act(IRA),passed into US law in 2022,represents an ambitious effort to accelerate the USs transition to a low-carbon economy,targeting critical sectors with substantial financial and policy support and incentives.Acc

282、ording to the USs Congressional Research Service,the measures in the IRA are projected to reduce US GHG emissions by approximately 33%to 40%below 2005 levels by 2030.Consistent with the EUs approach,the IRA constitutes a mixture of means to scale-up transition finance:Regulatory policies:such as tax

283、 credits for renewable energy generation Market-based instruments:such as methane emission charges Hybrid mechanisms:such as PPPs and EV grants and subsidiesSpecifically,it includes the Production Tax Credit(PTC)and Investment Tax Credit(ITC)to bolster renewable energy generation and infrastructure

284、investment.For transportation,it introduces Clean Vehicle Tax Credits to accelerate the adoption of EVs and funds alternative fuel infrastructure development to foster a sustainable transportation network.Additionally,it allocates$1 billion for clean heavy-duty vehicles and$3 billion for reducing ai

285、r pollution at ports.168 In connection with this,restrictions on fossil fuel resourcing are imposed,such as methane emission charges on specific petroleum and natural gas facilities.The manufacturing sector receives approximately$41 billion in tax credits for advanced energy production,underscoring

286、the focus on domestic clean energy manufacturing.For buildings and energy efficiency,the IRA offers Energy Efficiency Tax Credits to encourage retrofitting homes and businesses,reducing energy consumption while also supporting the use of low-carbon building materials.169With respect to environmental

287、 and climate justice,funding is made available for ensuring that disadvantaged communities gain equitable access to the benefits of climate initiatives,thus seeking to address long-standing environmental disparities.Agriculture,forestry and land conservation are also key components,with the Act prom

288、oting sustainable agricultural practices and funding forestry programmes focused on carbon sequestration,which are crucial for mitigating climate change.Furthermore,the IRA invests in climate research to enhance understanding and inform future policy decisions,ensuring that climate strategies are da

289、ta-driven and effective.Cross-cutting provisions support interagency collaboration to ensure that climate considerations are integrated across various sectors for cohesive and effective policy implementation.170 This approach potentially positions the IRA as a pivotal framework for achieving the USs

290、 climate goals.However,in light of the November 2024 US elections,the Act faces an uncertain future.The new Republican administration with the support of a Republican-controlled legislature may,at a minimum,be inclined to undermine its continued implementation.3.4 US Inflation Reduction Act(IRA)The

291、IRA contending with its internal inconsistencies and other concerns BOX 3The IRA has faced several criticisms,primarily concerning its potential economic and environmental shortcomings.Critics argue that the Act could inadvertently drive up energy prices and inflation,especially as the demand for cl

292、ean energy increases,without immediately mitigating the higher costs of fossil fuels during the transition.171 Concerns have been raised about the effectiveness of its environmental justice provisions,which some believe may not adequately address the needs of the most disadvantaged communities.172 T

293、he provisions tying renewable energy development to continued fossil fuel extraction a political necessity in a highly polarized policy-making environment have been criticized as counterproductive and perpetuating fossil fuel dependence.173 Challenges in implementation and regulatory coordination al

294、so pose significant risks to its success,with doubts about whether the current infrastructure and supply chains can meet the ambitious targets of its framers.174 Partners,such as the EU,have protested at its domestic production provisions,contending that they constitute a potential violation of trad

295、e rules and distort the market.There are also European concerns regarding the subsidies offered by the IRA and the potential growth of the US market for low-carbon innovation and technologies enticing European companies to the US at the EUs expense.The measures in the IRA are projected to reduce US

296、GHG emissions by approximately 33%to 40%below 2005 levels by 2030.Bridging the Gap:How to Finance the Net-Zero Transition25Bridging the climate finance gap:the big picture4Three principles can help guide the successful deployment of market mechanisms as consumer behaviour-altering instruments:cohere

297、nce,fairness and appeal.An emerging conclusion in this paper is that meaningful action on bridging the climate finance gap will require an innovative integration of market and non-market instruments.It demands the design of policies that can mobilize private and public sector funding as part of an a

298、mbitious agenda to equitably reduce global dependence on emission-intensive consumption with little to no adverse economic effects.This is a tall order.The scale of the challenge suggests that the majority of the financing to drive meaningful action on climate change must be mobilized from the priva

299、te sector by deploying incentive-based market instruments that eliminate or significantly reduce the risk associated with climate projects.However,the strategic allocation of public funding also plays a critical role.Carbon pricing instruments,such as the EU-ETS and CBAM,appear to be effective examp

300、les yet these instruments need to be resilient enough to address the often-overlooked misattribution challenge affecting such incentive-based tools.For example,in theory,cap-and-trade the most significant market instrument currently deployed globally(e.g.China ETS,EU-ETS)streamlines the vital featur

301、es that make the implementation of carbon pricing workable.Nevertheless,even if the process generates an“accurate”price signal that can impact consumption patterns significantly enough to achieve policy goals,product price signals by themselves are unlikely to offer the information consumers need to

302、 change their behaviour over the long term.This is because the evolution of prices may be due to factors not directly related to the emission-intensity of products,preventing consumers from being able to accurately assess the reasons for price changes in their consumption decisions.This is a crucial

303、 issue,because addressing climate change requires consumers to accurately infer the emission-driven costs of their consumption decisions.When this happens,consumers will gravitate towards lower-emission consumption,thus imposing higher risk on emission-intensive production activities.This paper prop

304、oses a set of principles that could be applied in developing instruments that can help accelerate the arrival of this future.At the core of the proposed principles is an acknowledgement of the opportunity presented by the combination of a data-rich economic environment,which has emerged in recent ye

305、ars,and an improved understanding of human behaviour.These two factors can help address the practical issues of price discovery,information transmission and consumer engagement.To address these issues,some jurisdictions are considering augmenting their existing upstream carbon pricing schemes with f

306、eatures that engage consumers more directly,or have already done so.Germany introduced a de facto tax of 25/tCO2e on petrol,diesel,heating oil and gas to ramp up the cost of dirty energy and incentivize greener ways of living,while Canada is examining the implementation of personal low-carbon saving

307、s accounts which consumers pay into each time a hydrocarbon-based fuel is purchased.Incentive-based schemes that are well-designed and elicit the expected response from consumers can be expected to lead to an intensification of capital flow towards low-carbon innovation as a result of the eliminatio

308、n of the negative externalities that make low carbon projects financially unfeasible.Germany introduced a de facto tax of 25/tCO2e on petrol,diesel,heating oil and gas to ramp up the cost of dirty energy and incentivize greener ways of living.Bridging the Gap:How to Finance the Net-Zero Transition26

309、By designing consumer-focused incentive-based mechanisms that capitalize on big data-driven innovation and fairly entrench individual responsibility,policy-makers will align their efforts to target market failures.This is fundamental,because achieving net zero will require change across the economy

310、and society.The UK governments Ten Point Plan for a Green Industrial Revolution is a good example.175 The plans ambition to deliver“jet zero and green ships”requires changes in the volume and patterns of foreign travel,while accelerating the shift to zero-emission vehicles,green public transport,cyc

311、ling and walking requires consumers to purchase EVs,adopt ride-sharing habits and change their day-to-day patterns of movement.This paper presents three principles that can help guide practical policy design actions to mitigate some of the political and behavioural constraints that impede the succes

312、sful deployment of market mechanisms as consumer behaviour-altering instruments.The three principles are coherence,fairness and appeal.CoherenceIt is important that instruments are designed to help their targets,such as consumers and businesses,understand the costs and environmental implications of

313、each design choice.Design options and associated implementation and operational costs should be tested to investigate the relative advantage or disadvantage of one choice over the other,with the need for ease of understanding and engagement being the goal.For example,under carbon pricing regimes tha

314、t place instruments at the producer level,businesses face trading costs.It is important to examine the likely range of trading costs that makes one type of carbon pricing regime,such as cap-and-trade and carbon taxes,equivalent from the perspective of a businesss total costs,and assess how carbon pr

315、icing design elements,such as supply control mechanisms,can mitigate these costs.An example of a supply control mechanism is the market stability reserve(MSR),176 which the EU deploys in the EU-ETS.From an informational perspective,while cap-and-trade,for example,does not offer the same degree of pr

316、ice certainty as a carbon tax,it can play a much stronger role in raising awareness of the implications of CO2 consumption on business and consumer budgets.In this context,the conditions under which cap-and-trade and taxes generate the same level of emission reductions would need to be examined,alon

317、g with how design elements,such as price collars,may make the former the preferred carbon pricing instrument.FairnessFor fairness purposes,policies should explicitly account for variations in target characteristics,such as the socio-demographics of consumers and economic attributes of businesses.Sur

318、veys indicate voter support for using climate change policy instruments if the potential negative effect on low-income households is mitigated.177 Therefore,policy-makers should endeavour to quantify the potential distributional impacts of design choices by investigating how different types of house

319、holds and businesses are affected by the instruments they design,both in terms of implementation and their design features.For policies affecting households,microeconomic analysis can be undertaken using datasets combining household expenditure,the associated emission for each commodity group and es

320、timates of consumer demand for different commodities.This analysis can then be used to quantify sensitivities to price changes for different commodities for households of certain socio-demographic attributes(and businesses financial constraints)as well as their associated emission equivalence.These

321、estimated parameters can feed into models used to illustrate the distributional and GHG emission implications of implementing specific design features of policy instruments.AppealEvidence suggests that voters will support climate policy instruments when revenues generated are spent on low-carbon res

322、earch and development and subsidies to promote deployment.Hence,assessing the level of public acceptability or demand for proposed new regime(s)and how this varies by institutional design features,feasible scope(e.g.across commodity groups,sectors and households)and allocation of benefits and burden

323、s(e.g.revenue recycling and cost containment provisions)should be a fundamental part of climate change policy-making.4.1 Principles for the design of market instruments to address the climate finance gapBridging the Gap:How to Finance the Net-Zero Transition27This may involve conducting surveys to q

324、uantify consequential factors,such as the:Proportion of businesses and consumers willing to engage with policy instruments Level of financial incentive required to encourage unwilling participants to engage Extent to which appeal varies along socio-demographic and economic dimensions and by key desi

325、gn featuresEconomic valuation methods178 can be used to assess demand,adoption and non-market valuation.179 Elicited demand curves from these exercises can be used to assess which design features are most appropriate,the socio-economic characteristics of likely participants and how to encourage and

326、compensate laggards.Important policy design questions BOX 4This paper advocates that the achievement of the policy design principles set out in this chap-ter can be realized by addressing the following questions during the design phase of developing instruments:1.What is the required and feasible sc

327、ope of the policy instrument?Streams of rich datasets from an array of sources,including those capturing the online presence of consumers and open finance-enabled financial transactions,now make it possible to account for the emissions consequences of consumption at a much more granular level than e

328、ver before.Policy-makers could exploit these datasets to create models of demand and corresponding emissions intensity across commodity groups and households by socio-economic characteristics.This will allow estimates of the scope required for participation in market instruments and coverage of comm

329、odity groups required to achieve change and can also inform how the instruments may support significant investments in low-carbon technologies through changes in consumer behaviour.2.How would the instrument allocate the benefits and burdens of the required changes?A transition to a net-zero future

330、offers large future benefits.The scope of the changes,however,involves all sectors of the economy and society and requires significant costs along with burdens of change which will have to be borne in the early years.The success of any instrument will depend on it being seen as acceptable across soc

331、iety,by allocating the benefits and burdens fairly.For example,an instrument which taxes petrol is consistent with achieving net zero;however,the gilets jaunes protests in France were driven in part by the perceived economic injustice that these types of taxes disproportionately place on lower incom

332、e consumers.The French government was forced to backtrack and reconsider the policy.Hence,policy-makers should focus on developing tools that model their policies aggregate benefit to society by each layer of design feature and seek to allocate its benefits and costs fairly.3.What are the appropriat

333、e institutional design features of the instrument?Any effective instrument with some consumer focus(i.e.aimed at changing human behaviour)will require that consumers engage with both the price and the emission intensity of their consumption.This implies that the introduction of such instruments will require consumers to make decisions under both financial and environmental constraints.Although we