Unlocking trillions: The economic logic of ambitious climate finance
In this policy brief Patrick Bolton and Alissa Kleinnijenhuis discuss the economic case for a New Common Quantified Goal of Climate Finance (NCQG) at scale for COP29. They argue that either developed countries provide and mobilize climate finance at scale to developing countries, or we are faced with a pathway of escalating climate loss, damages and adaptation costs.
Key calculations:
- Carbon budget: The remaining carbon budget to limit warming to 1.5°C with 50% probability is about 200 gigatonnes of CO2. At current emission rates of 41.6 gigatonnes per year, this budget will be exhausted in about 5 years.
- Social cost of carbon: Recent estimates put the social cost of carbon (representing climate damages) at $190-$1056 per tonne of CO2 while the current carbon pricing is at $4/tCO2 and that on only 24% of global emissions.
- Cost of capital differential: For financial markets alone to replicate a carbon tax of $190/tCO2, the cost of capital difference between brown and green firms would need to be 18%, which is considered unrealistic.
Costs for developed countries:
- Climate finance commitments: The paper discusses raising the annual climate finance provided by developed to developing countries from a floor of $100 billion to an estimated $2 trillion per year.
- Public funding requirements: While the exact split between public and private finance is not specified, a significant portion would need to come from public funds to de-risk investments and mobilize private capital.
Benefits for developed countries:
- Avoiding escalating climate damages: Without sufficient climate finance, developing countries cannot update their Nationally Determined Contributions (NDCs) in line with the 1.5°C goal. Current NDCs imply 2.8°C of warming, which would lead to catastrophic climate impacts globally.
- Reduced adaptation costs: By helping developing countries mitigate emissions, developed countries can reduce their own future adaptation costs. Just consider that the combined damages of Hurricanes Helene and Milton in the United States reached $300 billion in 2024.
- Economic opportunities: Investing in clean energy in developing countries can create new markets and economic opportunities for developed country businesses and investors.
Finally, the authors empirically evaluate the main elements under negotiation for the NCQG:
- Thematic scope
- Quantum(s)
- Sources (what counts and who contributes)
- Timeframe
- Qualitative elements
COP29: The Economic Case for a New Common Quantified Goal of Climate Finance (NCQG) at Scale
Authors: Patrick Bolton, Alissa M. Kleinnijenhuis
From: Imperial College, Cornell University
More proposals to unleash developing countries’ green potential
Ricardo Hausmann discusses the challenges and potential solutions for climate finance in developing countries. He argues that many developing countries are near their external debt ceiling, limiting their ability to borrow for climate initiatives and as a result they are forced to choose between climate projects and other development goals. At the same time multilateral development banks have increased climate finance at the expense of other essential development needs. He proposes:
- Expanding borrowing capacity: Climate finance should aim to expand developing countries’ borrowing capacity by reducing debt costs or boosting exports.
- Focus on subsidy component: Emphasis should be placed on the subsidy component of climate finance rather than just the total amount committed.
- Powershoring: Relocating energy-intensive industries to regions with ample, affordable clean energy.
- Developing countries as key suppliers: Enhancing developing countries’ ability to produce and export decarbonization enablers and their components.
A Better Approach to Climate Finance
By: Ricardo Hausmann – Harvard University
