# International Climate Change Financing: Needs, Sources, and Delivery Methods

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/crs%3AR41808

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** May 5, 2011
- **Citation:** R41808

## Text

International Climate Change Financing:
Needs, Sources, and Delivery Methods
(name redacted)
Analyst in Environmental Policy
(name redacted)
Specialist in Energy and Environmental Policy
May 5, 2011

Congressional Research Service
7-....
www.crs.gov
R41808

CRS Report for Congress
Prepared for Members and Committees of Congress

International Climate Change Financing: Needs, Sources, and Delivery Methods

Summary
Many voices, domestic and international, have called upon the United States to increase foreign
assistance to address climate change. Proponents maintain that such assistance could help
promote low-emissions and high-growth economic development in lower-income countries, while
simultaneously protecting the more vulnerable countries from the effects of a changing climate.
Recent studies estimate the needs for climate change financing in the developing world to range
from US$4 billion to several hundred billion annually by the year 2030. The United States has
pledged funds in such fora as the United Nations Framework Convention on Climate Change
(UNFCCC, 1992), the Copenhagen Accord (2009), and the UNFCCC Cancun Agreements
(2010), wherein the wealthiest countries, in aggregate, agreed to provide up to $30 billion in “fast
start” financing for the 2010-2012 period and to mobilize $100 billion annually by 2020. Pledged
funds are to come from a wide variety of sources, both public and private, bilateral and
multilateral, including alternative sources of finance. Lower-income countries have sought
assistance that is new, additional to previous flows, adequate, predictable, and sustained.
The fundamental dispute concerning international financing for climate change centers upon who
should pay for it and how. The debate has been dominated by economic assessments of marketbased mechanisms aimed at changing price incentives so that investment in low-emissions
development becomes more attractive (e.g., cap and trade, carbon fees, loan guarantees). Many
agree that private sector investment will likely have a significant role to play in any lowemissions future, and that establishing a price on GHG emissions will likely have a part in any
effective policy agenda. However, concerns remain whether such mechanisms can induce the
required shifts in production and consumption patterns, mobilize the necessary investment, and
contribute adequately to international financial assistance. From this perspective, public funds—
including from national governments and international organizations—continue to be a key driver
for climate change investment, specifically in low-income countries.
Many methods for disbursing international climate change financing currently exist. All have a
role in catalyzing climate action. They include private sector funding through such avenues as
foreign direct investment (FDI), export credit markets, multilateral development banks and
finance corporations, and the various U.N. Kyoto Protocol market mechanisms, as well as public
sector funding through official development assistance (ODA), multilateral trust funds (e.g., the
Global Environment Facility (GEF), Climate Investment Funds (CIF), Green Climate Fund
(GCF)), and the concessional lending windows housed at the World Bank Group. Many contend
that the financial architecture is underfunded, unnecessarily complex, and lacks both strategic
mandate and adequate coordination. Debate has arisen over the proper financial instruments to
employ in lower-income countries as well as the role shared by the public and private spheres.
Up to this point, the United States has relied mostly on direct budget appropriations to finance
climate change actions internationally, but recent Congresses have considered several alternatives
that could generate new financing for international purposes. Many in Congress and the public at
large may question why the United States should help finance other countries’ efforts on climate
change. Some claim that international financing would incur costs to the United States, or redirect
funds that could be used for domestic purposes and send them overseas. Others, however, contend
that international financing may offer potential benefits to the United States in terms of global
environmental protection, expanded commercial markets, and increased national security.

Congressional Research Service

International Climate Change Financing: Needs, Sources, and Delivery Methods

Contents
Introduction ................................................................................................................................1
Perspectives on the U.S. Role in International Climate Change Financial Assistance ...................3
In Opposition ........................................................................................................................3
In Support.............................................................................................................................5
Cost Estimates for International Climate Change Activities .........................................................7
Findings................................................................................................................................8
Methodology....................................................................................................................... 10
Mitigation Costs: Net Costs........................................................................................... 10
Mitigation Costs: Capital Intensity, or Up-Front Costs................................................... 12
Adaptation Costs........................................................................................................... 13
Total Costs for Mitigation and Adaptation Activities in Lower-Income Countries .......... 15
Sources for International Climate Change Financial Assistance ................................................. 16
Private Sector Sources......................................................................................................... 17
Public Interventions to Stimulate Private Sector Investment ................................................ 19
Public Sector Sources.......................................................................................................... 22
Innovative Finance.............................................................................................................. 24
Voluntary Actions................................................................................................................ 24
Caveats Regarding Sources ................................................................................................. 25
Methods for Delivering International Climate Change Financial Assistance............................... 26
Private Sector Mechanisms ................................................................................................. 28
Quasi-Private Sector Mechanisms ....................................................................................... 28
Public Sector Mechanisms .................................................................................................. 30
Bilateral: Official Development Assistance.................................................................... 33
Multilateral: International Financial Institutions ............................................................ 33
Caveats Regarding Mechanisms .......................................................................................... 36
U.S. Contributions to International Climate Change Financial Assistance .................................. 37
Congressional Authority, Oversight, Appropriations ............................................................ 37
Historical Contributions ...................................................................................................... 41
FY2011 Enacted Budget Authority and the FY2012 Budget Request ................................... 43

Figures
Figure 1. Global GHG Abatement Cost Curve ........................................................................... 11
Figure 2. Global Capital Intensity Cost Curve ........................................................................... 13
Figure 3. Climate Vulnerability vs. Social Capacity................................................................... 14
Figure 4. One Estimate of Annual Climate Change Financing Needed for Mitigation and
Adaptation Activities in Lower-Income Countries, 2010-2020................................................ 16
Figure 5. Total Investment in Emissions-Related Economic Sectors in 2007 .............................. 27
Figure C-1. Recent U.S Budget Authority and Requests for the Obama Administration’s
Global Climate Change Initiative by Agency and Category..................................................... 51

Congressional Research Service

International Climate Change Financing: Needs, Sources, and Delivery Methods

Tables
Table 1. Various Estimates of Annual Climate Change Financing Needed for Mitigation
and Adaptation Activities in Lower-Income Countries ..............................................................9
Table 2. Examples of Bilateral and Multilateral Financing Mechanisms for Climate
Change Mitigation and Adaptation Activities in Lower-Income Countries .............................. 31
Table 3. Historical U.S Budget Authority for International Climate Change Assistance by
Agency and Program.............................................................................................................. 39
Table 4. Recent U.S Budget Authority for International Climate Change Assistance by
Agency and Program (Obama Administration) ....................................................................... 44
Table A-1. Glossary of Finance Options .................................................................................... 45
Table B-1. Considerations Concerning Sources of Climate Change Financing ........................... 47
Table C-1. Recent U.S Budget Authority and Requests for the Obama Administration’s
Global Climate Change Initiative by Agency and Category..................................................... 51

Appendixes
Appendix A. Glossary of Options for Generating and Disbursing Financing to Address
Climate Change ..................................................................................................................... 45
Appendix B. Comparison of Sources of Climate Change Financing........................................... 47
Appendix C. U.S. Global Climate Change Initiative .................................................................. 51

Contacts
Author Contact Information ...................................................................................................... 53

Congressional Research Service

International Climate Change Financing: Needs, Sources, and Delivery Methods

Introduction
While some investigators disagree with the current risk assessments of climate science, most
accept the findings of the U.S. National Academies that the Earth’s climate has changed over the
past century and that human activities—particularly emissions of greenhouse gases (GHG)
through such activities as fossil fuel use, agricultural practices, and deforestation—have very
likely caused most of the observed effects.1 Broadly agreed findings conclude that the world faces
risks from the damaging effects of a changing climate unless GHG emissions are limited. There is
some political consensus internationally to try to stabilize GHG concentrations in the atmosphere
at approximately 450 parts per million by volume (ppm)2 carbon dioxide-equivalent (CO2e),3 a
volume which is projected to limit global warming to around 2˚C above pre-industrial levels.
Some people argue that a 2˚C target, if attained within a sufficient time frame, might prevent
dangerous anthropogenic interference with the climate system, allow ecosystems to adapt
naturally to climate change, ensure that food production is not threatened, and enable economic
development to proceed in a sustainable manner.4 Others suggest different target levels of varying
stringency.
Large-scale financial investments are projected to be needed to meet the global demand for
energy, water, transportation, heating, and other infrastructure services in countries with growing
populations and rising incomes. Financial requirements would be increased if countries made
such investments with the additional consideration of addressing climate change. Proponents
maintain that climate-relevant investments would promote low-emissions, high-growth economic
development while simultaneously protecting the more vulnerable countries and communities
from the effects of climate change. Some countries have begun to make moderate adjustments
focusing, in particular, on energy efficiency strategies, low-emissions energy infrastructure, and
sustainable land use, land use change, and forestry practices. However, despite expressions of
concern and commitment, the shift toward climate-relevant investment has been deemed slow by
many. Further, while industrialized countries continue to contribute a disproportionally large
share of global GHG emissions, and historically have contributed most of the global GHG
emissions over the past two centuries, future emission growth is projected to arise mostly from
the developing world, whose populations and economic aspirations continue to grow. Thus, even
if developed country emissions are significantly curtailed, climate targets may not be met without
the deployment of similar abatement efforts in the developing world. 5
1
Studies include U.S. Global Change Research Program, Global Climate Change Impacts in the U.S., 2009, at
http://globalchange.gov/publications/reports/scientific-assessments/us-impacts/key-findings (accessed March 31,
2011); Intergovernmental Panel on Climate Change, Climate Change 2007: Working Group I: The Physical Basis
(Cambridge, UK: Cambridge University Press, 2007); National Research Council, Reconciling Observations of Global
Temperature Change, Board on Atmospheric Sciences and Climate (BASC) (Washington, DC: National Academy
Press, 2000); National Research Council, Climate Change Science: An Analysis of Some Key Questions (Washington,
DC: National Academies Press, 2001); National Research Council, Abrupt Climate Change: Inevitable Surprises
(Washington, DC: National Academies Press, 2002). For background information on climate change science and
impacts, see CRS Report RL33849, Climate Change: Science and Policy Implications, by Jane A. Leggett.
2
In 2009, the CO2e global average concentration in Earth’s atmosphere was about 0.0387% by volume, or 387 ppm.
3

Carbon Dioxide Equivalent is a metric measure used to compare the emissions from various greenhouse gases based
upon their global warming potential (GWP). The greenhouse gases as defined by the UNFCCC include carbon dioxide
(CO2), methane (CH4), nitrous oxide (N2O), and gases (such as chlorofluorocarbons, CFC) that are controlled under the
Montreal Protocol to protect the stratospheric ozone layer.
4
These policies are in conformance with the United Nations Framework Convention on Climate Change (UNFCCC).
5
This report uses the terms “developing,” “developed,” “high-income,” “low-income,” “emerging,” “industrialized,”
(continued...)

Congressional Research Service

1

International Climate Change Financing: Needs, Sources, and Delivery Methods

While there is little doubt that the most efficient GHG reduction strategy would require efforts
from all countries, a fundamental dispute centers upon who should pay for them and how. Most,
if not all, low-income countries have argued that their success in abating GHG emissions and
curtailing deforestation would depend critically on receipt of international financial and other
support. They argue that reducing their share of GHG emissions and adapting to the effects of
climate change would incur costs above and beyond their normal economic growth trajectories.
These costs are particularly challenging to countries that have low incomes compared to
industrialized nations, consider alleviating poverty as their first priority, and conclude that they
have contributed only a minor share of the historical GHG emissions that force climate change.
Higher-income countries, including the United States, have pledged financial assistance to lowerincome countries in such fora as the United Nations Framework Convention on Climate Change
(UNFCCC, 1992).6 While vaguely defined, the UNFCCC pledges are not voluntary
commitments, but treaty obligations, signed and ratified by the U.S. government.7 More recently,
the Copenhagen Accord (2009) stipulated—and the UNFCCC Cancun Agreements (2010)
restated—that the wealthiest countries8 in aggregate would commit to provide up to $30 billion
“fast start” financing in the 2010-2012 period and to mobilize $100 billion annually by 2020 to
promote mitigation, adaptation, technology transfer, and capacity building efforts in lowerincome countries. The funding is to come from “a wide variety of sources, [both] public and
private, bilateral and multilateral, including alternative sources of finance.”9 The Copenhagen
(...continued)
among others, to describe the economic and political development of countries. It should be noted that there is no
universally accepted definition or categorization of these terms. Many commentators note that divisions between these
categories in climate-related literature are often arbitrary. Some commentators suggest that global economic
development may best be represented as a spectrum of values as opposed to binary categories. Other analyses use the
UNFCCC categories of “Annex I,” “Annex II,” “non-Annex I,” and “Least Developed” to refer to the income level of
country Parties (see UNFCCC at http://unfccc.int/parties_and_observers/items/2704.php (accessed March 31, 2011));
however, it should be noted that the UNFCCC categories are based on 1992 OECD statistics that have since changed.
Annex I countries currently include the United States, the 27 EU member states, Australia, Canada, Iceland, Japan,
New Zealand, Norway, Turkey and Russia. All other nations are in the category of non-Annex I. This report will
predominantly use the terms “higher-income” and “lower-income” in an effort to take note of the aforementioned
concerns.
6
For background on the history of international climate change agreements, see CRS Report R40001, A U.S.-Centric
Chronology of the International Climate Change Negotiations, by Jane A. Leggett.
7
United Nations Framework Convention on Climate Change, Full Text of the Convention, May 9, 1992, U.N.T.S., vol.
1771, No. 30822; S. Treaty Doc No. 102-38. See art. 4, § 3, which states: “Commitments: The developed country
Parties and other developed Parties included in Annex II shall provide new and additional financial resources to meet
the agreed full costs incurred by developing country Parties in complying with their obligations under Article 12,
paragraph 1 (i.e., the communication of information related to implementation including national emissions inventories,
national communications of direction, etc.). They shall also provide such financial resources, including for the transfer
of technology, needed by the developing country Parties to meet the agreed full incremental costs of implementing
measures that are covered by paragraph 1 of this Article (i.e., national development priorities including emission
inventories, mitigation and adaptation strategies, promotion of low-emission development, promotion of sustainable
management, scientific cooperation, national communications, etc.) and that are agreed between a developing country
Party and the international entity or entities referred to in Article 11, in accordance with that Article (i.e., the financial
mechanism of the UNFCCC). The implementation of these commitments shall take into account the need for adequacy
and predictability in the flow of funds and the importance of appropriate burden sharing among the developed country
Parties,” at http://unfccc.int/essential_background/convention/background/items/1349.php (accessed March 31, 2011).
8
Which countries provide funds and in what amounts remains an element of negotiation.
9
See “Copenhagen Accord,” United Nations Framework Convention on Climate Change, Report of the Conference of
the Parties on its fifteenth session, held in Copenhagen from 7 to 19 December 2009, Decision 2/CP.15,
FCCC/CP/2009/11/Add.1, March 30, 2010, § 8, at http://unfccc.int/resource/docs/2009/cop15/eng/11a01.pdf#page=4
(accessed March 31, 2011).

Congressional Research Service

2

International Climate Change Financing: Needs, Sources, and Delivery Methods

Accord is a non-binding political agreement among countries; the implementation of the Cancun
Agreements, as a product of the UNFCCC Ad Hoc Working Group on Long-term Cooperative
Action under the Convention (AWG-LCA), is still under negotiation by Parties.
This report aims to inform congressional decision-making on U.S. provisions for financial
assistance to low-income countries to address climate change. It proceeds by first framing some
perspectives on the U.S. role in international financial assistance for climate change. It then
addresses the following questions:
1. How much funding might be needed to address the problem?
2. What might the funding be used for?
3. Where might the funding come from?
4. How might the funding be delivered?
The final section of the report summarizes past and current U.S. contributions to international
climate change initiatives.

Perspectives on the U.S. Role in International
Climate Change Financial Assistance
Calls continue domestically and internationally for high-income countries to increase financial
assistance to low-income countries to address climate change. Many in Congress and the public at
large may question why the United States should help finance other countries’ efforts to reduce
GHG emissions or to adapt to climate variability and change. Some claim that international
financing would incur costs to the United States, or redirect funds that could be used for domestic
purposes and send them overseas. Others, however, contend that international financing may offer
potential benefits to the United States in terms of environmental protection, expanded commercial
markets, and national security.
Below is a brief outline of some of the arguments in support of and in opposition to the role of the
U.S. government in foreign aid in general and international climate change assistance in
particular.

In Opposition
Fiscal Constraints: Some critics of international climate change assistance to lower-income
countries argue that the United States needs to retain available funds for domestic priorities, such
as fostering renewed economic growth and creating jobs. They contend that the United States
should not be burdened with higher taxes or prices for investments abroad.10 The burden is
exacerbated during times of economic downturns, when governments are hard-pressed to
generate fiscal resources to adequately address domestic challenges and maintain basic levels of
public services and quality of life. For those who support some form of international development
10

“Americans want to cut foreign aid…to whom?” The Economist, April 9, 2010, 15:58 by M.S., at
http://www.economist.com/blogs/democracyinamerica/2010/04/deficit_reduction (accessed March 31, 2011).

Congressional Research Service

3

International Climate Change Financing: Needs, Sources, and Delivery Methods

assistance, they may argue that aid should be directed to country priorities other than climate
change, such as improving public health systems, water and sanitation resources, or
infrastructure.
Misuse of Funds: Many critics have claimed that international financial assistance targeted to
help average citizens in low-income countries often ends up supporting inefficient and bloated
bureaucracies (e.g., recipient governments, donor-funded multilaterals, or non-governmental
organizations). They argue that the national and international institutions that dispense financial
assistance focus on “getting money out the door” to lower-income countries, rather than on
delivering services; emphasize short-term outputs like reports and frameworks but do not engage
in long-term activities like the evaluation of projects after they are completed; and put enormous
administrative demands on lower-income country governments.11 Bilateral and multilateral
development agencies have also been criticized for the fragmentation of foreign assistance across
many small and uncoordinated bureaucracies, the lack of transparency about project procurement
practices and operating costs, and the proportion of funds that is misused or lost through instances
of graft, corruption, and other political inefficiencies.12
Poor Results: Some critics contest the overall effectiveness of foreign assistance in spurring
economic development and reform in low-income countries. Many studies have examined the
effects of international assistance provided to lower-income countries, including both bilateral
and multilateral mechanisms, and have returned mixed results. Conclusions range from
ineffective, 13 to highly effective, 14 to effective “in some countries under specific circumstances.”15
The divergent results of these studies may make it difficult to reach firm conclusions and support
continued contributions. Further, some commentators find that international environmental
assistance poses even greater uncertainties than other forms of aid due to difficulties in assessing,
measuring, reporting, and verifying environmental indicators. Some statistics have confirmed
these perceptions, as the success rate for environmental projects is often far below those of
education, health, or infrastructure.16
Development Inefficiencies: There is no satisfactory metric on the effectiveness of international
financial assistance to lower-income countries. Some critics claim that it may do more harm than
good.17 They assert that a reliance on foreign capital fosters an unhealthy economic dependence,
11

William Easterly, “The Cartel of Good Intentions,” Foreign Policy, vol. 131 (July-August 2002), pp. 40-49.
William Easterly and Tobias Pfutze, “Where Does the Money Go? Best and Worst Practices in Foreign Aid,”
Journal of Economic Perspectives, vol. 22, no. 2 (Spring 2008). For more on foreign aid reform, also see CRS Report
R40102, Foreign Aid Reform: Studies and Recommendations, by Susan B. Epstein and Matthew C. Weed and CRS
Report R40756, Foreign Aid Reform: Agency Coordination, by Marian Leonardo Lawson and Susan B. Epstein.
13
William Easterly, “Can Foreign Aid Buy Growth?,” Journal of Economic Perspectives, vol. 17, no. 3 (Summer
2003), pp. 23-48.
14
Carl-Johan Dalgaard and Henrik Hansen, “On Aid, Growth, and Good Policies,” Journal of Development Studies,
vol. 37, no. 6 (August 2001), pp. 17-41.
15
Craig Burnside and David Dollar, “Aid, Policies, and Growth,” American Economic Review, vol. 90, no. 4
(September 2000), pp. 847-868.
16
Statistical studies of the effectiveness of environmental aid are scarce. One performed by the World Bank shows that
only 25% of World Bank-financed environmental projects received a “satisfactory” project outcome rating, compared
to 100% for education, 86% for health, and 87% for infrastructure (these figures are for the years 2001-2003). For a
more complete discussion on the effectiveness of environmental aid, see Robert L. Hicks et al., Greening Aid?:
Understanding the Environmental Impact of Development Assistance, (New York: Oxford University Press, 2008).
17
Dambisa Moyo, “Why Foreign Aid is Hurting Africa,” The Wall Street Journal, March 21, 2009, at
http://online.wsj.com/article/SB123758895999200083.html (accessed March 31, 2011).
12

Congressional Research Service

4

International Climate Change Financing: Needs, Sources, and Delivery Methods

making poor countries poorer and economic growth slower, and leaving recipients more debtladen, inflation-prone, vulnerable to the vagaries of the currency markets, and unattractive to
higher-quality investment. They claim that grant-based assistance as a platform for development
is contradictory to sustainable economic growth and can squash private sector efforts in
commercial markets. They claim debt-based assistance is worse, requiring loans to be repaid at
the expense of recipient country’s education, health, and infrastructure investments. Further, large
inflows of foreign capital may have the effect of killing off a country’s export sector by causing
domestic currency to strengthen against foreign ones (referred to by economists as “Dutch
Disease”). As a counter to the practice of international financial assistance, these commentators
promote a strategy of development that emphasizes the role of entrepreneurship and private
markets over an aid system based on cycles of transfer flows.
Lack of Consensus on Climate Science: Some critics point to scientific uncertainties and
ambiguities within the fields of atmospheric chemistry and climatology as reasons to postpone
and/or reconsider international climate change assistance policies and programs. They contend
that the current scientific findings on climate change may not be sufficient to warrant government
action, either domestic measures to mitigate GHG emissions and adapt to the effects of climate
change or international policy actions and financial assistance to support other countries’ efforts.

In Support
Commercial Interests: Some advocates argue that international climate change assistance to
lower-income countries to support low-emission economic growth could benefit U.S. businesses
through increased trade, commerce, and economic activity in the global marketplace. They
contend that American clean energy and environmental management companies are well
positioned to provide the innovative technology and services needed to meet the rapidly growing
demand in emerging economies. Increased financing would not only promote development in the
host country, but allow U.S. industries to make competitive inroads into rapidly expanding
markets, improve the advancement and commercialization of U.S. technologies, mobilize greater
investment in domestic sectors, and enhance job creation in the United States. Decreased funding
may cede American influence in global markets to other economic powers still engaged with
lower-income countries on environmental and natural resource issues (e.g., the European Union,
China).
Investment Efficiencies: Some advocates claim that the costs of responding to tomorrow’s
climate-related catastrophes, instabilities, conflicts, and technological needs would be much
higher than the costs of working today to prevent them through emissions reductions. “Each year
of delay will lock in an increased amount of old [i.e., high-emissions] technology,” according to
the United Kingdom’s Secretary of State for Energy and Climate Change.18 Economists often note
that lower-income countries account for nearly all of the recent growth in global emissions and
represent the cheapest opportunity to mitigate GHG pollution as part of a cost-effective solution.
Additionally, some are concerned that locking in the developing world to a reliance on older,
more GHG-intensive technologies during economic development may limit their flexibility and
increase their costs to respond efficiently to future pollution abatement or climate resilient

18

“Energy Ministers Endorse Clean-Tech Measures, Back CCS Group,” Greenwire, July 20, 2010.
http://www.eenews.net/Greenwire/print/2010/07/20/4 (accessed March 31, 2011).

Congressional Research Service

5

International Climate Change Financing: Needs, Sources, and Delivery Methods

strategies. (Sometimes this is called a problem of “stranded capital.”) Economists view some
level of early investment as efficient, to hedge against these future risks. 19
Natural Disaster Preparedness: Some advocates point to international climate change assistance
as a means to assist in global disaster preparedness. They claim that recorded natural disasters
continue to increase each year resulting in more casualties and mounting economic losses.20 They
assert that extreme weather events have lead to increased droughts, food shortages, and resource
competition, which, in turn, has lead in some cases to population displacement and migration.
Some have proposed that increased international assistance to climate change adaptation
programs could help avoid capital and other losses (e.g., buildings, infrastructure, etc.), minimize
the redirection of strategic resources to ad hoc disaster response and urgent humanitarian needs,
and avoid chronic humanitarian crises, such as food shortages, particularly for the resource poor
in the least developed countries.21
National Security: Some advocates argue that international climate change assistance could help
address risks to national security. According to a 2008 National Intelligence Assessment, the
impacts of global climate change may worsen problems of poverty, social tensions, environmental
degradation, and weak political institutions across the developing world. 22 In October 2010,
Chairman Mullen of the Joint Chiefs of Staff highlighted that climate change creates conditions
“that could lead to failed states and make populations vulnerable to radicalization.”23 Combating
environmental drivers such as climate change, desertification, biodiversity loss, and deforestation
could reduce the instability caused by the scarcity of, and potential competition for, resources like
water, food, and habitat. Some see international financial assistance for climate change as a
means to help make lower-income countries less susceptible to these threats, for the benefit of
both the lower-income country and the security interests of the United States.
International Leadership: Some advocates contend that international climate change assistance
to lower-income countries helps the United States improve its leadership in global environmental
issues. Through leadership, the United States may be able to influence and set important
international economic and environmental policies, practices, and standards. But leadership—
apropos of voting share—is tied directly to the level of financial contribution in many multilateral
organizations. Some believe that delivering on financial pledges is an important opportunity for
19
See, for example, Robert J. Lempert, Michael E. Schlesinger, and Steve C. Bankes, “When we don't know the costs
or the benefits: Adaptive strategies for abating climate change,” Climatic Change 33, no. 2 (6, 1996): 235-274.
20
Munich RE Reinsurance, “Overall Picture of Natural Catastrophes in 2010,” press release, January 3, 2011, at
http://www.munichre.com/en/media_relations/press_releases/2011/2011_01_03_press_release.aspx (accessed March
31, 2011).
21
Both the World Bank and U.S. Geological Survey estimate that every dollar spent on disaster preparedness saves
seven dollars in disaster response. The World Bank, Natural Disasters: Counting the Cost, March 2, 2004, at
http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/
0,,contentMDK:20169861~menuPK:34458~pagePK:64003015~piPK:64003012~theSitePK:4607,00.html (accessed
March 31, 2011).
22
National Intelligence Council, National Intelligence Assessment on the National Security Implications of Global
Climate Change to 2030, Statement for the Record by Dr. Thomas Fingar, Deputy Director of National Intelligence for
Analysis, National Intelligence Council, before the U.S. Congress, House Permanent Select Committee on Intelligence
& House Select Committee on Energy Independence and Global Warming, June 25, 2008, at http://www.dni.gov/nic/
special_climate2030.html (accessed March 31, 2011).
23
Joint Chiefs of Staff, JCS Speech: Energy Security Forum, as delivered by Admiral Mike Mullen, chairman of the
Joint Chiefs of Staff, Washington, DC, Wednesday, October 13, 2010, at http://www.jcs.mil/speech.aspx?id=1472
(accessed March 31, 2011).

Congressional Research Service

6

International Climate Change Financing: Needs, Sources, and Delivery Methods

the United States to demonstrate credibility and support negotiations not just on environment, but
on economic and security issues as well. Withdrawing commitments may cede American
influence in world affairs to other economic powers still engaged with lower-income countries on
environmental and natural resource issues (e.g., the European Union, China). Weakened influence
could manifest in challenges to political negotiations, economic relationships, trade preferences,
and future collaborations.
International Obligations: Many advocates stress that the commitment to international climate
change assistance to lower-income countries is codified in current multilateral agreements. Under
the United Nations Framework Convention on Climate Change (UNFCCC), signed in 1992, the
United States and other industrialized countries listed in Annex II of the Convention24 committed
to provide financial and technical assistance to help lower-income countries’ efforts to meet their
UNFCCC obligations. While these commitments are legally binding, they are vaguely defined,
making them impractical to quantify and enforce. More recent negotiations have striven to
produce more quantified figures, and the Copenhagen Accord of 2009 produced an agreement by
the wealthiest countries to provide $30 billion of “fast start” financing in the period 2010 to 2012
and to seek $100 billion annually by 2020.25 However, these financial targets are not legally
binding, and accounting and enforcement remain difficult.
Equity Issues: Some advocates consider international climate change assistance to lower-income
countries a moral responsibility and a matter of climate equity. Not only have today’s highincome economies generated about 80% of past fossil fuel-based emissions, but those same
emissions have helped carry them to high levels of social and economic well-being. Past behavior
arguably calls for the industrialized countries to provide funding to reduce the current and future
risks imposed on others.

Cost Estimates for International Climate Change
Activities
The financial costs of coping with climate change may reach trillions of dollars. These costs
would aim to address some combination of mitigation activities (i.e., actions taken to eliminate or
reduce the long-term risk and hazards of climate change) and adaptation activities (i.e., actions
taken to adjust to climate change, moderate potential damage, or cope with the consequences).
Estimates of the projected costs vary widely depending upon assumptions made about the
accepted levels of pollution, the ambitiousness of the global response, its structure, timing, and
implementation, the potential climate-related damages, the affected sectors, as well as the
methods of sourcing and delivering the necessary funds. The stricter the emissions target, the
higher the estimate. The longer the response is delayed, the more threatening the damages may
be, and the greater the resources required to respond to the threats. Bearing the costs of action (or

24

Annex I countries currently include the United States, the 27 EU member states, Australia, Canada, Iceland, Japan,
New Zealand, Norway, Turkey and Russia. All other nations are in the category of non-Annex I. Annex II Parties
include the industrialized countries that were members of the OECD (Organization for Economic Co-operation and
Development) in 1992, but not the countries with economies in transition (the EIT Parties), including the Russian
Federation, the Baltic States, and several Central and Eastern European States.
25
UNFCCC, Decision 2/CP.15, op. cit.

Congressional Research Service

7

International Climate Change Financing: Needs, Sources, and Delivery Methods

inaction) are individuals, firms, local communities, national governments, and/or the international
community.

Findings
A variety of international institutions and non-governmental organizations have used various
climate change mitigation and adaptation analyses to estimate the climate-related financing needs
for lower-income countries.26 Table 1 reports findings from a variety of studies on both the “net
costs” and “associated financing requirements” for mitigation and adaptation efforts in lowerincome countries. “Mitigation costs” refer to net incremental costs as factored over the lifecycle
of the investment; and “mitigation financing” refers to the up-front capital investment needed
over and above the business-as-usual (BAU) investment. Both mitigation costs and mitigation
financing are estimated for stabilizing atmospheric concentrations at 450 ppm CO2e; adaptation
investments are estimated for a variety of assistance categories for both 2010 and 2030.
Focusing on the 450 ppm target, mitigation net costs in lower-income countries range between
$150 billion and $190 billion a year by 2030. If the estimates for associated financing needs are
included, the total costs increase to $287 billion to $614 billion a year. For adaptation, the most
comparable estimates are the medium-term figures produced by the UNFCCC and the World
Bank, which range from $30 billion to $110 billion annually.
Currently, resources committed to address mitigation and adaptation in lower-income countries
cover approximately 5% of the aforementioned estimates. One recent study has contributions for
mitigation-specific assistance at approximately $20 billion annually. Very few studies have
addressed current contributions for adaptation assistance. 27 Many claim that assessing climaterelated financial and investment flows is a formidable challenge, given the inconsistencies across
reporting systems, the many data gaps (with the further challenge of identifying the contributions
of underlying finance, which unlike specific climate finance is not reported as such), and the
complex web of flows (with the possibility of double counting).

26

This section presents the findings on various cost estimates for mitigation and adaptation needs in lower-income
countries. The following section, “Methodology,” discusses in greater detail the economic assumptions and modeling
behind the various estimates.
27
For a discussion of contributed estimates, see Jan Corfee-Morlot et al., Financing Climate Change Mitigation:
Towards a Framework for Measurement, Reporting, and Verification, Organisation for Economic Cooperation and
Development, October 2009; and World Bank, Monitoring Climate Finance and ODA, Issue Brief #1, May 2010..
OECD DAC introduced a system of monitoring aid that targets the objectives of the Rio Conventions (Rio Markers) in
2008 for mitigation and in 2010 for adaptation. The markers identify aid activities that contribute to the objectives of
the UNFCCC. Partial data indicate that over the past few years DAC donors have allocated $3 billion to $4 billion per
year for mitigation-related aid (about 3%-4% of total ODA). Other aid has been transferred via the UNFCCC Clean
Development Mechanism (CDM) as well as through debt instruments at the Multilateral Development Banks (MDB).

Congressional Research Service

8

International Climate Change Financing: Needs, Sources, and Delivery Methods

Table 1.Various Estimates of Annual Climate Change Financing Needed
for Mitigation and Adaptation Activities in Lower-Income Countries
In Constant 2008 US$ Billions
Estimate
2010-2020

Estimate
2030

Project Catalyst (2009)

45

—

See Figure 4 below

McKinsey & Co. (2009)

—

190

Total costs if pursuing the most economically rational abatement
opportunities to their full potential with transaction and program
costs

Pacific Northwest National Laboratory
(PNNL) (2008)

—

151

—

Project Catalyst (2009)

70-100

—

See Figure 4 below

McKinsey & Co. (2009)

326

612

Total upfront investment needed incremental to business-as-usual
(BAU)

International Institute for Applied
System Analysis (IIASA) (2009)

68-179

287

—

—

614

Annual averages through 2050

World Bank (2009)

10-45

—

Cost of climate-proofing development assistance, foreign and direct
investment

United Nations Development Program
(UNDP) (2008)

90-114

—

Cost of climate-proofing development assistance, foreign and direct
investment, plus cost of poverty reduction strategies and disaster
relief programs

Stern Review (2006)

4-40

—

Cost of climate-proofing development assistance, foreign and direct
investment

World Bank EACC (2009)

—

82-110

Average annual adaptation costs from 2010 to 2050 in the
agriculture, forestry, fisheries, infrastructure, water resource
management, and coastal zone sectors, including impacts on health,
ecosystem services, and the effects of extreme weather events

Project Catalyst (2009)

—

16-40

2030 cost of capacity building, research, disaster management and the
UNFCCC sectors (most vulnerable countries and public sector only)

UNFCCC (2008)

—

30-73

2030 cost in agriculture, forestry, water, health, coastal protection,
and infrastructure

Sources of Estimates

Details

Mitigation Costs

Mitigation Financing

International Energy Agency (IEA),
Energy Technology Perspectives (2008)
Adaptation Costs

Sources: Project Catalyst, Toward a Global Climate Agreement: Synthesis Briefing Paper, June 2009; and World
Bank, World Development Report: 2010: Development and Climate Change, 2009, with data for mitigation sourced
from IIASA, 2009 and additional data provided by V. Krey; IEA, 2008; McKinsey & Company, 2009, and additional
data provided by McKinsey (J. Dinkel) for 2030, using a dollar-to-Euro exchange rate of $1.25 to €1.00; PNNL
figures from Edmonds and others, 2008, and additional data provided by J. Edmonds and L. Clarke; and for
adaptation sourced from Agrawala and Fankhauser, Economic Aspects of Adaptation to Climate Change: Costs,
Benefits, and Policy Instruments, OECD, 2008, except World Bank EACC, Economics of Adaptation to Climate
Change, 2009.
Notes: Estimates are for stabilization of greenhouse gases at 450 ppm CO2e, which would provide a 40%-50%
chance of staying below 2°C warming by 2100. All figures have been adjusted to 2008 US$ in billions using U.S.
Bureau of Economic Analysis (BEA) Gross Domestic Product (GDP) Deflator and a dollar-to-Euro exchange rate
of $1.25 to €1.00.

Congressional Research Service

9

International Climate Change Financing: Needs, Sources, and Delivery Methods

Methodology
Estimates of the total net costs and financing requirements needed for mitigation and adaptation
activities in lower-income countries are often based on economic models of pollution abatement
costs and/or adaptation investments aggregated across sectors and regions. This section discusses
in more technical detail the economic modeling behind the various cost estimates presented in the
previous section. Due to characteristic differences, estimates of net costs and financing
requirements are often differentiated between the costs of mitigation and the costs of adaptation.

Mitigation Costs: Net Costs
Mitigation costs refer to the costs of actions taken to reduce or reverse the forces that contribute
to global climate change. In higher and lower-income countries alike, mitigation measures aim to
reduce current levels of emissions and to emphasize low-GHG development. Strategies include
transitioning to a low-emissions energy supply; capturing the opportunities in energy efficiency
improvements in buildings, transportation, and industry; reducing deforestation and improving
sustainable forest management to better serve as GHG emissions sinks; and employing more lowemissions and sustainable agriculture practices. In the future, it could also entail actions that
remove carbon dioxide from the atmosphere and sequestering it permanently, or other
geoengineering28 technologies.
Estimates have been made of the incremental costs29 of various mitigation strategies. Figure 1
shows one example of what analysts refer to as an “Emissions Abatement Cost Curve.” The
purpose of the curve is to summarize the many emission reduction strategies available, and to
characterize their emission reduction potential as well as their net costs, if the strategy is “pursued
aggressively.” The curve charts the amount of potential reductions (expressed along the horizontal
axis in gigaton30 of CO2e abated per year) against the cost of specific measures (expressed along
the vertical axis in cost per ton of CO2e abated). 31 Of particular note, the curve shows that many
abatement opportunities exist with net negative costs (approximately one-third of potential
reductions), meaning that the measures may pay for themselves within the useful lifetime of the
investment through efficiency savings (e.g., switching from incandescent light bulbs to LEDs
would both reduce emissions and save money in the long run due to the extended product life and
28
Geoengineering technologies, applied to the climate, aim to achieve large-scale and deliberate modifications of the
Earth’s energy balance in order to reduce temperatures and counteract anthropogenic (i.e., human-made) climate
change. For a detailed examination of geoengineering, see CRS Report R41371, Geoengineering: Governance and
Technology Policy, by Kelsi Bracmort, Richard K. Lattanzio, and Emily C. Barbour.
29
“Incremental costs” refer to costs above and beyond the costs of a “business-as-usual” strategy. For example, the
incremental cost of a proposed wind farm for electricity generation would be the cost of the wind farm above and
beyond the cost of a coal-fired generation plant that produced a comparable amount of electricity. For the purposes of
this report “incremental costs” and “additional costs” will be used interchangeably.
30
A gigaton is equivalent to 1 billion tons.
31

McKinsey & Company, Pathways to a Low-Carbon Economy, Version 2 of the Global Greenhouse Gas Abatement
Cost Curve, 2009, p. 7. Reading the curve: “the width of each bar represents the potential of that opportunity to reduce
GHG emissions in a specific year compared to the business-as- usual development (BAU). The potential of each
opportunity assumes aggressive global action starting in 2010 to capture that specific opportunity, and so does not
represent a forecast of how each opportunity will develop. The height of each bar represents the average cost of
avoiding 1 ton of CO2e by 2030 through that opportunity. The cost is a weighted average across sub-opportunities,
regions, and years. All costs are in 2005 real Euros. The graph is ordered left to right from the lowest-cost abatement
opportunities to the highest-cost. The uncertainty can be significant for individual opportunities for both volume and
cost estimates, in particular for the Forestry and Agriculture sectors, and for emerging technologies.”

Congressional Research Service

10

International Climate Change Financing: Needs, Sources, and Delivery Methods

energy efficiency of LEDs). These negative cost options (shown on the left of the graph) are
mainly found in energy efficiency measures in building, transportation, and industry as well as
some fuel switching, recycling, and waste management practices. For emission reduction
strategies in the agriculture and forestry sectors (e.g., improved agriculture practices,
afforestation, reforestation), 32 most options have low to moderate costs. Many of the low to
moderate cost options fall within the curve’s margin for error and are arguably breakeven
estimates. Sectors with relatively high cost reduction opportunities are in some energy production
options, with some emerging technologies having even higher costs than are represented on the
graph given their nascent state of development.
Figure 1. Global GHG Abatement Cost Curve
Beyond Business-as-Usual for 2030

Source: McKinsey & Co, Pathways to a Low-Carbon Economy, v.2.0, 2009.
Notes: The curve presents an estimate of the maximum potential of all technical GHG abatement measures
below €60 per tCO2e if each lever was pursued aggressively. It is not a forecast of what role different abatement
measures and technologies will play.

32

“Afforestation” refers to the planting of trees on areas that are not covered with forests. “Reforestation” refers to the
re-planting of trees on areas that were once covered with forests.

Congressional Research Service

11

International Climate Change Financing: Needs, Sources, and Delivery Methods

Figure 1 demonstrates that ideally if all possible mitigation measures were taken on the cost
curve in strict order from lowest-cost to higher-cost in sequence (i.e., from replacing all
residential incandescents with LEDs all the way up to retrofitting all coal-fired power generation
with carbon capture and storage technologies), global emissions abatement of 38 GtCO2e could
be achieved in 2030.33 At this rate, the average cost of the abatement opportunities would be $5
per tCO2e in 2030, and the total cost for realizing the whole curve would be $187.5 billion in the
year 2030. Transaction and program costs—not represented on the curve—are often estimated at
an average of between $1.25 and $6.25 per tCO2e abated, making the total annual global cost
approximately $250 billion to $375 billion by 2030.34 While an abatement cost of $6 to $12 per
tCO2e is reasonable in light of current economic discussions on climate change, many
commentators stress that mitigation costs are extremely sensitive to policy choices. They increase
steeply with the stringency of the emission reduction target and with the desired degree of
certainty of reaching it. Global mitigation costs would likewise rise to the degree that the world
deviates from a least-cost emission pathway (e.g., not tapping low cost reductions in lowerincome countries in the initial mitigation effort would increase global costs significantly). Further,
the failure to allow for all mitigation opportunities would likewise increase overall costs (e.g.,
only concentrating on energy efficiency measures and not on forest and agricultural management
could increase overall costs).

Mitigation Costs: Capital Intensity, or Up-Front Costs
Many commentators note that low-emission investments for mitigation activities often have high
up-front capital costs, followed later by overall savings in operating costs.35 Figure 2 charts the
incremental capital needs, or “capital intensity costs” (i.e., the extra investment needed at the
onset of a project over and above the business-as-usual (BAU) technologies), as an alternative
metric to the net cost curve of Figure 1 (which charts the additional net costs of a low-emission
project over its entire lifetime). Figure 2 shows that in some cases the difference between capital
intensity costs and net costs can be as much as a factor of two to four, depending on the rate of
opportunity costs assumed. The McKinsey & Company estimate concludes that the total global
upfront investment needed for abatement measures would be $1,012.5 billion per year in 2030—
incremental to BAU investments. For financially constrained countries, specifically many lowerincome countries, these high up-front capital costs can be a significant disincentive to invest in
low-emission technologies.
The McKinsey & Company estimate outlined above is just one of many assessments conducted
on financial needs. See Table 1 above for other mitigation cost estimates from a variety of
studies.

33

The abatement figure of 38 GtCO2e in 2030 is relative to BAU emissions of 70 GtCO2e, which is equivalent to 35%
and 40% decrease from 1990 levels, the reference year for the Kyoto Protocol and many current discussions, and
sufficient to having a moderate chance of holding global warming below 2 degrees Celsius.
34
These estimates use constant 2008 US $ from McKinsey & Co. with a dollar-to-Euro exchange rate of $1.25 to
€1.00.
35
Take for example wind or solar power generation. These technologies have significantly higher up-front capital costs
compared to more traditional coal- or natural gas-fired generation due to technical and material costs; however, once a
wind or solar power generator has been build or installed, the operating costs are significantly lower, due in no small
measure to the fact that its fuel source is renewable and does not need to be purchased.

Congressional Research Service

12

International Climate Change Financing: Needs, Sources, and Delivery Methods

Figure 2. Global Capital Intensity Cost Curve

Source: McKinsey & Co, Pathways to a Low-Carbon Economy, v.2.0, 2009
Notes: The capital intensity of an abatement measure is defined as the additional upfront investment relative to
the BAU technology, divided by the total amount of avoided emissions over the lifetime of the asset. For a more
fuel efficient car, for instance, the capital intensity would be calculated as the additional upfront investment
compared to the BAU technology, divided by the amount of CO2 saved through lower fuel consumption during
the lifetime of the car. The main difference with abatement cost is that the capital intensity calculation does not
take financial savings through lower energy consumption into account.

Adaptation Costs
Adaptation costs refer to the costs of adjustments made in natural or human systems in response
to actual or expected climate change and its effects. Estimates of adaptation costs have focused on
the additional amount of investment needed to reduce the impact of anticipated future damages
caused by climatic trends or events, including measures to increase resilience, reduce the impacts
of anticipated disasters, and cope with the aftermaths. Examples of adaptation measures include
employing climate-resistant crop varieties, improving irrigation systems, integrating sustainable
land management into agricultural planning, protecting water resources, managing coastal zones,
designing infrastructure for extreme weather or for sea-level rise, and improving public health
services.

Congressional Research Service

13

International Climate Change Financing: Needs, Sources, and Delivery Methods

Figure 3. Climate Vulnerability vs. Social Capacity

Source: World Bank, World Development Report 2010: Development and Climate Change, 2009.

Congressional Research Service

14

International Climate Change Financing: Needs, Sources, and Delivery Methods

From a global perspective, the adaptation challenge may be greatest in the developing world.
Lower-income countries are generally more vulnerable to climate change because their
economies are more dependent on climate-sensitive sectors such as agriculture, fishing, and
tourism. Further, with lower per capita incomes, weaker institutions, and limited access to
technology, lower-income countries are considered to have less adaptive capacity. See Figure 3
for one analysis of vulnerability and social capacity by country and region. The figure shows that
in many cases a lower social capacity (as measured by literacy, education, health, and governance
indexes) may make countries more vulnerable to the impacts of climate change.
Estimating the costs of adaptation with precision is difficult, not only because adaptation
measures are widespread and heterogeneous, but also because the measures are embedded in the
broader network of economic development strategies. While any investment in education, health,
sanitation, and security, for example, may constitute good development, it also may help reduce
socioeconomic vulnerability to both climactic and non-climactic stress factors. A variety of
studies have tried to estimate the incremental costs of adaptation in low-income countries.
Methods, definitions, and scopes of adaptation in these studies vary, accounting for many of the
differences in cost estimates. 36 In particular, many estimates assume that some portion of the
incremental costs will be covered by the recipient countries themselves. Some studies attempt to
consider “all” costs of adaptation to climate change and resulting damages (although none are
comprehensive); some include just large-scale adaptation costs (i.e., not private measures taken
by individuals); and some try to discern just the need for public financing for adaptation. The
UNFCCC Secretariat estimates that the additional annual investment and financial flows needed
worldwide would be on the order of $49 billion to $171 billion by 2030, with $30 billion to $73
billion needed for lower-income countries (the largest element of uncertainty in the UNFCCC
estimate lies in the cost of infrastructure adaptation). Other sources have produced varying
estimates. See Table 1 above for adaptation cost estimates from a variety of studies.

Total Costs for Mitigation and Adaptation Activities in Lower-Income
Countries
A variety of international institutions and non-governmental organizations have used various
climate change mitigation and adaptation analyses to estimate the climate-related financing needs
for lower-income countries. One example by Project Catalyst (Figure 4) sums the incremental
costs for the period 2010-2020 to give an average total of $45 billion per year for mitigation
needs in lower-income countries. Factoring in a higher rate of investment in lower-income
countries and covering transaction costs and specific funding for emerging technologies brings
the total financing requirement for abatement in lower-income countries to around $100 billion
annually. Including projections for the additional costs of adaptation activities gives a final
estimate of $126 billion per year for the period 2010-2020 in lower-income countries.37

36
When assessing costs of adaptation activities, terms like “climate-proofing development” and “disaster relief” can
take on several different meanings across different studies. Some studies look only at cost to infrastructure
development aimed at reducing anticipated damage from future impacts of climate change to a given region, while
other studies may look at the costs of climate-proofing infrastructure to the current climate.
37
Constant 2008 U.S. $ from McKinsey & Co. estimates using dollar-to-Euro exchange rate of $1.25 to €1.00.

Congressional Research Service

15

International Climate Change Financing: Needs, Sources, and Delivery Methods

Figure 4. One Estimate of Annual Climate Change Financing Needed
for Mitigation and Adaptation Activities in Lower-Income Countries, 2010-2020
In Constant 2008 US$ Billions

Source: Project Catalyst, Toward a Global Climate Agreement: Synthesis Briefing Paper, June 2009.

Sources for International Climate Change
Financial Assistance
As outlined in the previous section, trillions of dollars may be advocated over the coming decades
to provide scaled-up, new, additional, predictable, and adequate38 financing for lower-income
countries to enable and support their actions on climate change. These investments would aim to
upgrade and expand energy, industry, and transport infrastructure; to manage land use, land use
changes, and forestry practices; and to support the implementation of adaptation activities for
reducing climate vulnerability and building climate resilience. Having estimated the potential
financial costs for climate change investment, the next step in the process would be to consider
the sources from which these funds may be generated. While markets that are privately
constituted and self-regulated have delivered moderately to climate change investments worldwide, public institutions—including national governments, international organizations, and
official financing mechanisms of the UNFCCC39—continue to be key drivers for climate change
investments, specifically in lower-income countries. In the past, these institutions have relied
heavily on government revenues to finance their activities. But, with climate-related costs rising
into the tens or hundreds of billions of dollars a year, it is unlikely that direct budget contributions
from governments can meet the demand. Other sources of finance may be sought, and many
proposals exist.
38

“Scaled-up,” “new,” “additional,” “predictable,” and “adequate” are all terms stipulated by the UNFCCC. Debate
and controversy over the precise definitions of these terms is outlined in this section.
39
See “Quasi-Private Sector Mechanisms UNFCCC Kyoto Protocol Mechanisms” section for description.

Congressional Research Service

16

International Climate Change Financing: Needs, Sources, and Delivery Methods

Potential sources of international climate change financing for lower-income countries can be
divided into five broad categories: (1) private sector; (2) public interventions to stimulate private
sector investment; (3) public sector; (4) innovative finance; and (5) voluntary actions. Most
potential sources of finance would require some measure of government action or oversight—
either directly, through budget contributions or a transfer of funds, or indirectly, through statesponsored regulations or other incentives to leverage private sector investment. See Appendix A
for an extended glossary of terms related to the various sources of climate finance discussed in
this section.
Each of the categories identified above could potentially generate funds to address climate change
in lower-income countries. Each has advantages and disadvantages. There is no single set of
criteria for comparing these options. 40 Some of the criteria employed by commentators include
the potential magnitude of funds that could be generated by each source; the economic and/or the
GHG-related efficiency of each source; the practicality and predictability of generating funds
from each source; the plausibility of assessing the “additionality”41 of each source; the overall
accessibility and transparency of the funds provided and their use; and the equity and incidence
effects as expressed among countries or between higher and lower-income countries. A brief
summary of some of the more significant outstanding issues regarding the choice of sources is
included in a discussion at the end of this section “Caveats Regarding Sources”; and a tabulated
comparison of the various sources is offered in Appendix B.

Private Sector Sources
Private capital markets can provide one source for mobilizing financing for low-emission
investments in lower-income countries. Instruments such as foreign direct investment, portfolio
investment, microfinance, and public-private partnerships could be promoted to scale up private
financing for climate change mitigation and adaptation activities. Incentive structures may need
to shift in order to favor such investment, and economic and/or regulatory policies may need to be
implemented to define targets and raise the profitability of alternatives. The section below
outlines possible sources for international climate change financing in a privately constituted and
self-regulated market. Public sector interventions to stimulate private capital investments are
addressed in the next section.
Foreign Direct Investment: Foreign direct investment is the long-term participatory investment
in the ownership of productive assets—such as factories, mines, and land—by a multinational
corporation in a developing country’s energy, industry, or transport sector. It can be a relatively
stable source of financing. It has the greatest advantages in mitigation activities, in terms of
40
Investigations into potential sources to finance international climate change mitigation and adaptation activities are
numerous among economic foundations and environmental organizations. Further, in February 2010, United Nations
Secretary General Ban Ki-moon assembled a High Level Advisory Group on Climate Change Financing to identify
technically sound and politically feasible potential sources to scale up long-term financing for adaptation, mitigation,
technology development and transfer, and capacity building in developing countries. Discussion on potential sources
and an assessment on them according to several criteria—including revenue potential, efficiency, equity, incidence,
practicality, reliability, additionality and acceptability—can be found at the Group’s U.N. website http://www.un.org/
wcm/content/site/climatechange/pages/financeadvisorygroup (accessed March 31, 2011).
41
“Additionality” means additional to what currently exists or to would otherwise have occurred. Additionality of
financing expresses the concern of current aid recipients that donors could merely shift existing development aid into
climate-related funds, with no incremental assistance comparable to the extra costs they perceive to be incurring by
addressing climate change.

Congressional Research Service

17

International Climate Change Financing: Needs, Sources, and Delivery Methods

transferring technology and standards which could allow economic development to leapfrog into
more climate-friendly sectors such as energy efficiency and renewable energy. Many highemission sectors—such as road transport, metals, mining, chemicals, timber, and cement—are
dominated by large multinational corporations, and their investments and practices may likely
have a big influence on the timing of alternative development pathways in lower-income
countries.42 However, given that foreign direct investment tends to lag rather than lead economic
growth, it is unlikely to play a significant role in the early stages of a shift onto such a
development pathway, particularly given the initial high degree of uncertainty and the absence of
the in-country inputs that large international firms need in order to operate efficiently.43
Portfolio Investment: Portfolio investment is the purchase of stocks, bonds, and money market
instruments by foreigners for the purpose of realizing a financial return but not resulting in
foreign management, ownership, or legal control. It could also be a stable source of international
climate change financing. Investment could be mobilized through venture capital funds or
specific “green” funds. It could appeal to investors willing to allocate investments to options that
might generate less return but have greater potential in terms of climate change mitigation and
socially responsible business practices. Currently, almost all “green” investment opportunities are
concentrated in the more industrialized countries or the countries with emerging economies.
Funds made available through this channel to lower-income countries have been both limited and
skewed in favor of one or two countries. Without other incentives, the amount of resources that
can be raised is likely to remain quite small.44
Microfinance: Microfinance is the provision of financial services, in the fora of small loans at
market value, to lower-income country clients who traditionally lack access to banking and
related services. It could serve as another vehicle for mobilizing local private resources for
investments in climate-friendly development. Over the past three decades, microfinance has
grown dramatically, with more than 7,000 microcredit institutions in 2006, serving about 80
million people in about 65 countries. 45 Climate-relevant microfinance has expanded beyond
merely encompassing programs of credit provisioning to include schemes of microsavings and
microinsurance. Given the close links between poverty reduction and climate vulnerability,
scaling up microfinance has been considered a possible source of finance for climate adaptation
programs. However, observers note that scaling up microfinance for long-term investment in

42

Department of Economic and Social Affairs, World Economic and Social Survey 2009, Promoting Development,
Saving the Planet, United Nations Publication, 2009.
43
For examples of surveys or reports on international investment in climate change, see The United Nations
Conference on Trade and Development (UNCTAD), World Investment Report 2010: Investing in a Low-Carbon
Economy, 2010; The World Bank Group’s International Finance Corporation’s Climate Unit, at http://www.ifc.org/
climatebusiness; or any multinational private corporation’s climate change division (e.g., see, among others, General
Electric Company, at http://www.ge.com/news/our_viewpoints/energy_and_climate.html; Ford Motor Company, at
http://corporate.ford.com/microsites/sustainability-report-2009-10/issues-climate; or Wal-Mart Stores, Inc., at
http://walmartstores.com/Sustainability/ (accessed March 31, 2011).
44
For a review of climate change issues as related to private investment, see the industry report from Mercer, Climate
Change Scenarios – Implications for Strategic Asset Allocation, February 15, 2011, at http://www.mercer.com/articles/
1406410; or any investor service site such as Responsible Investor, at http://www.responsible-investor.com/home/; or
any investment private equity firm that concentrates on climate change investments (e.g., among others, Climate
Change Capital, at http://www.climatechangecapital.com/home.aspx ) (accessed March 31, 2011).
45
DESA, op. cit.

Congressional Research Service

18

International Climate Change Financing: Needs, Sources, and Delivery Methods

productive activities and sustainable development would require support through a broader
development strategy, including investments in infrastructure and human capital.46
Public-Private Partnerships: Public-private partnerships are business ventures funded and
operated through a partnership between government and one or more private companies. They
involve a contract between a public-sector authority and a private party, in which the private party
provides a public service or project and assumes substantial financial, technical and operational
risk in the project. Public-private partnerships have helped stimulate private financing for energy
efficiency and renewable energy projects in lower-income countries. Likewise, they have
assumed a growing importance as a vehicle for financing climate change adaptation programs, in
the form of infrastructure projects and the delivery of health services. 47

Public Interventions to Stimulate Private Sector Investment
Much of the economic policy debate on climate change has been dominated by the search for
market-based solutions to the problem of market failure (i.e., the external costs of GHG
pollution).48 Successful policy would address the externalities of GHG pollution in the market
and reveal the costs of choosing high-emissions over low emissions technologies. Once
determined, these costs could be internalized through economic incentives (e.g., setting emissions
levels or compliance pricing, etc.) to help drive pollution abatement. Funds for public or private
sector contributions to international climate change financial assistance for lower-income
countries could be derived and transferred in any number of ways from the finances generated by
the market-mechanism. 49

46

Anne Hammill et al., Microfinance and Climate Change Adaptation. Institute of Development Studies, Sussex,
United Kingdom, Bulletin, vol. 39, no. 4 (September 2008). For examples of microfinancing corporations that address
climate change, see, among others, Consultative Group to Assist the Poor, at http://www.cgap.org/p/site/c/template.rc/
1.9.34043/; Green Microfinance, at http://www.greenmicrofinance.org/; The Center for Financial Inclusion, at
http://www.centerforfinancialinclusion.org/Page.aspx?pid=1273; Opportunity International, at
http://www.opportunity.org/our-work/ (accessed March 31, 2011).
47
For examples of public-private partnerships for climate change activities, the United Nations has a comprehensive
database of voluntary multi-stakeholder initiatives contributing to the implementation of Agenda 21, Rio+5 and the
Johannesburg Plan of Implementation (JPOI). It provides a searchable database of U.N. Commission on Sustainable
Development (CSD) Partnerships information, publications, events, and links which implement sustainable
development goals, at http://www.un.org/esa/dsd/dsd_aofw_par/par_index.shtml (accessed March 31, 2011).
48
See box “GHG Emissions and Economic Externalities” for the economic assumptions underlying this analysis.
49
Recent legislative examples of the use of market-based mechanisms to support international climate change financial
assistance to lower-income countries include the June 2009, House passed H.R. 2454, the American Clean Energy and
Security Act (ACESA or Waxman-Markey bill), which had provisions to allow domestic sources to meet their
compliance requirements by acquiring up to 1 billion emissions offsets internationally each year, potentially providing
a many-billion-dollars stream of private finance for emission abatement projects in developing countries. The bill also
would have auctioned a share of domestic allowances to generate funds to help prevent tropical deforestation, build
governance and private sector capacities, support cooperation to advance and deploy clean technologies, and to support
adaptation to climate change in vulnerable and low-income countries. The parallel bill in the Senate, S. 1733, the Clean
Energy Jobs and American Power Act (CEJAPA) or Kerry-Boxer bill, contained similar provisions. Some Members of
Congress and advocates had also sought to increase allocation of allowances and/or appropriations for international
finance, from $2 billion to $38 billion for international adaptation.

Congressional Research Service

19

International Climate Change Financing: Needs, Sources, and Delivery Methods

GHG Emissions and Economic Externalities
In economic theory, GHG emissions are considered a form of pollution and are thus characterized as “negative
externalities.”
A negative externality (also referred to as a negative transaction spillover or an external cost) is defined as the cost of
a transaction incurred by an individual who did not participate in the transaction; and, because this cost is incurred
outside the transaction, it is not reflected in the market price. For example, buying fossil-fuel generated electricity
may lead to air pollution and adverse health effects, the costs of which (both monetary and non-monetary, such as
illness, suffering, or curtailed activities) are carried by many people, not necessarily just the electricity producers and
consumers within the transaction. In most cases, the costs of these third-party illnesses, suffering, or curtailed
activities have not been factored into the market price of the electricity.
For many economists, GHG emissions are an acute example of a negative externality for several reasons. First, GHG
emissions are highly diffuse and dispersed—GHG pollution involves individuals and firms in every country and
continent on the planet, and each polluter makes only a very small contribution to GHG pollution. This makes GHG
emissions very difficult to control (contrast this with “point pollution” where pollution emerges from one fixed, welldefined, and easily identified and controllable source, like a factory polluting a river). Second, the environmental costs
of GHG emissions are also highly dispersed, as they are borne by individuals and firms in every country and continent
on the planet. Third, incurring these risks is completely disconnected from responsibility for emitting GHG, and there
are no simple institutional (political, social, and economic) or technological ways of linking them.50
Under the conditions of externalities, a free market (i.e., a privately constituted and self-regulated market) is
“inefficient.” There is no incentive to limit pollution because the full cost of polluting the atmosphere with GHG
emissions is not borne by the person or firm or country responsible for the pollution. For the market to be efficient,
producers and consumers would need to internalize the external costs of pollution into the price of their transactions
(i.e., determine a “price on carbon”). Theoretically, market efficiency would be achieved when the price of GHG
emissions is set to equal the marginal benefits of abatement.51 Policymakers differ on the mechanisms through which
to internalize the external cost of pollution, but many see some mixture of public sector regulation and/or market
based incentives as the primary policy instruments.52

In general, market-based mechanisms to reduce GHG emissions specify either the acceptable
emissions level (quantity) or the compliance costs (price) and allow the marketplace to determine
the economically efficient solution for the other variable. For example, tradable permit programs
set the amount of emissions allowable under the program (i.e., the number of permits available
limits, or “caps,” allowable emissions), while allowing the marketplace to determine what each
permit will be worth. Likewise, carbon fees set the maximum unit cost (per ton of CO2e) that one
should pay for reducing emissions. Private decisions would determine how or how much
pollution actually gets reduced. In one sense, preference for a carbon fee or a tradable permit
system depends on how one views the uncertainty of costs involved and benefits to be received.53

50
“Climate Change and Development Challenges,” seminar series from the Centre for Financial and Management
Studies, University of London, at http://www.cefims.ac.uk/cedepapp/124_web_unit/page_17.htm (accessed March 31,
2011).
51
Some economists view climate change as more than a simple policy problem of marginal abatement costs. See
Morgan, M. Granger et al., “Why Conventional Tools for Policy Analysis Are Often Inadequate for Problems of Global
Change.” Climatic Change, vol. 41, no. 3 (March 1, 1999): pp. 271-281, the discussion beginning p. 274.
52
For further discussion, see CRS Report RL33799, Climate Change: Design Approaches for a Greenhouse Gas
Reduction Program, by Larry Parker; and CRS Report R41212, EPA Regulation of Greenhouse Gases: Congressional
Responses and Options, by James E. McCarthy and Larry Parker.
53
For further explanations of how emission control systems, including cap-and-trade, may work, see CRS Report
RL33799, Climate Change: Design Approaches for a Greenhouse Gas Reduction Program, by Larry Parker; CRS
Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program: Potential Benefits and
Concerns, by Jonathan L. Ramseur; CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and
Considerations for Congress, by Jonathan L. Ramseur and Larry Parker, and CRS Report R41049, Climate Change
(continued...)

Congressional Research Service

20

International Climate Change Financing: Needs, Sources, and Delivery Methods

Tradable Permit Systems: Tradable permit systems—better known as “cap and trade
programs”—set an overall cap on GHG emissions and then issue tradable permits to firms which
would allow them to emit specified quantities of GHG.54 Firms are required to hold a number of
permits equivalent to their level of pollution. Those firms that need to increase their permissible
quantities would purchase permits on the market. Those that could reduce their emissions more
cheaply could potentially sell their allowances on the market. Some cap and trade programs
would auction all permits during the initial issuance. Some programs would phase in permits
through a period of free or reduced price allocations of permits. Some programs include a
mechanism whereby firms could gain emission credits through pollution reductions performed in
economic sectors outside of the regulated market (e.g., agriculture, forestry, or in countries or
regions not covered by the program). This is referred to as an “offset” market. In each case,
revenue for international climate change assistance can be generated in a number of ways.
a. Revenues from domestic auctioning of emission allowances in domestic
emission trading schemes: This would involve auctioning of domestic credits
(as in the EU Emission Trading Scheme phase III, or any potential domestic cap
and trade program) and transferring some part of associated revenues to
international climate change financing.
b. Revenues from international auctioning of emission allowances in
international emission trading schemes (such as Assigned Amount Units under
the Kyoto Protocol): An Assigned Amount Unit (AAU) is a tradable “carbon
credit” representing an allowance to emit GHG under the UNFCCC Kyoto
Protocol emissions trading market. AAUs are issued up to the level of initial
“assigned amount” of an Annex 1 Party. Some countries support sourcing
revenue for international climate change activities by retaining some allowances
from the Annex I countries and then auctioning them. 55
c. Revenues from offset levies: This would involve withholding a share of offset
revenues from emissions trading markets—such as the Kyoto market or any
domestic market—as an international source of climate change financing. This is
currently done with the Kyoto Protocol’s Clean Development Mechanism
(CDM),56 which capitalizes the UNFCCC Adaptation Fund through a 2% levy on
the proceeds from its certified emission reductions.57

(...continued)
and the EU Emissions Trading Scheme (ETS): Looking to 2020, by Larry Parker; among other relevant CRS reports on
“Climate Change Policy” available at http://www.crs.gov/.
54
Tradable Permit Systems are currently in place in the United States at the state and regional level. See the Regional
Greenhouse Gas Initiative (RGGI) wherein ten Northeastern and Mid-Atlantic states have capped CO2 emissions from
the power sector with the aim of reducing emissions by 10% by 2018 at http://www.rggi.org/home. See also the
regional strategy proposed by the Western Climate Initiative at http://www.westernclimateinitiative.org/
55
The United States is not a Party to the Kyoto Protocol, and has often not supported international efforts to create an
international emission trading market, particularly one in which all significant GHG emitting countries (e.g., China,
India) are not a Party.
56
See discussion of the Clean Development Mechanism in the section “Methods for Delivering International
Climate Change Financial Assistance.”
57
For more information about the Clean Development Mechanism or the Adaptation Fund, see the UNFCCC website at
http://unfccc.int/cooperation_and_support/financial_mechanism/adaptation_fund/items/3659.php

Congressional Research Service

21

International Climate Change Financing: Needs, Sources, and Delivery Methods

Emission-Based Fees, and Other Levies: An emission-based fee is an environmental fee that is
levied on the GHG content of fuels or other sources of emissions. By increasing the cost of
emissions, emission fees raise public revenue, any or all of which could be transferred and used
for international climate change assistance to lower-income countries. Emission fees are
occasionally referred to as “carbon taxes”; under guidelines of the U.S. Office of Management
and Budget, a “tax” is primarily for generating revenues, while a user (i.e., emissions) fee58 is
primarily to charge for an entity’s use of a resource (e.g., the atmosphere as a place to discharge
waste emissions).59
a. Revenues from GHG fees: This would involve a tax on GHG emissions in
countries raised on a per ton emitted basis.
b. Revenues generated from taxes on international aviation and shipping: This
would involve either a levy on maritime bunker/aviation jet fuels for
international voyages, or a levy on passenger tickets of international flights.
c. Revenues generated by removing fossil energy subsidies: This would involve
public funds made available by the removal of fossil energy subsidies which
could be diverted towards international climate change financing. While not a
levy per se, redirection of subsidy grants or increases in tax receipts by reducing
credits and deductions would function in a comparable economic manner to an
emission tax on consumers.
d. Revenues from fossil fuel extraction royalties/licenses: This would involve a
redirection of a portion of existing government receipts associated with domestic
fossil fuel production for use in international climate change financing.60

Public Sector Sources
Allocating resources in a national public budget directly to international climate change
assistance is a straightforward way for governments to finance activities in lower-income
countries, and historically public funding has played an important role in both mitigation and
adaptation financing. In practice, public funds may be mobilized similar to, or as part of, official
development assistance (ODA); or, public funds may flow through international financial
institutions as grants or grant-equivalent (i.e., “concessional”) loans.61 While some see public
funds as a practical, equitable, and potentially predictable source of international climate change
financing, political acceptability in the donor countries over the longer term may depend on
national circumstances and on the size of the contribution. Further, global fiscal cycles can place
public finances in many high-income countries under extreme pressures and could make it
58
U.S. Office of Management and Budget, User Charges, Circular No. A-25 Revised, at http://www.whitehouse.gov/
omb/circulars_a025/ (accessed March 31, 2011).
59
It should be noted that fees set a price on emissions, not a limit on the quantity; and their primary effect is economic,
not environmental. Thus fees may be unrelated to marginal benefits or pollution abatement.
60
Among higher-income countries, fossil fuel revenues are concentrated among five major producers (U.S., U.K.
Canada, Australia, Norway). Impacts within countries would be determined by how budgets are adjusted to compensate
for this diversion of existing revenues.
61
“Concessional loans” are loans that are extended on terms substantially more generous than market loans. The
concessionality is achieved either through interest rates below those available on the market or by long grace periods,
or a combination of these. See International Monetary Fund, External Debt Statistics: Guide for Compilers and Users –
Appendix III, Glossary, 2003.

Congressional Research Service

22

International Climate Change Financing: Needs, Sources, and Delivery Methods

difficult to generate sufficient and reliable financial flows over the required period or in the
required order of magnitude. 62
Voluntary Budget Contributions: Voluntary contributions involve public revenues provided to
recipient countries—either directly or by international financial institutions—through national
budgetary decisions. Voluntary contributions have played—and likely may continue to play—the
most important role in publically funded international climate change finance. Voluntary
contributions may draw revenue from a domestic base (e.g., through taxes or fees) and allow for
contributing governments to (1) pursue different options at different times as public opinion
evolves, (2) divert only a portion of revenue from a particular source for international climate
change financing, rather than the entire revenue flow, and (3) retain control over annual spending,
rather than provide some kind of automated mechanism. But voluntary contributions in many
countries are subject to legislative decision making and annual appropriations, making
predictability and reliability difficult to ascertain.
Mandatory or Assessed Budget Contributions: Some lower-income countries63 have proposed
that UNFCCC Annex I parties contribute from 0.5%-1.0% of their gross national income to
climate change financing in non-Annex I countries, to be channeled through a multilateral fund
under the authority of the Convention. This would generate approximately $150 billion to $300
billion per year at pre-crisis income levels of major Organization for Economic Cooperation and
Development (OECD) economies. Others have proposed assessed contributions formulated on
the basis of some combination of a contributing country’s GHG emissions, population, and gross
domestic product, in accordance with the principle of common but differentiated responsibilities
and respective capabilities. Supporters propose that mechanisms should be put in place to make
contributions legally binding. The source for these funds would be similar to voluntary
contributions (i.e., domestic taxes or fees).
Public Debt Instruments: Public debt instruments raise money for public entities by borrowing
from bond markets. Most high-income country governments can borrow money at a discount
because their chance of default is considered low compared to privately held companies.
Multilateral Development Banks (MDB) and other International Financial Institutions (IFI) use
the same principle for raising capital for lower-income country governments. Using their good
credit rating, which is based on the fact that they are backed by the capital subscriptions of
developed country governments, IFIs and MDBs borrow money at favorable conditions to lend at
a lower interest rate or accept a higher risk, a benefit that they can pass on to their clients in the
interest of development and climate protection. Increased capital subscriptions from higherincome countries would allow these institutions to increase lending to lower-income countries.

62

These arguments are further outlined in United Nations, Report of the Secretary-General’s High Level Advisory
Group on Climate Change Financing, November 5, 2010, at http://www.un.org/wcm/webdav/site/climatechange/
shared/Documents/AGF_reports/AGF%20Report.pdf (accessed March 31, 2011); and responses to it, such as Timme
van Melle et al., International Climate Financing: From Cancún to a 2°C stabilization pathway, Ecofys Netherlands
BV, 2011, at http://www.fao.org/fileadmin/user_upload/rome2007/docs/
Climate_financing_after_Cancun%20ECOFYS.pdf (accessed March 31, 2011).
63
Proposed to the UNFCCC by the Group of 77 and China. The Group of 77, see http://www.g77.org/doc/.

Congressional Research Service

23

International Climate Change Financing: Needs, Sources, and Delivery Methods

Innovative Finance
Despite the spectrum of sources available for international climate change financing, many
observers consider current funding inadequate, and look to more innovative methods of finance.
Various proposals have been made for raising revenues for climate action from sources not
closely linked to GHG emissions. While these proposals have the capacity to generate large
quantities of financial assistance, they may be perceived as arbitrary in their choices and by the
numerous competing causes that could benefit from their financing. Two of the more heavily
discussed proposals include a financial transaction tax and special drawing rights.
Financial Transaction Tax: A Financial Transaction Tax (FTT) is a levy on international
financial transactions. The level of estimated revenues from the FTT is driven by the tax base, the
tax rate, and the elasticity of the transaction volume to the tax rate. A global FTT, as currently
debated, would be a new and additional source for climate finance. Strong international
coordination and allowances for international implementation could increase the efficiency of
such a source. However, critics point out that FTTs are unconnected to GHG emissions in any
practical way, and the unresolved issues of incidence on both higher and lower-income countries
would make it difficult to implement universally.
Special Drawing Rights: Special Drawing Rights (SDRs) are an accounting mechanism—
sometimes called “virtual currency”—typically held as a reserve asset in financial organizations
such as the International Monetary Fund (IMF). SDRs supplement IMF member countries'
official reserves and generate liquidity in the event of balance of payments difficulties. The value
of an SDR is based on a basket of key international currencies. In some proposals to capitalize a
fund for climate change financing, SDRs could be issued in exchange for real currency to
generate revenues. In other proposals, bonds could be issued on the back of paid-in SDRs to
generate liquidity and contributors would receive an equity stake in the fund proportional to their
contribution. In either case, the IMF would not necessarily be the entity issuing these proposed
SDRs or managing the system. Most policymakers have not supported the use of SDRs to
capitalize resources for climate change finance because the effort would undermine the primary
purpose of the SDR system, present legal and political/financial challenges in implementation,
and offer few if any advantages over traditional capitalization.

Voluntary Actions
Some sources for international climate change financing may be found in philanthropic or
voluntary markets. Proponents note that some companies and some consumers have already
begun to implement voluntary changes and have already begun to make voluntary contributions
in order to reduce GHG emissions. Many believe that absent more aggressive governmental
intervention, it is unlikely that these trends would be quantitatively sufficient and timely enough
to make a significant impact on climate change. Voluntary action may also hurt relative
competitiveness and increase costs in the short term, reducing incentives to adopt more stringent
standards in the future.
Philanthropy: Many philanthropic organizations already provide contributions to climate change
mitigation or adaptation financing in lower-income countries. Many work closely with
nongovernmental and civil society organizations to promote education, knowledge sharing, and
human capital advancements to further climate change investment in lower-income countries.

Congressional Research Service

24

International Climate Change Financing: Needs, Sources, and Delivery Methods

Voluntary Offsets: Voluntary offsets are “carbon neutral” certificates that are sold by some
private entities in exchange for climate-related services (e.g., a contribution to an international
climate change fund). Companies currently sell offsets in exchange for assurance that the funds
will be used to reduce GHG emissions (e.g., by planting trees). This may differ from general
philanthropy in the sense that funds are, in principle, directly in exchange for quantified
emissions reduction performance and could be issued through aggregators of small, diversified
projects or through brokers.

Caveats Regarding Sources
The Role of Markets: The economic debate within international climate change policy has been
dominated by assessments of market-based mechanisms aimed at changing price incentives so
that investment in low-emissions development becomes more attractive (e.g., cap and trade,
carbon fees, loan guarantees). Many agree that private investment will likely have a predominant
role to play in any low-emissions economic future, and that establishing a price on GHG
emissions will likely have a part in any effective policy agenda. However, concerns remain
whether such mechanisms can induce the required shifts in production and consumption patterns
and mobilize the necessary investment. Some assert that price mechanisms are unreliable guides
in cases where investments are large, where returns are not immediately visible, and where
conditions are dependent upon unpredictable policy initiatives. The uncertainties in investments
are heightened when the climate and development challenge takes place against a backdrop of
systemic financial market failure and natural resource price volatility. As such, some
policymakers believe that market mechanisms would contribute only a partial role in a larger
package of measures that includes a reliance on regulations and large-scale public investments.64
The Role of Governments: Notwithstanding economic considerations, the “private funding”
versus “public funding” debate also has political, legal, and equity components. For example,
some recipient countries contend that donor governments should provide public funds as the main
source of climate change assistance because they understand climate finance as an international
equity issue, with contributions serving as reparation for past environmental loss or damage.
Others assert that developed country governments—not private corporations—have signed onto
legally binding international environmental agreements to provide assistance to lower-income
countries. Some may believe public monies would be more direct and easier to generate, and
therefore more predictable and sustained. They may not consider or recognize the challenges in
some countries to appropriating federal funds for international purposes. Similarly, some recipient
countries may be suspicious of foreign private investment and would prefer the funding to be
under the control of local governmental decision-makers, hoping this would better reflect local
priorities and indigenous cultures. Conversely, donor countries tend to underscore the costs of
extending such financing, including the direct outlays of funds, the secondary costs to their
domestic economies for investing abroad at concessional terms, and the losses accrued by passing
funds through governments institutions or other intermediaries.
The Requirement for Scaled Up, New and Additional, Predictable and Adequate Financing:
Most, if not all, low-income countries have stated that fulfilling their commitments under the
UNFCCC would depend on financial and technical support from higher-income countries. As
noted above, they seek resources that can be defined as “scaled up, new and additional,
64

See DESA and UN, Report of the Secretary-General’s High Level Advisory Group on Climate Change, op. cit.

Congressional Research Service

25

International Climate Change Financing: Needs, Sources, and Delivery Methods

predictable and adequate.”65 While the term “scaled up” presumes an increase in funding from
existing sources, the terms “new,” “additional,” and “adequate” are subject to diverse
interpretations and controversy. “New” funds could signify entirely unique funding sources
arising from new public levies, new international allocations, or new multilateral mechanisms; or,
it could simply refer to funds from a new fiscal year, a new multilateral replenishment
contribution, or a new domestic or international program that takes the place of an expiring one.
Some are concerned that funding is not shifted merely from one type of development assistance
to climate change assistance, with little or no increase comparable to the stated needs.
“Additional” is meant to denote an increment above and beyond “business-as-usual.” However,
speculating as to counterfactual development assistance trajectories that would have taken place if
not for the “additional” funding is rife with debate. Finally, the term “adequate,” with respect to
needs, is a wholly subjective quantity.

Methods for Delivering International
Climate Change Financial Assistance
The previous section outlined many of the existing and proposed funding sources for investment
in climate change mitigation and adaptation activities in lower-income countries. The next step
would be to consider the methods through which these funds could be transferred from
contributing countries to their recipients. A variety of mechanisms, organizations, and institutions
for disbursing international climate change financing already exists. All have a role in catalyzing
climate action: mobilizing additional resources; reorienting public and private flows toward lowcarbon and climate-resilient investments; supporting the research, development, and deployment
of climate-friendly technologies; and strengthening the institutional capacities of recipient
countries. Mechanisms can be divided into three broad categories: (1) private or quasi-private
sector, (2) public sector bilateral, and (3) public sector multilateral.66 Foreign Direct Investment
(FDI), Export Credit markets, non-concessional lending at the Multilateral Development Banks
(MDB), and the various Kyoto Protocol market mechanisms at the UNFCCC (e.g., the Clean
Development Mechanism (CDM)) would be classified as private or quasi-private sector
mechanisms. Public sectors mechanisms would include contributing countries’ Official
Development Assistance (ODA) as well as many of the multilateral environment and
development trust funds (e.g., the Global Environment Facility (GEF)) and the concessional
lending windows housed at the various institutions at the World Bank Group.
Figure 5 presents a comparison of the financial flows for energy and infrastructure
development—including development specific to climate change mitigation—in low-income
countries per annum (in this example, the analysis compares flows for the year 2007). The figure
shows that total investment in all “mitigation-relevant” sectors (i.e., funding for economic
development in all key sectors that shape future GHG emissions in developing countries,
including energy, transport and water infrastructure, industry, waste management, agricultural,
65
As outlined in the most recent UNFCCC draft negotiations: United Nations Convention on Climate Change, Draft
decision -/CP.16, Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the
Convention, 2010, Section IV.A. “Finance,” at http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf
(accessed March 31, 2011).
66
In general, “bilateral” assistance involves a direct transfer from one country to another; “multilateral” assistance is
distributed through international organizations and agencies like the United Nations Organization and the World Bank
Group. Further clarifications and debates on the mechanisms respective merits are elaborated in this section.

Congressional Research Service

26

International Climate Change Financing: Needs, Sources, and Delivery Methods

and forestry) amounted to an estimated $316 billion, of which over 80% was from private sector
funds. It should be noted that “mitigation-relevant” investments need not be GHG reducing
investments (e.g., both wind power generation and fossil fuel power generation are “mitigationrelevant” investments). “Mitigation-specific” investments (i.e., investments in which the primary
objective is to reduce GHG emissions) amounted to $20 billion in 2007—or 6% of total key
sector investment—of which approximately 60% was from private sector funds.
Figure 5.Total Investment in Emissions-Related Economic Sectors in 2007

Source: Jan Corfee-Morlot et al., Financing Climate Change Mitigation: Towards a Framework for Measurement,
Reporting, and Verification, Organization for Economic Cooperation and Development, October 2009.
Notes: “Total Investment in all emission-related economic sectors” refers to assistance for economic
development in all key sectors that shape future emissions in developing countries, including energy, transport
and water infrastructure, industry, waste management, agricultural, and forestry.” “Emission-related” investment
may serve to increase or decrease GHG emissions. “GHG mitigation-specific” assistance refers to assistance
aimed “to achieve GHG mitigation in developing countries as its main objective.” “ODA “Rio Markers” refers to
Official Development Assistance contributed by OECD Members of the Development Assistance Committee
(DAC), who report their aid activities to the OECD Creditor Reporting System (CRS) database, that specifically
targets the objectives of the three United Nations Rio conventions (i.e., U.N. Convention on Biological Diversity,
U.N. Framework Convention on Climate Change and U.N. Convention to Combat Desertification).

All of the mechanisms identified above could potentially deliver funds to address climate change
in lower-income countries. Each has advantages and disadvantages, and there is no single set of
criteria for comparing these options. Many critics contend that the overall architecture of financial
mechanisms to address climate change is underfunded and unnecessarily complex. The array of
funds and financial institutions lack both strategic mandate and adequate coordination, leaving
many gaps, overlaps, and inefficiencies. Divisions have arisen over the proper financial
instruments to employ in lower-income countries (e.g., grants or loans) as well as the role shared
by the public and private spheres. A brief summary of some of the more significant outstanding

Congressional Research Service

27

International Climate Change Financing: Needs, Sources, and Delivery Methods

issues regarding the choice of sources is included in a discussion at the end of this section under
“Caveats Regarding Mechanisms.”

Private Sector Mechanisms
The sheer magnitude of the required investment for climate change mitigation and adaptation
activities necessitates capital flows from the private sector. Currently, the private sector accounts
for over 85% of global investment in those economic sectors relevant to climate change
mitigation and adaptation activities, although governments largely control the underlying
infrastructure investments that affect the opportunities for low-emissions economic development.
Similarly, public sector financing has been more prominent in low-income countries—
particularly the least developed countries and the small island states—in which private entities are
still reticent to invest. To this point, private capital markets have filled in the gaps in climate
change financing in lower-income countries, and, in some cases, have taken the lead in marketready mitigation investment to create a low-carbon economy, such as energy-efficient machinery,
cleaner cars, and renewable energy.
Foreign Direct Investment: Over the past two decades, the international climate change agenda
has shared a stage with an expanding global economy. 67 As such, particular attention has been
paid to foreign direct investment (FDI) in lower-income countries to address climate change. FDI
has many potential benefits, including financing infrastructure expansion without contributing to
public debt, supporting technology and knowledge transfer, and acting as a catalyst for further
capital inflows. Despite considerable efforts to attract FDI in the last several years, actual levels
of such investment into the energy and industry sectors in many countries with economies in
transition have been moderate.68 Similarly, FDI tends to lag rather than lead economic growth,
and, as such, is not likely to play a significant role in the early stages of a shift to lower-emission
development trajectories. Mobilization of the necessary capital resources requires an attractive
investment climate—a business-friendly environment, favorable macroeconomic performance,
and a regulatory environment that is predictable, fair, transparent and efficient.

Quasi-Private Sector Mechanisms
Several mechanisms function predominantly in the private sector but were set up initially by
public sector entities or are currently backed by guarantees (whether financial or institutional)
from them.
Export Credit Agencies: Export Credit Agencies (ECA) are private or quasi-governmental
financial institutions or agencies that provide financing to domestic companies for their
international trade activities. ECA services can include such instruments as direct loans, loan
guarantees, and insurance for companies in order to help promote exports. These programs are
implemented in cases where the private sector is unable or unwilling to provide financing to
ensure equitable competition for U.S. exporters due to potential commercial, exchange rate, or
political risks and uncertainties in overseas markets. The primary objective of ECAs is to remove
the risk of repayment to exporters by shifting the financial burden of uncertainty onto themselves,
67
Strong arguments exist on both sides as to whether “globalization” is a benefit to developing countries, the
environment, or both.
68
World Bank, 2010, op. cit.

Congressional Research Service

28

International Climate Change Financing: Needs, Sources, and Delivery Methods

for a premium. The U.S. Export-Import Bank and the Overseas Private Investment Corporation
are two examples of export credit and overseas investment agencies connected to the United
States government.69
Development Banks: Non-Concessional Lending: The International Bank for Reconstruction
and Development (IBRD) and the International Finance Corporation (IFC) are the facilities
within the World Bank Group that make non-concessional or “hard” loans to middle-income
countries as well as provide services for private sector ventures and projects in developing
countries. While similar in structure to a commercial lending facility, the IBRD focuses primarily
on investments that support poverty reduction, economic development, and global public goods,
including food security and climate change. The IBRD currently has plans to increase lending to
support renewable energy and energy efficiency projects in lower-income countries, and it
continues to serve as a center for research and knowledge-sharing on development practices,
promoting lessons learned and identifying innovations to combat the effects of climate change.
The regional banks in the World Bank Group have similar non-concessional lending windows.
The United States supports the IRBD through its capital subscription to the IBRD General Capital
Increase (GCI).70
UNFCCC Kyoto Protocol Mechanisms: The UNFCCC introduced three market-based
mechanisms to assist countries with commitments under the Kyoto Protocol to limit or reduce
greenhouse gas emissions. The mechanisms include International Emission Trading, the Clean
Development Mechanism, and Joint Implementation. Most relevant to developing country
assistance, the Clean Development Mechanism (CDM) allows entities with emission-reduction or
emission-limitation commitments under the Kyoto Protocol to implement emission-reduction
projects in lower-income countries in order to earn saleable certified emission reduction (CER)
credits which can be counted towards meeting Kyoto targets. Though the CDM has been used far
less than many had initially envisioned (in part because of slow processes and governance issues),
its board says that it has issued more than 1.7 billion tons of CO2e GHG reductions ($2.9 billion
expected by end of 2012), and has leveraged US$33 billion from investors in 2007 alone.71
Similar programs include the World Bank’s Carbon Finance Unit, which uses donations from
private and public entities to purchase GHG emission reductions in client countries.72

69

See CRS Report 98-568, Export-Import Bank: Background and Legislative Issues, by Shayerah Ilias.
See CRS Report R41170, Multilateral Development Banks: Overview and Issues for Congress, by Rebecca M.
Nelson.
71
Danieli Violetti, “Clean Development Mechanism: Achievements and Developments,” paper presented at the 6th
Session of the High-Level Task Force on the Implementation of the Right to Development, Geneva, 2010.
72
See CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali “Action Plan,” and International Actions, by
Jane A. Leggett.
70

Congressional Research Service

29

International Climate Change Financing: Needs, Sources, and Delivery Methods

Public Sector Mechanisms
As a complement to private sector investment, many countries also contribute funds to climate
change initiatives in lower-income countries through various public sector mechanisms,
organizations, and institutions. Governments may choose to contribute these funds either directly
to recipient countries (i.e., bilateral assistance) or in combination with other donors through an
international institution (i.e., multilateral assistance).73 Bilateral assistance is often provided
through a contributing country’s development agency (e.g., U.S. Agency for International
Development (USAID)). These direct and long-standing relationships between donor and
recipient countries’ development agencies can enable cooperative implementation plans with
respect to environmental issues. Many climate change initiatives share a sensitivity to other
development sectors (e.g., agriculture, biodiversity, health, and infrastructure) and provide an
opportunity to implement innovative cross-sectoral programs. Further, bilateral assistance gives
contributors more control over where the money goes and how the money is spent. For example,
contributing countries may have more flexibility to allocate funds to countries that are of
geopolitical strategic importance, but not facing the greatest development needs, than might be
possible by providing assistance through a multilateral organization. By building a clear link
between the contributing country and the recipient country, bilateral assistance may also garner
more goodwill from the recipient country than if the funds had been provided through a
multilateral organization.
Multilateral organizations offer different benefits for contributing countries. Multilateral
organizations pool the resources of several contributors, allowing countries to share the cost of
development projects (often called burden-sharing). In this way, one country’s multilateral
assistance is said to “leverage” additional funds from other contributing countries, as well as from
implementing agencies, non-governmental organizations, the private sector, and even the
recipient countries themselves. Further, long-standing and established multilateral institutions
dedicated to climate change initiatives and sustainable development practices may hold a level of
expertise and may benefit from knowledge carry-overs that are not as prevalent in the smaller
bilateral assistance agencies of some contributing countries. Additionally, contributing countries
may find it politically sensitive to attach or enforce policy reforms to bilateral assistance, and
multilateral organizations can usefully serve as a shield for imposing and enforcing conditionality
that may be politically sensitive to attach bilaterally. Finally, many believe that providing funds to
multilateral organizations plays a role in a contributing country’s leadership in the world
economy.
Table 2 lists some of the most prominent bilateral and multilateral financing mechanisms for
climate change activities in lower-income countries. Below are descriptions of the various public
sector mechanisms currently employed by the United States. Commentary on the effectiveness of
each mechanism can be found in the topical discussion at the conclusion of this section as well as
in the respective CRS reports footnoted under each heading.

73

For more on the choice between bilateral and multilateral aid, see, for example: Helen Milner and Dustin Tingley,
“The Choice for Multilateralism: Foreign Aid and American Foreign Policy,” Working Paper, February 10, 2010, and
Helen Milner, “Why Multilateralism? Foreign Aid and Domestic Principal-Agent Problems,” in Delegation and
Agency in International Organizations, eds. Darren Hawkins et al. (New York: Cambridge UP, 2006), pp. 107-139.

Congressional Research Service

30

International Climate Change Financing: Needs, Sources, and Delivery Methods

Table 2. Examples of Bilateral and Multilateral Financing Mechanisms for Climate
Change Mitigation and Adaptation Activities in Lower-Income Countries
In Constant 2008 US$ Millions
Name

Funding Pledge
(All Donors)

Usea

Details

Multilateral Funds Associated with the United Nations Framework Convention on Climate Change
Global Environment Facility (GEF)-5

4,340

M

Provides grants. Time frame: 2010-2014,
prior contributions from 1991 through
2009 amount to approximately $9 billion

400-1,500

A

Provides grants. Time frame: 2008-2012;
as of 2008, $91.3 million was available (4
million certified emission reductions
(CERs) at €17.5 per CER)

Least Developed Countries’ Fund

172

A

Provides grants. Includes pledges as of
December 2008; $91.8 million has been
received as of November

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR41808. Public record. Not legal advice.