IPBES: Economic and financial systems must evolve to protect biodiversity and support transformative change

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Key points:

  • The IPBES Nexus assessment – a first-of-its-kind scientific assessment from an intergovernmental body on the interlinkages between biodiversity, climate, health, water and food – has significant findings on the risks to the financial and economic systems that these connections pose.
  • In parallel, the Transformative Change Assessment provides insights into the shifts in views, structures and practices needed for deliberate transformative change for a just and sustainable world. 
  • Financial and economic systems need nature to function. Around USD 58 trillion – or over half of the world’s GDP in 2023 – comes from sectors that are moderately or highly dependent on nature, meaning that the increasing degradation of natural resources is putting the way our economy functions at risk. 
  • The negative externalities arising from the fossil fuel, agriculture and fisheries sectors are estimated at USD 10 trillion–25 trillion annually, severely impacting biodiversity, water, food security, health and climate change.
  • In contrast, investment in biodiversity conservation remains critically low, with only between USD 135 billion and USD 200 billion directed toward improving the status of nature annually from both public and private sources. To tackle the biodiversity funding gap, the financial needs are estimated in the range of USD 300 billion–1 trillion per year.
  • To protect nature and biodiversity and address the risks posed by climate change, reforms in economic and financial systems are necessary. These will include increasing financial flows to biodiversity, addressing debt crises, fostering greater involvement of the private sector, pricing environmental degradation, reforming harmful subsidies and decreasing inequalities.

The Nexus Assessment, released by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES, sometimes called the IPCC for biodiversity) on December 17, 2024, is the most ambitious scientific assessment ever undertaken of the interlinkages between biodiversity loss, water availability and quality, food insecurity, health risks and climate change. At the same time, IPBES also produced the Transformative Change Assessment, which provides insights into the underlying causes of biodiversity loss and the shifts needed to affect deliberate transformative change for a just and sustainable world. The release of both reports followed negotiations between IPBES’ 147 member states after three years of work by experts and multiple consultations with Indigenous Peoples and practitioners.

The assessments make it clear that economies face substantial risk due to our high dependence on biodiversity and nature – which has largely been a blind spot in the global finance system. Scientists agreed that over half of the world’s GDP – USD 58 trillion in 2023 – is generated in sectors that are moderately to highly dependent on nature, exposing these economic activities to risks from biodiversity loss and ecosystem collapse. 

One of the key elements in both reports is the role of economic and financial systems, particularly public and private spending, in supporting or hindering transformative change and the challenges and crises of biodiversity loss, water availability and quality, food insecurity, health risks and climate change (also referred to as the nexus elements). This briefing draws on the findings to summarise how economic and financial systems impact the interlinkages between the nexus elements, and highlights the role finance and economic policy decisions play in securing deliberate transformative change for a just and sustainable world.  

The causes of the breakdown: how economic and financial systems contribute to erosion of biodiversity, water, food, health and climate

The Nexus and Transformative Change reports make clear that economic and financial activity is actively contributing to the deterioration of biodiversity and nature, with the Nexus Assessment stating that: “Dominant economic systems can result in unsustainable and inequitable economic growth”. 

Current policies and international agreements fail to address the substantial negative externalities and can contribute to harming nature. Societal, economic and policy decisions that focus on short-term financial returns without accounting for the broader costs to nature and other nexus elements lead to unequal outcomes for human well-being. For example, the Transformative Change Assessment points out that current market growth-driven paradigms, embodied by metrics such as Gross Domestic Product, limit our definition of development, ignoring other economic, social (including cultural) and environmental dimensions.

More than half of the global population lives in areas facing significant pressure on one or more nexus elements. These impacts are felt disproportionately by those living in low-income countries and small island developing states, as well as by marginalised groups and Indigenous Peoples. While different countries experience the economic impacts of biodiversity loss to varying degrees, developing countries face higher relative impacts due to financial barriers such as high debt burdens that make it more difficult for them to mobilise financial flows. 

The two reports put a value on the impact of economic and financial systems on biodiversity and other nexus elements:1Some figures from the Nexus Assessment and the Transformative Change Assessment vary slightly due to different calculation methodologies and definitions in the underlying literature upon which they are based. Multiple analyses coming to similar results supports the validity of the conclusions.

  • The Nexus Assessment calculates that USD 7 trillion per year is invested in economic activities that damage biodiversity. Of this, private sector financial flows directly harmful to biodiversity total about USD 5.3 trillion per year and public flows are around USD 1.7 trillion. 
  • The Transformative Change Assessment collates global public explicit subsidies to sectors driving nature’s decline, finding they stood between USD 1.4 trillion and USD 3.3 trillion in 2023. Agriculture received USD 520 billion-851 billion and fossil fuels received USD 440 billion-1.26 trillion.
  • The negative externalities arising from the fossil fuel, agriculture and fisheries sectors are estimated at around USD 10 trillion–25 trillion annually, according to figures in both reports, illustrating how severely consumption and production in these sectors affect biodiversity, water, food, health and climate change. 
  • Illegal resource extraction globally, including in the wildlife, timber and fish trades, is valued at USD 100 billion–300 billion or more each year, per Nexus Assessment figures.

In contrast to the trillions of dollars invested in or subsiding harm to the nexus elements, funding for biodiversity sits between USD 135 billion and USD 200 billion according to the Transformative Change Assessment and the Nexus Assessment (see Figure 1).

Figure 1: Financial flows harming biodiversity vastly outweigh funding to improve it
Source: Transformative Change Assessment Figure SPM. 7

Transforming the economic and financial system to preserve nature

Both reports lay out the importance of taking action to transform economic and financial systems to conserve and restore nature. Taking action now could have a business opportunity value of over USD 10 trillion and support 395 million jobs by 2030, according to a recent study cited in the Transformative Change Assessment. The reports outline a number of such actions, several of which are described below.

Increase financial flows to biodiversity, particularly to Indigenous Peoples and local communities

The current economic system fails to comprehensively capture biodiversity’s full value and relies on incentives that only consider how nature benefits humans directly, for example through food and water provision. Despite nature’s role in underpinning economic activity, investment in biodiversity conservation remains low. Only around USD 153 billion-200 billion in annual expenditure is directed toward biodiversity improvement efforts, according to both reports.

This funding is significantly lower than financial flows that cause direct harm to nature. According to the Nexus Assessment, bridging this gap requires additional resources estimated in the range of USD 300 billion–1 trillion per year,2The Transformative Change Assessment puts the financing gap at USD 598 billion to 824 billion, showing that these estimates are highly consensual if not exactly identical. with at least USD 4 trillion needed to meet the Sustainable Development Goals most connected to water, food, health and climate. Promising mechanisms such as green bonds or blue bonds remain underutilised, and other options such as payments for ecosystem services mobilise only USD 42 billion per year from both public and private sources, according to the Nexus Assessment. Likewise, establishing sustainability as a central tax principle and reducing tax avoidance can help generate funds for biodiversity.

Indigenous Peoples frequently experience degraded biodiversity, water, food, health and climate, have difficulty accessing financing and are excluded from decision-making processes. Despite this, Indigenous Peoples and local communities make successful contributions to biodiversity conservation and the sustainable management of resources, highlighting the importance of recognising their rights and roles in decision-making processes. Recognising and supporting Indigenous-led conservation activities and food system management leads to significant benefits across the nexus elements. Successful conservation projects must involve Indigenous Peoples and local communities in all steps of the process, including co-decision and governance. Yet, only a small fraction of biodiversity finance is spent in developing countries, and Indigenous Peoples face challenges accessing funding and finance.

Reform debt to enable highly indebted biodiverse countries to protect nature

Low- and middle-income countries are most likely to feel the economic effects of biodiversity loss and the degradation of water, climate, food, and health. Developing countries also face significant barriers in accessing finance to protect nature and address climate change. Reforms to the financial system, including addressing debt crises, taking into account the need to enable just and equitable transitions and tackling the cost of finance connected to perceived investment risks, could help these countries access adequate and affordable financing.

Foster greater involvement from the private sector

Private finance for biodiversity is lacking, with the private sector accounting for only 17% of investments in nature-based solutions, according to the Transformative Change Assessment. Additionally, what private finance there is gets skewed towards developed countries, with just 5% allocated to least-developed and other low-income countries, according to the Nexus Assessment. 

One option to incentivise private investment in biodiversity is to make nature a key financial factor for companies. Furthermore, coalitions with multiple actors, including the private sector, are more effective at creating transformative change in general, showing that they have a role to play beyond simply providing finance.

Put an accurate price on environmental degradation

The current economic and financial systems fail to account for negative externalities from the most polluting sectors, with environmental impacts costing trillions of dollars per year, according to figures from both reports. Different ways to internalise these costs – to ensure they are included in the cost of doing business and reflected in the final price of products and services – could be employed more widely. Examples include water pricing and natural capital accounting, which helps identify and value natural assets, and the application of taxes or fines on environmentally harmful activities.

Eliminate, phase out or reform subsidies to move towards more sustainable practices

Governments spend USD 1.7 trillion a year on subsidies that incentivise biodiversity-damaging activities, according to the Nexus Assessment, and these subsidies have increased by 55% since 2021, according to the Transformative Change Assessment. By eliminating, phasing out or reforming public subsidies that damage biodiversity, water, food, health or climate, business models could be moved towards sustainable practices, taking into account the differing needs of developing countries. For example, some agricultural subsidies support unsustainable food production practices and undermine the livelihoods of small-scale producers. These subsidies could be eliminated, phased out or reformed to better support the consumption and production of sustainable food.

Decrease inequalities to address underlying causes of biodiversity loss

The concentration of wealth and power is an underlying cause of biodiversity loss. These differences in wealth and power exist between countries and also within countries, with the wealthiest segment of the global population consuming and using more resources. Because of these unsustainable practices, the rich drive biodiversity loss both locally and globally. Current power dynamics create structural inequalities within economic and financial systems that act to increase distributional inequity and make justice more difficult. In response to these challenges, the Transformative Change Assessment points to revising multilateral cooperation agreements and trade policies to help overcome global inequalities and create coherent governance for just and sustainable development.

  • 1
    Some figures from the Nexus Assessment and the Transformative Change Assessment vary slightly due to different calculation methodologies and definitions in the underlying literature upon which they are based. Multiple analyses coming to similar results supports the validity of the conclusions.
  • 2
    The Transformative Change Assessment puts the financing gap at USD 598 billion to 824 billion, showing that these estimates are highly consensual if not exactly identical.

Promises and reality of climate finance flows in Latin America and the Caribbean

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This briefing is also available in Spanish.

Key points:

  • Developed nations pledged USD 100 billion annually by 2020 to support developing countries with climate initiatives. This goal was achieved only in 2022, primarily by adjusting existing development finance.
  • Latin America and the Caribbean (LAC) countries face severe climate impacts, including droughts, heat waves and rainfall variability, which affect key sectors like agriculture, mining, and tourism. Economic impacts are significant, with potential GDP losses between 0.8% and 6.3% by 2030, reaching up to 23% by 2050.
  • The Inter-American Development Bank estimates that 7% to 19% of LAC’s GDP (up to USD 1.3 trillion by 2030) is needed for sustainable, resilient growth.
  • Current climate finance flows to LAC are only 0.5% of GDP, requiring an 8-10x increase to meet commitments outlined in Nationally Determined Contributions (NDCs).
  • LAC received 17% of international climate finance between 2016 and 2020, mostly in loans rather than grants, increasing regional debt burdens.
  • Many LAC countries spend more on debt interest than on social and climate expenditures, complicating sustainable financing for climate adaptation and mitigation.
  • Brazil, Mexico, Costa Rica, and Colombia received nearly half of the climate finance directed to the region, focused on mitigation over adaptation.

A little bit of climate finance history and why it matters

As evidenced by the increasing frequency and intensity of extreme weather events worldwide, managing the impacts of climate change requires substantial financial resources, which are out of reach of Global South countries. 

To tackle the challenges associated with financing climate change mitigation and adaptation, developed nations pledged under the Copenhagen Accord (December 2009) and the Cancun Agreements (December 2010) to allocate new and additional funding for climate initiatives in developing countries. Through the Copenhagen Accord, developed economies committed to jointly mobilising USD 100 billion annually by 2020 for developing countries. 

In 2021, during the Parties to the Paris Agreement meeting, the New Collective Quantified Goal on Climate Finance (NCQG) was settled as an upcoming global target for climate finance, expected to establish a baseline of USD 100 billion per year by 2025. This last commitment is expected to be negotiated during COP29 in Azerbaijan in 2024.

These efforts resulted in approximately USD 30 billion through the Fast-Start Finance initiative between 2010 and 2012. In 2022, developed countries provided and mobilised USD 115.9 billion in climate finance for developing nations, according to figures from the Organisation for Cooperation and Economic Development (OECD), finally meeting their annual target of USD 100 billion for climate action two years later than initially planned.

However, there have been some challenges to the OECD’s figures, with other bodies pointing out that some financing was overstated or double-counted with other assistance. The Center for Global Development (CGD) estimated total climate finance in 2022 at USD 106.8 billion, noting that the target was partially met by incorporating climate objectives into existing development finance flows and therefore not “new or additional,” as outlined in the Copenhagen Accord.

According to Climate Policy Initiative (CPI), climate flows continue to “fall short of needs”, particularly in developing and low-income economies and those especially vulnerable to climate change. As of 2023, less than 3% of the global total went to or within least developed countries (LDCs), while 15% went to or within emerging markets and developing economies (EMDEs), excluding China. The ten countries most affected by climate change between 2000 and 2019 – Puerto Rico, Myanmar, Haiti, Philippines, Mozambique, the Bahamas, Bangladesh, Pakistan, Thailand and Nepal – received less than 2% of total climate finance.

Figure 1: Climate finance provided and mobilised between 2013 and 2022

Climate change poses significant challenges  in Latin America and the Caribbean

As a region, Latin America and the Caribbean (LAC) accounts for only 6.7% of global greenhouse gas emissions but is highly vulnerable to climate change. Most countries are located in geographical areas that are particularly exposed to extreme weather events caused by greenhouse gas emissions, including heat waves and significant variability in precipitation levels and patterns. 

The region is also highly dependent on economic activities at risk from climate change, such as agriculture, mining and tourism, creating further economic need for adaptation and mitigation financing. Studies estimate a decline in regional per capita GDP due to climate change impacts ranging between 0.8% and 6.3% by 2030. By 2050, this fall could reach 23%.

Agriculture is expected to be the economic sector most affected by climate change in LAC, facing challenges such as soil erosion, changing rain patterns and pest infestations. This is a significant problem for the region as the World Bank estimates that agriculture, fishing and forestry represent 5.9% of LAC’s GDP in 2023. 

Energy presents another major challenge, as LAC is projected to have one of the highest increases in energy consumption globally, driven by anticipated economic growth. This pending demand highlights the importance of adopting a low-carbon development pathway to supply electricity to the region’s people and industry.

The region’s financing needs are not being met

The region’s financial frameworks are ill-equipped to deal with these challenges. LAC has the lowest levels of public investment globally, hindering its ability to build dynamic, job-creating economies resilient to climate change.

The Inter-American Development Bank (IDB) indicates that addressing the climate crisis in LAC will require annual spending on infrastructure services amounting to 2% to 8% of GDP, alongside 5% to 11% of GDP dedicated to tackling social challenges. Altogether, this would mean redirecting 7% to 19% of annual GDP – equivalent to between USD 470 billion and USD 1.3 trillion by 2030 – toward sustainable, resilient, low-carbon development goals.

The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) estimates that annual investment needed to meet regional climate commitments, as outlined in the Nationally Determined Contributions (NDCs) under the Paris Agreement, ranges between 3.7% and 4.9% of the region’s GDP until 2030. 

ECLAC breaks this total down by type of financing. Mitigation actions related to the energy system, transportation, and deforestation reduction will require between 2.3% and 3.1% of regional GDP annually by 2030. Adaptation efforts, including early warning systems, poverty prevention, coastal protection, water and sanitation services, and biodiversity protection, will require investments of between 1.4% and 1.8% of regional GDP each year until 2030.

These financing needs translate to an annual flow between USD 215 billion and 284 billion between 2023 and 2030. However, climate finance flows to the region amounted to only 0.5% of regional GDP in 2020, requiring an increase of 8 to 10 times to close the funding gap. 

From 2016 to 2020, the region received an average of 17% of international climate finance each year, with 81% of this funding provided as loans rather than grants, further intensifying the region’s debt crisis. Climate action funding is nearly evenly split between public and private sources in LAC, highlighting a strong contribution from private sector players compared to other Global South regions. Africa, for example, gets nearly 90% of its climate financing from public sources.

Box 1: Climate change and debt, interrelated crisis?

According to the United Nations Trade and Development (UNCTAD), global public debt1According to the IMF, public sector debt “combines general government with public nonfinancial corporations and public financial corporations, including the central bank”. It also covers publicly guaranteed debt and external public debt. reached a record of USD 97 trillion in 2023, of which LAC countries account for 17% above the region’s share of the global population at 8.2%.  

The region faces significant debt-related challenges, particularly in light of the increasing financial demands of climate change – including adaptation, mitigation, and addressing loss and damage.

These issues are common across the Global South. Since 2022, interest payments on public debt have grown faster than public expenditures in developing economies: one out of every three countries spends more on interest payments than on social spending (which includes climate investment). 

In 2024, debt servicing is projected to consume 41.5% of expected budget revenue across developing countries. For context, this is a higher proportion than was seen during the debt crisis in Latin America in the 1980s before debt relief was provided.2The Latin American debt crisis was a financial crisis that began in the early 1980s when public debt of Latin American countries surpassed their capacity to generate income, making them unable to repay it. Debt service accounted for 35.3% of national incomes in Latin America in 1981, one year before the debt crisis began.

The reality of financing flows

Between 2013 and 2020, an annual average of just over USD 20 billion was mobilised in LAC to fund climate change mitigation and adaptation, which amounted to over USD 161 billion in this period. 

In 2020, the total reached USD 22.9 billion, representing a 14% increase from 2019 and a 32% increase from 2018, regaining much-needed upward momentum after falling from a 2017 peak. However, this represents only around 10% of the low-end annual total ECLAC estimates will be needed between 2023 and 2030 to meet climate finance needs, highlighting the inadequacies of financing provided and the gap left to fill going forward.

Of the 2020 total – which represented 0.5% of the region’s GDP – 90% came from multilateral development banks (MDBs) and green bonds, adding to the region’s debt burden.

Figure 2: Climate finance for LAC between 2013 and 2023

Climate Funds Update tracks multilateral climate funds, covering the period between 2003 and 2023. Though it does not capture the full financing picture, it is a useful tool to access regional financing over time and at the country level. 

With some exceptions, climate fund commitments have risen from USD 26.8 million in 2006 to USD 902.2 million in 2021, with notable jumps in 2009, 2014, 2018 and 2021, and a short period of declining commitments from 2014-2017. The most recent peak, in 2021, also marks the end of the growth trajectory for financing approvals, which have fallen to USD 311.5 million by 2023 (figure 3). 

The approval-to-disbursed ratio is notably higher during the first years of the analysis, largely tracking approvals through 2014 before falling off through 2017. Recorded disbursements rise in 2018 before tapering off again to very low levels by 2023. However, it should be noted that as well as a delay in disbursement, either as a result of slow contributor disbursal or slow recipient uptake, this may indicate a lack of information on the status of funds after approval.

Figure 3: Multilateral climate change funds for LAC per year

On a national level, climate finance in LAC is heavily concentrated in four countries – Brazil, Mexico, Costa Rica, and Colombia – that receive nearly half of the region’s funding. Mitigation activities – such as forest protection and reforestation – receive over five times the amount allocated to adaptation efforts from multilateral climate funds. Nearly all of this finance has been issued as concessional loans.

  • 1
    According to the IMF, public sector debt “combines general government with public nonfinancial corporations and public financial corporations, including the central bank”. It also covers publicly guaranteed debt and external public debt.
  • 2
    The Latin American debt crisis was a financial crisis that began in the early 1980s when public debt of Latin American countries surpassed their capacity to generate income, making them unable to repay it.

Carbon Border Adjustment Mechanisms require coordinated global action

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Key points:

  • A Carbon Border Adjustment Mechanism (CBAM) charges a tariff on imports based on their emissions. Paired with a domestic carbon price, it aims to prevent carbon leakage – companies moving their emitting activities to other countries – and lead to an overall reduction in emissions. 
  • In 2023, the EU started its CBAM – the first to be implemented globally. This was met with a strong reaction from other countries, such as China, South Africa, India and Brazil, which criticised the mechanism for placing an unfair burden on developing countries and for breaking WTO rules. 
  • The EU CBAM will likely only reduce emissions slightly on top of the EU emissions trading system currently in place. An EU carbon price of USD 88 on all emissions reduces emissions by 21%, and the introduction of the CBAM only adds another 1.3 percentage points. 
  • Modelling suggests that the EU CBAM could cost developing countries USD 10.2 billion, with some countries, like Zimbabwe and India, most exposed.
  • The introduction of the EU CBAM has led to the announcement of more climate and international trade measures worldwide as countries try to limit their exposure to it. Thus far, this has resulted in an uncoordinated and confusing policy landscape. 
  • To ensure that climate and trade policies work to reduce global emissions, they should be aligned with UNFCCC principles and should provide exemptions to avoid placing additional burdens on developing countries.

A Carbon Border Adjustment Mechanism is a carbon tariff on import

A Carbon Border Adjustment Mechanism (CBAM) is a policy that charges a carbon price on certain types of imports based on the amount of carbon emissions associated with their production. 

When paired with domestic carbon pricing, it aims to “level the playing field”: A CBAM aims to ensure that when a carbon price is put in place, the higher prices for carbon-intensive domestic goods do not lead to more imports of cheap, carbon-intensive goods from countries where carbon taxes are not in place. It aims to prevent ‘carbon leakage’, where carbon-intensive activities are moved to another location with less regulation on emissions, instead of being reduced, resulting in no overall decrease in emissions.

In the absence of domestic carbon pricing, a CBAM functions as a border tariff targeting carbon-intensive production and is not likely to contribute to further emissions reductions. 

EU CBAM has sparked discussions on climate and trade

In 2023, the European Union started implementing the EU CBAM, the first to be implemented globally. It is designed to ensure EU policies limiting emissions in specific sectors are not undermined by the import of carbon-intensive goods from outside the EU. The European Union writes that the CBAM also aims to “contribute to the promotion of decarbonisation in third countries.”

This has led to a wide range of reactions from different countries, including the development of new CBAMs and other trade policies, as well as harsh criticism. 

At COP28 in Dubai, countries expressed their concerns over the EU CBAM. There was an attempt by the BASIC group of countries – made up of Brazil, South Africa, India and China – to introduce “unilateral trade measures related to climate change” as a point on the COP agenda, which “could have resulted in an impasse in the climate talks.” The proposal received support from 134 countries, including key developing country negotiating blocs and the G77, but was not included in the final agenda. However, according to E3G developing countries’ sentiment towards CBAM and similar initiatives was included in the COP28 final text: “Unilateral measures should not lead to unjustifiable or arbitrary discrimination or restriction in international trade.”

Throughout 2024 and in the lead-up to COP29, discussions on trade measures and climate policy have ramped up. In June 2024, the BRICS group of countries1The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates. released a statement condemning the introduction of trade policies “under the pretext of environmental concerns,” such as “unilateral and discriminatory” CBAMs. This statement was also included in the declaration for the BRICS Summit in October 2024.

Additionally, the BASIC group, chaired this year by China, is again pushing to have trade agreements on the agenda at COP as a separate agenda item, potentially resulting in disputes over trade stalling climate negotiations.

Application of the EU CBAM is ramping up

The EU CBAM was introduced as a component of the European Green Deal, a package of policy initiatives aiming to help the EU reach climate neutrality by 2050. As part of this package, the EU has implemented an emissions trading scheme (ETS), which is a cap-and-trade system to reduce emissions by putting a price on carbon. The ETS allocates a specific amount of emissions allowances to different participants in different industries, including electricity producers, heavy industry and intra-EU aviation. Over time, the cap is lowered and the amount of GHGs these industries are allowed to emit is reduced.

Currently, some ETS participants receive free emissions allowances as they are considered exposed to external trade. The allocation of free allowances means these businesses do not have an incentive to reduce their emissions and can even profit from selling their emissions allowances, if, for example, production levels fall. 

The implementation of the EU CBAM is “aligned with the phase-out of free allowances” under the EU ETS, as both moves reduce opportunities for ‘free’ emissions and therefore“support the decarbonisation of EU industry.” It will take until 2034 for the EU CBAM to be fully phased in and for the free allowances to be fully phased out.

The CBAM entered its ‘transitional phase’ on October 1 2023, which will end at the end of 2025. During this time, importers of affected goods are required to report on emissions but nothing will need to be paid for embedded emissions, which refers to the carbon emissions generated in the production of goods. 

From the start of 2026, the ‘definite period’ will begin and importers will have to purchase and “surrender” certificates corresponding to the carbon emissions embedded in imported goods impacted by the mechanism. This will start off as a small obligation, with businesses only needing to purchase certificates equivalent to 2.5% of their emissions in 2026, and will gradually be ratcheted up to cover 100% of emissions in 2034.

At first, the CBAM will apply to imports “whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.” When the CBAM is fully phased-in, this will account for over 50% of emissions in sectors covered by the ETS. It is also expected that the number of industries included in the CBAM will expand following further assessment to include, for example, ceramics and paper industries. 

The complexity of global trade interlinkages and national policies means that the understanding of what exactly the CBAM would mean is varied and impacts are not always well understood. While a resolution adopted by the European Parliament “stresses that Least Developed Countries and Small Island Developing States should be given special treatment” as the CBAM could potentially impact their development, current CBAM regulation does not provide exemptions from the mechanism for any developing countries.

The EU CBAM is projected to only slightly reduce emissions

The EU CBAM is anticipated to slightly reduce emissions when implemented in alignment with a domestic carbon price. 

A 2021 study conducted by UNCTAD estimated that a carbon price set at USD 88 per tonne of carbon would result in CO2 emissions being reduced in the EU by 704 million tonnes. A CBAM implemented on top of this would reduce emissions outside the EU by 59 million tonnes, but would increase emissions in the EU by 13 million tonnes – a net reduction in emissions of just 45 million tonnes. Therefore, a CBAM results only in a slightly improved overall emissions reduction – equivalent to 6% of the emissions reductions from the carbon pricing mechanisms itself. While an EU carbon price of USD 88 reduces global emissions by 21%, the introduction of the CBAM only adds another 1.3 percentage points.

However, at the same carbon price, a CBAM would reduce carbon leakage by more than half (55%), from 15.1% when only carbon pricing is used to 6.9% when a CBAM is in place. 

Other studies have shown similarly modest reductions in emissions:

  • The Asian Development Bank (ADB) calculated that implementing both the ETS and CBAM with a 100 euro carbon price would reduce global carbon emissions by 1.26%, with the CBAM contributing approximately 0.2% of these emissions reductions, and this would be accompanied by a 0.4% reduction in global exports to the EU. 
  • The African Climate Foundation and the London School of Economics (LSE) calculated that, with a carbon price of 87 euros covering all products, a CBAM would only result in a 0.002% additional reduction in global carbon emissions. This suggests that a CBAM encourages a shift in carbon-intensive production between countries more than it encourages an overall reduction in emissions.
  • The European Commission estimated in 2021 that its initial proposed CBAM design would reduce emissions from affected EU industries by 1% by 2030, while global emissions from these industries would be cut by 0.4% over the same timeframe.
  • A 2009 study by the Brookings Institution and Syracuse University found that any emissions reduction resulting from a CBAM would occur not by incentivising the trade of less carbon-intensive goods, but primarily due to decreased international trade.

In the studies above, estimates of overall global emissions reductions do not consider the knock-on benefits from a CBAM, such as incentivising clean energy investment.

Projected economic impact of the EU CBAM

A fully implemented CBAM should incentivise investment in emissions reductions for carbon-intensive exporters, so they are not required to pay as high tariffs at the EU border. Additionally, it allows exporters whose production of goods is relatively ‘cleaner’ or less carbon-intensive to capture higher margins.  

Based on current emissions intensities, the World Bank’s Relative CBAM Exposure Index shows that Zimbabwe, Ukraine, Georgia, Mozambique and India will be the countries most exposed to the CBAM. Countries such as the US, Australia and the UK will likely have little-to-no exposure to the CBAM. Some countries, such as Colombia and Albania, are anticipated to gain more competitiveness as they produce products covered by CBAM in a way that is cleaner than the EU average.

Figure 1. Countries most and least exposed to the EU CBAM
Source: World Bank, 2023

The 2021 UNCTAD study highlighted that developing countries could lose USD 10.2 billion in income due to the implementation of the EU CBAM. Non-EU countries are anticipated to lose USD 14.2 billion, while the EU gains USD 5.9 billion. Overall, there is a net income loss of USD 8.3 billion. 

Anticipated impacts in other regions include:

Ultimately CBAM’s impact on other economies will depend on how other players globally respond to its implementation. The more countries decarbonise their exports to the EU, the less they will feel its impacts and the greater their margins. Some countries are already considering carbon pricing and other mechanisms that will reduce their exposure to the CBAM.

Announcement of the CBAM has sparked strong reactions 

While the EU supports the introduction of the CBAM as a mechanism to increase climate ambition both within and outside the EU, not all countries share this perspective. 

The CBAM has been perceived as a protectionist measure, particularly by the African negotiating group and BRICS. Criticisms have focused on two areas: the EU CBAM possibly being in violation of World Trade Organization (WTO) rules and burdening developing countries. 

While the EU CBAM has been designed to be compliant with WTO rules, not all countries agree. Countries such as China, Brazil, India and South Africa have criticised the EU CBAM at international fora, including the WTO, for being a unilateral measure – the EU intends to implement it independently and “without requiring consensus or agreement from other countries.” 

India’s Finance Minister Nirmala Sitharaman has denounced the CBAM as a “trade barrier”. Brazil has strongly opposed the policy due to it being “discriminatory” and has warned that it may hamper global climate efforts. However, the EU is “confident the measure would survive a possible challenge at the World Trade Organization because it applies to domestic producers as well imports,” according to the Financial Times.

Developing countries have argued that they are disproportionately burdened by the CBAM, hindering economic growth and “further take[ing] away the ability of developing countries to finance decarbonisation”. As a major exporter, China also strongly opposes the policy. The EU CBAM will expose a lot of Chinese exports to tariffs and it is likely that “similar measures from other countries including the US, UK, Canada and Japan may amplify the exposure of Chinese exports to border adjustment taxes.”

The domino effect

The introduction of the EU CBAM has triggered, both directly and indirectly, a cascade of carbon pricing announcements from other countries. Countries are aiming to reduce their exposure to the CBAM by introducing their own carbon pricing mechanisms and incentivising the production of less carbon-intensive products.

Resources for the Future wrote that implementation of a CBAM could “lead to a virtuous cycle, where more and more countries adopt carbon pricing”. 

The carbon taxes and emissions trading schemes currently in effect worldwide cover almost a quarter of all global emissions. As of September 2024, there were “78 different carbon pricing and taxation mechanisms in the world,” according to WTO Director-General Ngozi Okonjo-Iweala. Between 2009 and 2022, the WTO was notified of over 5500 trade measures linked to climate objectives.

Box 1. Policy responses to the EU CBAM

United Kingdom

In October 2024, the UK government confirmed that it will introduce a CBAM for some sectors from January 2027, with the primary aim of addressing the risk of carbon leakage. The UK CBAM will operate similarly to the EU CBAM but with some differences in the sectors covered. For example, the UK CBAM will not cover imported electricity. 

There have been calls for better alignment with the EU CBAM, “suggesting that this would reduce the economic risk to the UK.” Already the UK steel and energy industry has successfully demanded the UK government align EU and UK mechanisms more closely following the closure of Port Talbot steel works in 2024. 

United States

There has been ongoing debate in the US about potentially implementing a CBAM. However, without a unified domestic carbon pricing mechanism a CBAM would not be able to accurately reflect the emissions-related costs borne by US producers. Without carbon pricing, it would likely only work as a tariff costing foreign exporting countries without requiring domestic producers pay the same fees – therefore not contributing to overall emissions reductions. 

There has been much activity in Congress focused on implementing a CBA-like mechanism. Multiple bills to enact a US version of a CBAM have been introduced, including the Republican-endorsed Foreign Pollution Fee and the Democrat-sponsored Clean Competition Act. Recent statements from Republicans Donald Trump and JD Vance have defended tariffs against dirtier producers to protect US industry. 

Canada

The Canadian government launched a consultation to explore establishing its own CBAM in 2021. 

Australia

In Australia, the government launched a review to assess the potential of a CBAM to prevent carbon leakage. The recommendations are due to be presented before the end of 2024.

Fraying trade relationships between major blocs are driving developed and developing economies to consider their own CBAMs and carbon taxes. The EU has suggested that India consider setting its own carbon price or CBAM to reduce tariff payments to the EU. Malaysia’s Investment, Trade and Industry Ministry has been advised to “think about adopting a carbon tax or carbon pricing more broadly, but also consider adopting its own Malaysian CBAM,” with a pilot in the steel industry.

However, only one of 80 low and lower-middle income countries has implemented a carbon price. Implementing a carbon price could help countries avoid paying higher CBAM fees as exporters will be incentivised to reduce the carbon-intensity of their goods. This raises concerns that they are unprepared for the end of the EU CBAM transition phase in 2025.

Lacking coordination 

The rapid introduction of various carbon pricing mechanisms has so far lacked coordination, resulting in an increasingly confusing global trade landscape. There are also wide disparities in carbon pricing among countries, ranging from as low as  USD 6 per tonne in South Korea to around USD 80 per tonne in the UK and EU in June 2024. 

Governments and stakeholders have expressed concerns that the “evolving patchwork” of national plans could undermine climate action, by fragmenting trade and “fail[ing] to provide businesses with the predictability and assurances they need to drive transformation of production and supply chains.”

The International Institute for Sustainable Development (IISD) warns that because every CBAM regime will be different to comply with national policies, there is a risk that exporters will have to comply with many different requirements, including the measurement, reporting and verification of the carbon embedded in their goods. 

This would make it difficult for developing countries and small producers to meet the high cost of compliance, potentially excluding them from the marketplace. This could restrict international trade, with knock-on impacts for poverty alleviation and sustainable development.

Box 2. Not all CBA mechanisms are made the same

The label ‘CBA’ (carbon border adjustment) can be applied to a wide range of mechanisms. The IISD suggests six key factors in how a CBAM is developed that can greatly affect its potential impact:

  1. Trade scope: Will the tariff be charged only for imports, or also provide rebates for exports? 
  2. Country exceptions: Will there be any tariff exceptions for specific countries, such as developing countries or countries with more ambitious climate policies?
  3. Scope of coverage: Will the mechanism cover only ‘direct’ emissions, or also ‘indirect’ emissions from energy used in the production of products and ‘precursor’ product emissions embodied in imported CBAM goods? 
  4. Carbon accounting methodologies: How will the carbon intensity of products be measured and defined?
  5. Credit for foreign action: If a foreign producer is already subject to a carbon price or climate-related fee in their own country, will this be considered and compensated for?
  6. Use of revenues: How will the funds generated from the CBAM be used? Sending the money back sends a strong signal that the regime was not about protecting domestic producers and could compensate for the need for compliance.

A CBA mechanism would need to be designed to complement distinct national policies, as well as inevitable costs for foreign producers arising even in the “most thoughtfully crafted BCA regime.”

Moving discussions on climate and trade forward

As in previous years, trade-related climate measures are likely to be brought up during discussions at COP29, as countries express their differing views. 

There is a need to create a clearer understanding of the impacts of implementing the EU CBAM, as well as other potential climate and trade measures. International cooperation can help set agreed on principles and best practices for the development of CBA mechanisms, helping to prevent future trade frictions. Without a unifying trade-climate framework, this will lead to prohibitively high costs that disproportionately burden the poorest countries and smaller firms.

Climate and trade goals can be aligned in a way that prioritises fair economic relations and embodies the UNFCCC principles, including “common but differentiated responsibilities and respective capabilities and their social and economic conditions.”

The WTO released a report in October 2024 that outlines “pathways for coordinated approaches on climate action, carbon pricing, and the cross-border effects of climate change mitigation policies with a view to achieving global climate goals.” The International Chamber of Commerce (ICC) has also released a set of “global principles” to guide countries in introducing their own CBAMs and avoid disjointed mechanisms. The principles highlight that CBAMs should support Paris Agreement goals as “the primary objective,” ensure WTO compliance, respect UNFCCCC and Paris Agreement Principles, and provide targeted exemptions for most vulnerable countries. 

Existing and future climate finance commitments and obligations need to be met to enable developing countries to bear the costs of decarbonisation and compliance with CBA mechanisms. A key moment during COP will be discussions on the New Collective Quantified Goal on Climate Finance (NCQG), which has the potential to unlock trillions in critically-needed climate financing for developing countries.

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    The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates.

Expanding the contributor base: a solution for all climate finance woes?

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Key points:

  • Countries are set to prepare a new collective quantified goal for climate financing at the climate conference, or COP, in November 2024. This new goal offers an important opportunity to improve the way that climate finance is provided and increase the goal.
  • According to the OECD, developed countries finally met their objective of providing USD 100 billion in climate finance in 2022. However, this goal was not met on time, and the finance provided up until now has frequently been through instruments that are not necessarily adapted to developing countries’ needs.
  • Needs estimates show that developing countries will need at least USD 1 trillion per year to tackle climate change, illustrating the urgent need for increased financing.
  • To fill this gap, some countries and experts have suggested expanding the contributor base to include certain emerging countries.
  • While there is some justification for certain countries to join the ranks of contributors, most of these countries already contribute voluntarily in line with Article 9.2 of the Paris Agreement. These voluntary contributions are an important source of climate finance for developing countries.
  • Our estimates of a potential addition of more countries to the contributor base show that the current financing gap wouldn’t be significantly reduced even if countries voluntarily providing climate finance were to increase their contributions to the current level of developed countries.
  • Efforts to add new mandatory contributors require a broader discussion on the categorisation of countries under the UNFCCC and the Paris Agreement.

Current financing structures found lacking

Climate change mitigation, adaptation, and loss and damage are and will continue to be expensive, particularly for countries with fewer resources at their disposal. The principle of “Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC)” was enshrined under the 1992 United Nations Framework Convention on Climate Change (UNFCCC) to account for the different historical contributions to climate change and countries’ abilities to support climate action.1Climate Nexus, ‘Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC)’, 23 March 2017, https://climatenexus.org/climate-change-news/common-but-differentiated-responsibilities-and-respective-capabilities-cbdr-rc/. Developed countries, listed in Annex II of the Convention, were given responsibility for taking significant steps to mitigate climate change and to contribute to funding mitigation and adaptation efforts by developing countries (non-Annex countries).2United Nations, ‘United Nations Framework Convention on Climate Change’, FCC/INFORMAL/84/Rev.1(1992), page 21, https://unfccc.int/sites/default/files/convention_text_with_annexes_english_for_posting.pdf.

A first effort to this end was a goal of providing USD 100 billion per year of climate finance for developing countries by 2020 was set for in the nonbinding Copenhagen Accord in 2009.3UNFCCC, ‘Copenhagen Accord’, FCCC/CP/2009/L.7 (2009), https://unfccc.int/resource/docs/2009/cop15/eng/l07.pdf. This target was only met for the first time in 2022, although the USD 115.9 billion mobilised did represent nearly a 30% increase compared to 2021.4OECD, ‘Climate Finance Provided and Mobilised by Developed Countries in 2013-2022’ (OECD, 29 May 2024), https://doi.org/10.1787/19150727-en.

There is now an opportunity to reinvigorate global climate financing structures and accountability. According to the Paris Agreement, countries should agree to a new collective quantified goal (NCQG) for financial support for developing countries to mitigate and adapt to climate change before 2025.5UNFCCC, ‘Durban Platform for Enhanced Action (Decision 1/CP.17) Adoption of a Protocol, Another Legal Instrument, or an Agreed Outcome with Legal Force under the Convention Applicable to All Parties’, 15 December 2015, https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf. This is a key task for COP29 in Azerbaijan in November 2024. This new goal is meant to be needs-based, and while precise estimates vary, the evidence points to the need for at least USD 1 trillion per year.6Natalia Alayza, Gaia Larsen, and David Waskow, ‘What Could the New Climate Finance Goal Look Like? 7 Elements Under Negotiation’, 29 May 2024, https://www.wri.org/insights/ncqg-key-elements. Because of the scale of the financing required, some experts7W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’, Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79, https://link.springer.com/article/10.1007/s40641-024-00197-5. and countries, including Switzerland, Canada and the US,8Matteo Civillini, ‘Swiss Propose Expanding Climate Finance Donors, Academics Urge New Thinking’, Climate Home News, 16 August 2024, https://www.climatechangenews.com/2024/08/16/as-swiss-propose-ways-to-expand-climate-finance-donors-academics-urge-new-thinking/. have suggested expanding the list of countries mandated to contribute, also called the contributor base, to include emerging countries with high emissions and high incomes.

This briefing investigates estimates of funding needs and the current state of funding from developed and emerging countries to shed light on the potential impact of expanding the contributor base.

How much climate finance is needed?

Several estimates exist on developing countries’ needs for climate finance. The UNFCCC Standing Committee on Finance estimates a total of USD 5.8 trillion to USD 5.9 trillion will be needed to cover the costed needs of 153 developing country Parties, based on its assessment of nationally determined contributions (NDCs). This is likely to be an underestimation given that only a small proportion of needs were costed across the documents provided.9UNFCCC Standing Committee on Finance, ‘Executive Summary by the Standing Committee on Finance of the First Report on the Determination of the Needs of Developing Country Parties Related to Implementing the Convention and the Paris Agreement’ (Bonn, Germany: UNFCCC, 2021), https://unfccc.int/sites/default/files/resource/54307_2%20-%20UNFCCC%20First%20NDR%20summary%20-%20V6.pdf. Regionally, around USD 2.5 trillion of global need comes from African states, around USD 3.2 trillion from Asia-Pacific states and around USD 168 billion from Latin American and Caribbean states.

The Independent High-Level Expert Group on Climate Finance put forward the need for a mix of financing from private and public sources to reach USD 1 trillion per year by 2030 for emerging and developing countries10Excluding China. based on financing needs to transform the energy system and pursue a just transition, cope with loss and damage, invest in adaptation and natural capital, and mitigate methane emissions.11V Songwe, N Stern, and A Bhattacharya, ‘Finance for Climate Action: Scaling up Investment for Climate and Development’ (London: Grantham Research Institute on Climate Change and the Environment, London School of Economics, 2022), https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/11/IHLEG-Finance-for-Climate-Action-1.pdf. UN Trade and Development (UNCTAD) takes a different approach, suggesting a contribution of around 1% of gross national income (GNI) for climate finance, adding to the 0.7% of GNI that developed countries are supposed to allocate towards official development assistance (ODA). This would raise total funding to approximately USD 1.55 trillion per year by 2030.12United Nations, ‘Considerations for a New Collective Quantified Goal’ (Geneva: United Nations, 2023), https://unctad.org/system/files/official-document/gds2023d7_en.pdf.

Though the final figure these reports come to varies, in essence they tell us the same thing: at least USD 1 trillion per year will be needed to tackle the climate crisis, far above the USD 100 billion goal previously set.

While numbers this big may appear abstract, the funds they represent have real consequences on people’s lives. In the decade to 2022, heat-related deaths increased by 85% compared to the period from 1991 to 2000. By the end of the century, heat-related deaths will affect 683-1,537% more elderly people than currently.13Marina Romanello et al., ‘The 2023 Report of the Lancet Countdown on Health and Climate Change: The Imperative for a Health-Centred Response in a World Facing Irreversible Harms’, The Lancet 402, no. 10419 (16 December 2023): 2346–94, https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(23)01859-7/abstract. And these are but a small fraction of the many health and economic impacts of climate change, illustrating the imperative to do more, faster.

Tracking climate finance – and accounting disagreements – to date

Developed countries have responsibilities under international law due to their historical emissions and their wealth to contribute financially to developing countries for mitigation and adaptation actions.14However, there is little clarity about which countries are defined as developed under the UNFCCC, leading to difficulties in tracking progress. Indeed, while developed countries are noted as being required to provide climate finance (Article 9.1 of the Paris Agreement), there is no specific delineation of which countries should be considered developed. Because of this lack of clarity, there is a de facto practice of relying on the 1992 country lists, with Annex II being often referred to as the developed country list for finance purposes. Other countries are encouraged to contribute under Article 9.2 of the Paris Agreement but are not required to do so.S Colenbrander, L Pettinotti, and Y Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, ODI Working Paper (London: ODI, 2022), 17, https://media.odi.org/documents/A_fair_share_of_climate_finance.pdf. The amount of climate and development finance provided and mobilised by developed countries15In this case, defined by the OECD as Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, European Union, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom and the United States. is regularly tracked by the Organisation of Economic Co-operation and Development (OECD). Its calculations show that the USD 100 billion goal was achieved two years late, in 2022, mainly due to increased public climate finance (Fig. 1).16As of the time of writing, the OECD had not released data breaking down specific country contributions, although other authors have put forward estimates. See for example: L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal’, ODI Working Paper (London: ODI, 2024), https://media.odi.org/documents/ODI_2024_Fair_share_climate_finance_new.pdf.

Fig. 1: OECD’s recording of climate finance from developed countries, 2013-2022 (USD billion)

Yet this conclusion has been challenged by other sources that contend that much of this financing is double counted with development aid budgets and includes loans, therefore concluding that the USD 100 billion climate finance goal has not been met. Research by Care International found that only 7% of climate finance from 2011 to 2020 was additional to official development assistance (ODA),17Andrew Hattle, ‘Seeing Double’ (Care International, 2023), https://careclimatechange.org/wp-content/uploads/2023/09/Seeing-Double-2023_15.09.23_larger.pdf. while Oxfam calculated that climate finance was overstated by as much as USD 88 billion.18Oxfam, ‘Rich Countries Overstating “True Value” of Climate Finance by up to $88 Billion, Says Oxfam’ (Oxfam GB, 9 July 2024), https://www.oxfam.org.uk/media/press-releases/rich-countries-overstating-true-value-of-climate-finance-by-up-to-88-billion-says-oxfam/.

Even when the OECD figures are taken at face value, they remain under 1% of the combined GNI of the contributing countries, reaching a maximum of 0.21% of their combined GNI in 2022, according to calculations by ZCA using World Bank GNI data and OECD climate spending data (see Table 1).

Table 1: Climate finance from current contributor base as a proportion of GNI, 2013-2022

ODI has calculated whether developed countries (defined here as Annex II countries) have provided their “fair share” of climate finance by looking at their GNI, cumulative territorial carbon dioxide emissions and population.19The calculation methods were established by Colenbrander, S, Y Cao, L Pettinotti, and A Quevedo. ‘A Fair Share of Climate Finance? Apportioning Responsibility for the $100 Billion Climate Finance Goal’. Working paper. London: ODI, 2021. https://media.odi.org/documents/ODI_WP_fairshare_final0709.pdf.The latest numbers referenced here come from L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal.’The think tank finds that in 2022 while some countries like Norway, France and Luxembourg are hitting above their weight, other countries like the US, Greece and Portugal are providing less climate finance than they should be. Overall, according to the analysis, 11 out of 23 countries do not provide their fair share towards helping developing countries mitigate and adapt to climate, with the US providing 32% of its fair share, ahead only of Greece (see Table 2).20L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal.’

Fig. 2: Developed countries progress towards meeting their fair share of climate financing in 2022 (%)

Another analysis by Bos, Gonzalez and Thwaites roughly followed this formula, with some variation to try to better account for population size and future development, but have nevertheless found that many developed countries are not providing enough climate finance.21Julie Bos, Lorena Gonzalez, and Joe Thwaites, ‘Are Countries Providing Enough to the $100 Billion Climate Finance Goal?’, 10 July 2021, https://www.wri.org/insights/developed-countries-contributions-climate-finance-goal.

Assessments of the quality of finance also show a lack of ambition from contributors. It is estimated that nearly 95% of current climate finance is in the form of debt (61%) or equity (34%), and around 80% of loans are made at market rates, adding to the debt burden of countries already likely to be over-indebted.22Climate Policy Initiative, ‘Global Landscape of Climate Finance A Decade of Data: 2011-2020’ (Climate Policy Initiative, 2022), https://www.climatepolicyinitiative.org/wp-content/uploads/2022/10/Global-Landscape-of-Climate-Finance-A-Decade-of-Data.pdf. The OECD estimates a lower amount, with bilateral finance loans being 79% concessional loans, 41% of multilateral climate funds and 23% for multilateral development banks. The difference can be attributed to differences in definitions of concessionality.OECD. ‘Climate Finance Provided and Mobilised by Developed Countries in 2013-2022’. OECD, 29 May 2024. https://doi.org/10.1787/19150727-en. Among contributors, the instruments used to disburse financing varies, with Japan and France having been found to tend to give proportionally more loans in their financing mix.23Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, 26–27.

As many developing countries are already highly indebted, this form of climate finance can serve to further weaken the macroeconomic stability of developing countries and divert spending from public services. Least-developed countries and small island developing states spent USD 48 billion repaying such loans to G20 countries between 2020 and 2022, and payment amounts have been increasing over time.24IIED, ‘Climate-Vulnerable Indebted Countries Paying Billions to Rich Polluters’ (IIED, 2023), https://www.iied.org/climate-vulnerable-indebted-countries-paying-billions-rich-polluters.

A shortage of financing directed towards adaptation threatens to exacerbate the issue for vulnerable countries that are unable to take measures to protect themselves from extreme weather events caused by climate change without financing and in the face of high debt servicing requirements. As continued fossil fuel use increases the likelihood of extreme weather events, there will be an increasing need for adaptation financing.25Zero Carbon Analytics, ‘Unnatural Disasters: The Connection between Extreme Weather and Fossil Fuels’ (Zero Carbon Analytics, 2024), http://zaerocarbonlive.local/archives/energy/unnatural-disasters-the-connection-between-extreme-weather-and-fossil-fuels. Adaptation received just 8% of global climate finance recorded by the Climate Policy Initiative in 2020, at USD 56 billion out of USD 665 billion, and against USD 589 billion given to mitigation initiatives.26Climate Policy Initiative, ‘Global Landscape of Climate Finance A Decade of Data: 2011-2020’ (Climate Policy Initiative, 2022), https://www.climatepolicyinitiative.org/wp-content/uploads/2022/10/Global-Landscape-of-Climate-Finance-A-Decade-of-Data.pdf. Meanwhile, the UN Environment Programme estimates that there is a need for USD 215 billion per year for adaptation alone.27United Nations Environment Programme, ‘Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate Investment and Planning on Climate Adaptation Leaves World Exposed’ (United Nations Environment Programme, November 2023), 35, https://wedocs.unep.org/handle/20.500.11822/43796;jsessionid=AC69CB2C709FC5BC0FB8124E18F1ED1.

Search for solutions to fill the finance gap

In light of these funding gaps, some stakeholders have considered the logic of expanding the funder base to include emerging countries like China, Brazil and Saudi Arabia.28Matteo Civillini, ‘Swiss Propose Expanding Climate Finance Donors, Academics Urge New Thinking’, Climate Home News, 16 August 2024, https://www.climatechangenews.com/2024/08/16/as-swiss-propose-ways-to-expand-climate-finance-donors-academics-urge-new-thinking/. They assert that the high emissions or high GNI of these countries mean they have a role to play in closing the funding gap.

Researchers have used several methods to determine whether emerging countries should be contributing (more) to climate finance, as there is no agreed-upon threshold or metric to determine which countries should be contributors. Most suggested models aim to compare both income and contribution to climate change of potential contributors to existing contributors, using the median values of GNI and emissions for Annex II countries against those of other countries.

ODI researches propose that non-Annex II countries should become contributors under three thresholds related to per capita GNI or emissions in comparison to a minimum number of Annex II countries. Accordingly, ODI suggests that Brunei, Israel, Kuwait, Qatar, Singapore, South Korea and the United Arab Emirates are potentially good candidates to provide funds.29Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’.

Another academic article published in 2024 looks at several metrics for historic emissions and capability to pay, as well as institutional affiliation (EU, OECD, G20) and countries’ payments to other multilateral funds. On the basis of these findings, the paper suggests that Czechia, Estonia, Monaco, Poland, Qatar, Saudi Arabia, Slovenia, South Korea, Turkey, and the UAE would be good candidates.30Pauw, W. Pieter, Michael König-Sykorova, María José Valverde, and Luis H. Zamarioli. ‘More Climate Finance from More Countries?’ Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79. https://doi.org/10.1007/s40641-024-00197-5.

Meanwhile, the Center for Global Development creates multiple models to account for responsibility and capability to pay and finds that Mexico, Poland, Russia, Saudi Arabia, South Korea, Taiwan and the UAE should contribute.31Beynon, Jonathan. ‘Who Should Pay? Climate Finance Fair Shares’. CGD Policy Paper. Washington, DC: Center for Global Development, 2023. https://www.cgdev.org/sites/default/files/who-should-pay-climate-finance-fair-shares.pdf.

What could expanding the contributor base amount to?

To add to the analysis above, we have estimated the amount of financing from the combined group of countries frequently mentioned in the literature or in the press, to understand the financial impact if they contributed at the same rate as developed countries. To do so, we first calculated the average climate finance spending of developed countries32The same developed countries were included as those included in the OECD’s calculations, excluding Monaco for which GNI data is unavailable from the World Bank. as a percent of their GNI, using data from the OECD and the World Bank (see Table 1 above). This equalled 0.21% in 2022, the year with the most up-to-date data and when developed countries met their USD 100 billion target.

We then took this percentage and multiplied it by the GNI of each of the candidate countries. This analysis shows that countries that are not required to contribute to global climate finance have nevertheless raised on average almost 30% of developed countries’ spending, according to the latter’s average GNI contributions (see Table 2, column 5), with a total of USD 12.3 billion in 2022. This methodology likely underestimates the amount of finance given by emerging economies as it only considers multilateral development finance due to data availability limitations. Despite not having any requirements to contribute, these countries are already providing finance for climate action.

It also shows that if countries currently being considered as candidates for mandatory spending contributed at the same rate as developed countries actually provided in 2022, this could raise an additional USD 51.19 billion33This is the sum of all the candidate countries, excluding Czechia, Estonia, Poland, and Slovenia as they are already included in the OECD’s calculations for total climate finance and thus any funding would not be considered additional. or 5.12% of the USD 1 trillion minimum needed to meet developing countries’ needs.

Table 2: Estimated contribution of candidate countries’ spending

Like previous analyses, this evidence does not provide definitive answers to the political question of who should be paying more or less to meet global climate finance needs. But it does show that many countries are already stepping up without any binding rules and that mandating an increase of their participation to the current real level of developed countries will likely not make a meaningful dent in the current financing gap.

Therefore, the literature and the additional evidence provided here reinforce the need for more leadership from developed countries.34S Colenbrander et al., ‘“The New Collective Quantified Goal and Its Sources of Funding: Operationalising a Collective Effort”’, Working Paper (London: ODI, 2023), https://media.odi.org/documents/ODI_The_new_collective_quantified_goal_and_sources_of_funding.pdf. As the Centre for Global Development concludes, “the analysis confirms that developed countries should continue to take primary responsibility, with the USA in particular shouldering at least 40% of the burden in virtually every scenario.”35Beynon, ‘Who Should Pay? Climate Finance Fair Shares’, 13. Other experts agree, noting “If we are to timely address the pressing global needs of emissions reductions; adaptation; and averting, minimising and reducing losses and damages, the contribution of developed countries should remain central to any type of agreement around the NCQG.”36W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’, Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79, https://doi.org/10.1007/s40641-024-00197-5, 76.

Moving finance forward

The NCQG offers the opportunity for countries to come together and hammer out details that have until now been left aside. The three questions raised by ODI should be kept in mind during the upcoming NCQG negotiations: “First, how much should each individual developed country be contributing towards this target? Second, which states should be considered ‘developed countries’ for the purposes of climate finance provision and mobilisation? And third, what counts as climate finance and how can we compare countries’ different contributions and commitments?”.37Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, 14.

While ODI and others have started to put together methodologies to define the level of contribution from developed countries based on historical emissions and ability to pay, the second question of clarifying the definition of the contributor base would require the UNFCCC’s annexes to be reworked and clarified. There have been two changes since the original categorisation in 1992: one in 2002 when Turkey was removed from Annex II, and the second when new EU Member States including Czechia and Malta asked to be put on the Annex I list.38W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’

Expanding the contributor base has been a point of discussion since at least 2009, with strong feelings on both sides and a certain level of “arbitrariness” in any outcome.39W. Pieter Pauw et al., 76. Research recommends several ways forward, including creating a net recipients category and a list of countries excluded from giving finance to ease discussions going forward.40W. Pieter Pauw et al. The ODI recommends a similar approach, proposing the creation of a new category called “non-developed Parties” that would not be required to provide climate finance.41Pettinotti, L, T Kamninga, and S Colenbrander. ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal’. ODI Working Paper. London: ODI, 2024. https://media.odi.org/documents/ODI_2024_Fair_share_climate_finance_new.pdf.

Beyond ensuring that the high-level target meets developing countries’ needs, it is critical to answer the ODI’s questions above to create accountability for meeting the target and ensure that reported finance is actually going where it is most needed. This includes discussions around loss and damage, which have remained outside of the financing goal up until now, but is a particularly contentious subject for negotiators,42Alayza, Larsen, and Waskow, ‘What Could the New Climate Finance Goal Look Like?’ and on adaptation, which has been neglected in climate financing to date.43Bos, Gonzalez, and Thwaites, ‘Are Countries Providing Enough to the $100 Billion Climate Finance Goal?’ Finally, the question of transparency and tracking of funds is critical to even be able to measure if what is pledged is delivered.44Bos, Gonzalez, and Thwaites.

Reforming climate finance: Unlocking funds from multilateral development banks

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Key points:

  • Multilateral development bank (MDB) funding is one of the fastest-growing sources of climate finance, increasing by nearly 3.3 times between 2012 and 2023.
  • MDBs could unlock hundreds of billions of dollars more in financing if they implemented reforms such as taking on more risk, innovating and boosting transparency, according to a G20 report.
  • Increased MDB funding will likely play an important role in the New Collective Quantified Goal (NCQG) – which will determine the amount of finance developing countries receive for climate mitigation and adaptation.

MDBs could unlock hundreds of billions in climate finance 

Multilateral development banks hold over USD 1.8 trillion in assets globally and play a critical role in climate finance by providing and mobilising funds for climate mitigation and adaptation. In a report published in April 2023, Zero Carbon Analytics highlighted how MDBs, unlike commercial banks, have unique financial strengths such as callable capital and preferred creditor status. However, their capital adequacy frameworks (CAFs), which help them assess whether they have enough capital to absorb potential losses, still don’t fully reflect these advantages. Risk aversion by MDBs, driven by a focus on maintaining AAA credit ratings, limits their willingness to expand lending, holding back billions in climate finance. 

A G20 expert panel found that reforms by MDBs could unlock hundreds of billions of dollars of financing in the medium term, while posing negligible risk to their financial stability.1For more information, see the Zero Carbon Analytics explainer: Climate change requires a new approach from international financial institutions. These reforms include taking on more risk, giving more credit to callable capital, innovating, improving credit rating agency assessments and boosting transparency. This funding could be a step towards the USD 8.6 trillion in funding required annually to implement climate action plans globally by 2030.

MDBs make moderate progress on reforms

The Center for Global Development (CGD) has monitored progress by seven MDBs on several reforms, including the G20 recommendations.2CDG reviewed progress by the African Development Bank, the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank, the European Bank for Reconstruction and Development, EIB Global, the Inter-American Development Bank Group (IDBG), and the World Bank Group (WBG). In April CGD released an update to the tracker which showed that the majority of MDBs have indicated their intention to pursue most of the reform agenda items. In its October update, CGD said it was “a mixed picture, with promising signs of progress in some areas, while other important reforms have not yet been initiated and relatively few reforms have been fully completed.” The think tank added that some MDBs, including the Asian Development Bank and the Inter-American Development Bank Group, had made more progress than others.

At present, the progress the seven MDBs have made in implementing CAF measures could unlock up to USD 357 billion in additional lending headroom in the coming decade. 

However, there are several further actions they could take to unlock further lending. S&P predicted that MDBs could invest USD 500 billion–1 trillion more by revising their CAF policies, while posing no risk to their current credit ratings. While Fitch Ratings found that a dozen MDBs could collectively lend nearly USD 480 billion more before risking rating downgrades. 

Table 1: Progress by seven MDBs on reforms

MDBs’ current contribution to climate finance

MDBs’ current contributions to climate finance falls short of the trillions of dollars required annually to address climate change. In 2022, USD 1.26 trillion was invested in climate finance globally- with MDBs providing 8%3Zero Carbon Analytics estimation based on USD 99.45 billion. of this amount. MDBs’ contribution accounts for about 1% of the USD 8.6 trillion in climate finance needed annually by 2030. However, MDB’s contribution to climate finance is increasing each year. In 2023, MDBs provided about USD 125 billion for climate finance, up 26% from USD 99.45 billion in 2022. The majority of this funding goes to climate mitigation. In 2023, 67% of funding by MDBs went to climate mitigation, while 33% went to adaptation. 

In 2023, 60% of climate finance by MDBs went to low-income and middle-income economies – totalling around USD 74.7 billion. About 63% of this finance was provided in the form of loans4Zero Carbon Analytics analysis based on USD 47 billion (page 55) channelled through investment loans. – in a context where 53% of low-income countries are in or at risk of debt distress.

Figure 1: MDB’s climate finance per region per type of income 
Under-utilised finance tools by MDBs

In addition to the reforms in Table 1, MDBs could make greater use of several financial tools to scale up financing to developing countries. Equity finance currently makes up only about 1.8% of MDBs’ climate finance commitments in emerging markets and developing economies, according to the IMF. Equity finance currently accounts for 1.8% of MDBs’ commitments to climate finance in emerging markets and developing economies. However, equity investments by MDBs could draw in more private finance. Currently, every USD 1 invested by MDBs attracts USD 1.2 of private finance. By increasing equity investment, MDBs can signal to private investors that projects are viable and worth supporting. This can help reduce perceived risks and mobilise significantly more private capital. 

Private sector actors often emphasise that guarantees – where MDBs commit to repaying a loan if the borrower is unable to – are useful for making investments viable as they reduce risk and lower debt costs. Guarantees also have the highest mobilisation ratios, attracting an average of USD 1.5 in private capital for every USD 1 invested by MDBs, outperforming loans and equities by six times. However, despite their effectiveness, guarantees currently only account for 4% of MDBs’ total climate finance commitments. 

Similarly, project development typically accounts for 2-5% of a project’s total cost but can attract 20-50 times more early-stage investment. This leverage effect is critical in mitigating development risk, making early-stage funding more accessible and effective in advancing project viability. MDBs could leverage concessional financing to establish and expand project development facilities that offer technical assistance, advisory services, and customised models to foster earlier investment and help scale investment-ready projects in developing countries. 

Role of MDBs in the NCQG

The NCQG on climate finance is currently being negotiated ahead of COP29 in Azerbaijan. The stakes are high — the outcome of the negotiations will determine the size, contributors to and the scope of the new goal to support developing countries’ climate action. Achieving climate action (a four-fold increase in adaptation, resilience and mitigation compared to 2019), in developing countries excluding China requires additional annual investments of USD 1.8 trillion by 2030, while meeting SDGs needs extra spending of USD 1.2 trillion per year. The G20 expert group recommends channelling USD 260 billion annually through MDBs to achieve the goal, 78% of which should come from non-concessional lending. 

In light of this, the NCQG is likely to target an amount significantly larger than the USD 100 billion climate finance goal set in 2009, according to Boston University’s Global Development Policy Center. It would be difficult to meet the new goal “without major increases in MDB climate finance” the report said. MDB funding is the fastest-growing source of climate finance, increasing by nearly 3.3 times between 2013 and 2022. In addition, MDBs increased the amount of climate finance provided to low-and middle-income economies by over 26% in 2023 from 2022. 

However, researchers have pointed out that while MDB climate finance is likely to play an important role in the new NCQG, it should complement, not replace, grant-based finance. The new NCQG should differentiate clearly between different types of public finance, so the growth in MDB finance does not displace other forms of climate finance.

  • 1
    For more information, see the Zero Carbon Analytics explainer: Climate change requires a new approach from international financial institutions.
  • 2
    CDG reviewed progress by the African Development Bank, the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank, the European Bank for Reconstruction and Development, EIB Global, the Inter-American Development Bank Group (IDBG), and the World Bank Group (WBG).
  • 3
    Zero Carbon Analytics estimation based on USD 99.45 billion.
  • 4
    Zero Carbon Analytics analysis based on USD 47 billion (page 55) channelled through investment loans.

Risks and opportunities for nature-based solutions in Latin America and the Caribbean 

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This article is also available in Spanish.

Key points:

  • Nature-based solutions (NbS) are actions that aim to address societal challenges through the protection, management and restoration of ecosystems, such as restoring wetlands, forest conservation and developing green infrastructure. NbS are seen as a way to simultaneously tackle climate change and biodiversity loss.
  • 62% of governments had incorporated NbS into their Nationally Determined Contributions (NDCs) as of 2020, including countries in Latin American and the Caribbean.
  • Studies estimate that NbS could mitigate around 10-12 billion tonnes of CO2 equivalent per year – 27% of the current annual GHG emissions – but meeting this potential would mean reforesting, restoring and changing practices over huge areas of land, much of which would be located in the Global South.
  • NbS do not address the source of fossil fuel emissions and are not enough to limit global warming to below 2°C. The concept has been criticised for distracting from the need for action to reduce emissions.
  • NbS is a broad term and some nature-based projects come with significant risks and trade-offs, including biodiversity loss and increasing risk of land grabs. Projects have disregarded the rights and knowledge of Indigenous and local communities and raised human rights concerns.
  • To be successful, solutions should be based on local knowledge systems and address local concerns, seek the engagement and consent of local and Indigenous communities, and provide clear, measurable benefits for ecosystems.

What are Nature-based solutions?

In 2024, the World Economic Forum (WEF) rated biodiversity loss and ecosystem collapse as one of the top five risks over the next 10 years, requiring urgent attention. One type of response has generated much attention: Nature-based solutions (NbS). The term emerged during the late 2000s – it was used by the World Bank in 2008 and adopted the same year by the International Union for Conservation of Nature (IUCN). The IUCN defines NbS as “actions addressing key societal challenges through the protection, sustainable management and restoration of both natural and modified ecosystems, benefiting both biodiversity and human well-being”.

The concept of NbS emerged as international institutions aimed to address and mitigate the effects of climate change by working with ecosystems, rather than through conventional engineering projects, enhance sustainable livelihoods and preserve ecosystems and biodiversity. The NbS framework was significant because it recognised that people are not just passive beneficiaries of nature’s services – they can actively engage in protecting, managing and restoring natural ecosystems to help overcome various challenges.

Natural climate solutions is a similar but narrower term, explicitly referring to NbS that focus on climate mitigation.

Some examples of NbS outlined by IUCN include:

  • The restoration and sustainable management of wetlands and waterways, to help enhance fish stocks, support livelihoods, lower flood risks and support recreation and tourism.
  • Forest conservation to protect biodiversity, help with climate adaptation and mitigation, improve food and energy security and support local incomes.
  • Restoring drylands to improve water security, reinforce local livelihoods and climate resilience.
  • Developing green infrastructure in urban areas1For example, “green walls, roof gardens, street trees, vegetated drainage basins”. to enhance air quality, water quality and wastewater treatment, reduce stormwater runoff, and enhance the quality of urban life.
  • Employing natural coastal defenses, like barrier islands, mangrove forests, and oyster reefs, to shield shorelines from flooding and mitigate the impacts of rising sea levels.

As of 2020, two-thirds of countries recognised in their Nationally Determined Contributions (NDCs) that ecosystems are vulnerable to climate change and 62% included ecosystem-based approaches to adaptation, or conservation actions. However, measures to implement NbS for climate change adaptation differed significantly based on economic development, region and habitat type.

Challenges with the definition of nature-based solutions

‘Nature-based solutions’ is a very broad concept. One of the main criticisms of the concept is that its definition is too vague and does not clarify which types of projects count as NbS, meaning nature-based actions that damage ecosystems and local communities can be labelled as NbS. For example, protected natural areas that encroach on the actions and land rights of local and Indigenous communities.

The concept does not make any reference to who and what are creating the problems that NbS seek to solve, while the focus on nature as a ‘solution’ suggests that nature’s value is solely based on its utility to humans rather than acknowledging it for its own sake.Implementing NbS with clear standards and evaluation criteria is essential to ensure their quality and integrity. WWF advocates using the 2020 IUCN Global Standard for Nature-based Solutions. The framework provides 28 indicators that guide the design and implementation of NbS, “in a way that allows nature to deliver its valuable ecosystem services,” as well as measuring impact.

Nature-based solutions vs. ecosystem-based approaches

NbS is an umbrella concept encompassing a wide range of ecosystem-related actions that address societal challenges. The definition of NbS from the Convention on Biological Diversity (CBD), for example, indicates that NbS “are broader than ecosystem-based approaches and include benefits for biodiversity, water quality/quantity, sustainable land management, etc.”

Ecosystem-based approaches (EbA), or ecosystem-based adaptation, refers to when biodiversity and ecosystem services are used as part of a climate change adaptation strategy. EbA is a subset of NbS focused specifically on using nature to adapt to climate change. According to CBD, EbA “may refer to a wide range of ecosystem management activities to increase the resilience and reduce the vulnerability of people and the environment, including to climate change and disasters.”According to the WWF, although NbS should be considered a broader tool than EbA and both have their own objectives, they can be complementary and mutually supportive.

Nature-based solutions in Latin America and the Caribbean

Countries in Latin America and the Caribbean (LAC) are integrating NbS by embedding ecosystems and their services into their revised NDCs. As of 2022, 10 of the 16 EUROCLIMA+ programme countries in LAC2The EUROCLIMA+ Programme “supports countries in the formulation and implementation of their NDCs”. It is funded by the EU and other EU countries. This study analysed 16 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay and Peru. explicitly adopt an NbS or EbA approach,3Argentina, Chile. Colombia, Costa Rica, Guatemala, Honduras, Mexico, Paraguay, Panama and the Dominican Republic. highlighting the growing prevalence of these strategies in climate targets. A smaller group (6 out of 16)4Bolivia, Brazil, Cuba, El Salvador, Nicaragua and Peru. do not explicitly reference these approaches but still incorporate nature in their climate commitments.

Forest conservation and reforestation are NbS that facilitate carbon sequestration, reduce vulnerabilities to extreme weather events such as droughts and floods, and simultaneously protect biodiversity. Costa Rica, Chile, Colombia, Mexico and Panama have widely highlighted forest actions in their updated NDCs, while Argentina, the Dominican Republic, Honduras and Nicaragua outline similar policies as EbA.

In addition to land-based solutions such as planting forests and changing agricultural practices, NbS efforts in the region include coral reef and mangrove restoration to strengthen coastal resilience, adding vegetation on slopes to prevent landslides, and encouraging permeable green spaces to recharge groundwater.

A 2016 projection5Vergara, Walter, Luciana Gallardo Lomeli, Ana Ríos, Paul Isbell, Steven Prager, and Ronnie De Camino. ‘El Argumento Económicos Para La Restauración de Paisajes En América Latina’. World Resources Institute (WRI), 2016, 5. estimated that restoring 20 million hectares of degraded lands in LAC – equivalent to around half the surface area of Paraguay6Estimated surface area of Paraguay is 40.7 million hectares. – would generate USD 1,140 per hectare, or around USD 23 billion over a 50-year period. This amount is equivalent to the climate finance received by the ten countries most affected by climate change between 2000 and 2019. Gains would come from timber and non-timber forest products, ecotourism revenues, increased agricultural productivity, carbon capture, and the avoided losses from food insecurity.

A study by the Inter-American Development Bank (IDB) and World Resources Institute (WRI) looked at 156 NbS projects across LAC in 2020. Just under half of the NbS projects (47%) were operational, meaning they had moved beyond the initial pilot phase, with the other half (53%) in preparation and not yet implemented, implying they were still seeking funding or financing. Nearly 75% of these projects rely on grants as a key part of their funding, and 60% are actively seeking further investment or financing. Money provided as grants does not accumulate interest, so projects financed in this manner do not contribute to national debt.

Fig. 1: Projects using NbS in Latin America and the Caribbean (2020)

Nature-based solutions, decarbonisation and ecosystem protection

Several studies estimate that NbS could mitigate around 10-12 billion tonnes of CO2 equivalent (GtCO2e) per year by 2050, potentially reducing peak global warming by approximately 0.3°C. This means that NbS projects could mitigate up to 27% of global annual emissions through the protection or restoration of different ecosystems, such as forests and oceans.

Despite this, a significant gap would remain between the approximately 40 GtCO2 emitted annually from fossil fuel combustion and land-use change and the amount of carbon that NbS can mitigate or capture. This highlights the need for broader climate action to reduce emissions alongside NbS. The timescales projected for most NbS extend beyond the immediate need for atmospheric CO2 reductions and the UN Environment Programme (UNEP) recognises the limitations of the concept, stating that the tool cannot “replace rapid, deep and sustained reductions in greenhouse gas emissions.”

Nature can contribute towards climate adaptation. For example, mangroves reduce annual flooding for over 18 million people worldwide, preventing up to USD 82 billion in flood damage annually.

Biodiversity-rich ecosystems are more resilient, providing more robust protection against the impacts of a changing climate. Since climate change and biodiversity loss share many underlying causes, some solutions could tackle both issues simultaneously. For example, preserving ecosystems that store carbon while supporting native species.

To promote NbS’s ability to tackle the climate and biodiversity crises, well-regulated financial markets are key in mobilising funding for place-based NbS initiatives. However, in 2022, UNEP estimated that annual finance flows to NbS amounted to USD 154 billion, less than half of the USD 384 billion annually required by 2025, and only a third of the USD 484 billion per year needed by 2030.

Potential benefits of nature-based solutions in LAC

Climate-related natural disasters in LAC have increased threefold over the past 50 years, resulting in severe impacts on health, ecosystems and economies. In lower-income countries in the region, these disasters can diminish GDP by 0.9% and damage can reach up to 3.6% in the Caribbean.

The LAC region is one of the most biodiverse areas in the world, but its natural resources are continually being exploited. Ecosystem degradation increases vulnerability to natural disasters, drives up costs, disrupts essential services, raises the risk of infrastructure damage and endangers populations. NbS are being suggested as one way to help address the challenges imposed by climate change in LAC. For example:

Drawbacks and trade-offs of nature-based solutions in LAC

Although NbS can contribute to climate mitigation and the protection of ecosystems, the potential impacts of such solutions are limited and must be implemented alongside other actions to swiftly and substantially reduce emissions.

Nature-based projects can also present significant risks and trade-offs for local ecosystems, and local and Indigenous communities.

Impacts on biodiversity and land security

The IPCC Special Report on Climate Change and Land (SRCCL) indicated that solutions for reducing land-use emissions, like new plantations, may increase the demand for land, which could lead to “adverse side effects for adaptation, desertification, land degradation and food security.” For NbS to mitigate 10 billion tonnes of CO2 equivalent per year, land use practices would need to change over huge areas: Ecosystem destruction would need to be stopped globally, including preventing 270 million hectares of deforestation, 678 million hectares of ecosystems would need to be restored – an area more than twice the size of India – and the management of 2.5 billion hectares of land would need to be improved by mid-century.

The majority of this land is expected to be in the Global South, including the land used for afforestation, soil carbon sequestration in croplands and grasslands, and bioenergy. This could mean major disruptions to land and water, and to nitrogen and phosphorus stocks and flows resulting from extensive fertiliser use from new plantations.

NbS could lead to the expansion of large monoculture plantations, impacting biodiversity. Establishing new tree plantations, instead of restoring primary vegetation, has negative ecological consequences. A study has shown that pressure against biodiversity is greater inside protected areas compared to unprotected ones.These new forestations may sow fast-growing and non-native species that are more susceptible to fires, consume more water and are harvested in a few years, quickly returning captured carbon back to the atmosphere.

Friends of the Earth International warns that alongside an increase in monoculture plantations, NbS could lead to extensive land grabs. NbS that involve forests (as with many other tools for mitigation of climate change) raise the risk of a wave of land grabs disguised as climate action and biodiversity protection. Land grabs pose a significant threat to local food sovereignty, particularly for the small-scale producers who provide 70% of the world’s food.

Impacts on local and Indigenous communities and human rights

NbS are often criticised for not aligning with the “wisdom, cosmology, traditional knowledge and sustainable livelihoods” of local communities and Indigenous Peoples, overlooking critical cultural and ecological perspectives held by these communities.

The expansion of plantations and land grabs results in human rights violations, particularly for Indigenous Peoples, local communities and other rural populations. Survival International reports that, the creation of protected areas globally has displaced Indigenous and local communities from their lands and restricted their access to essential resources, food, and medicine they traditionally relied on from those areas. In turn, undermining local and Indigenous land rights from protected areas can have a negative impact on biodiversity by allowing for encroachment and disrupting sustainable practices.

Current safeguards are not enough. Only a third of National Biodiversity Strategies and Action Plans (NBSAPs) presented by each CBD party have provisions to enhance Indigenous Peoples and local communities’ rights. The IUCN Standard for NbS includes a human rights indicator that establishes that “The rights, usage of and access to land and resources, along with the responsibilities of different stakeholders,” should be “acknowledged and respected.” However, these safeguards are voluntary, and compliance can be self-assessed. As a result, adding these ‘safeguards’ to NbS offers little reassurance.

The absence of Free, Prior, and Informed Consent (FPIC)8According to FAO, the FPIC is “a specific right granted to Indigenous Peoples recognised in the UN Declaration on the Rights of Indigenous Peoples (UNDRIP), which aligns with their universal right to self-determination. It allows Indigenous Peoples to give, withhold, or withdraw consent at any time for projects that affect their lands and territories. and human rights references in the design of carbon market activities has raised concerns that this could force already marginalised Indigenous communities to be evicted – communities who are also affected by the impacts of climate change.

Risk of greenwashing

As NbS gains popularity, it is crucial to critically evaluate its financing. Evidence suggests that risks are being overlooked in the rush to scale up funding, which could have significant implications for natural ecosystems and the communities that depend on them.

For example, NbS can be a way for polluting companies – such as fossil fuel, large forestry and agribusiness corporations – to claim green credentials without necessarily changing their business models or practices, shifting attention away from actions that reduce emissions at the source. Friends of the Earth International warns that NbS will lead to “greenwashing and hiding growth in fossil fuel emissions from governments and private sector actors alike”.

Global North-South power imbalances

Creating systems in international markets for natural resources – such as carbon markets – that require significant technical expertise and financial resources, much of which is based in the Global North, is risky. The complex and costly legal frameworks needed to define rights to natural resources – similar to any financial asset – could reinforce structural inequalities between the Global North and South.The financialisation of natural resources – or trading natural resources as commodities – may have similar effects, prioritising the interests of those already benefiting from capital markets and shifting focus away from addressing the underlying causes of the climate and biodiversity crises. This approach could reduce pressure on businesses and governments to confront these issues.

What is needed for NbS to provide sustainable benefits for nature and society?

In order to benefit nature and society, enable synergies and minimise the risks and trade-offs, nature-based solutions should:

Financing mechanisms are essential to boosting investment in NbS. However, closing the climate and biodiversity funding gap will require diverse and complementary approaches to generating finance. For example, repurposing government subsidies or imposing taxes on environmentally damaging activities. Unconditional cash transfers or debt relief programs could ease the financial burden on developing economies, enabling them to allocate more resources towards addressing environmental and social challenges.

Decentralised nature-based solutions can help overcome issues. These solutions are founded on “ecological, autonomous management, traditional knowledge, and governance by Indigenous Peoples, local communities and peasants, of their own land and territories.” Examples of decentralised NbS include:

  • Community Forest Management, which safeguards forests and ecosystems that store carbon naturally, currently preserving 80% of the remaining intact and semi-intact ecosystems.

Agroecology, which helps reduce fossil fuel consumption, enhance crop yields and store soil carbon.

  • 1
  • 2
    The EUROCLIMA+ Programme “supports countries in the formulation and implementation of their NDCs”. It is funded by the EU and other EU countries. This study analysed 16 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay and Peru.
  • 3
    Argentina, Chile. Colombia, Costa Rica, Guatemala, Honduras, Mexico, Paraguay, Panama and the Dominican Republic.
  • 4
    Bolivia, Brazil, Cuba, El Salvador, Nicaragua and Peru.
  • 5
    Vergara, Walter, Luciana Gallardo Lomeli, Ana Ríos, Paul Isbell, Steven Prager, and Ronnie De Camino. ‘El Argumento Económicos Para La Restauración de Paisajes En América Latina’. World Resources Institute (WRI), 2016, 5.
  • 6
    Estimated surface area of Paraguay is 40.7 million hectares.
  • 7
    It is estimated that 0.47% is based in Brazil, 10.17% in the Caribbean and 0.3% in the Eastern Tropical Pacific. This last region includes part of the Gulf of California that is not considered LAC.
  • 8
    According to FAO, the FPIC is “a specific right granted to Indigenous Peoples recognised in the UN Declaration on the Rights of Indigenous Peoples (UNDRIP), which aligns with their universal right to self-determination. It allows Indigenous Peoples to give, withhold, or withdraw consent at any time for projects that affect their lands and territories.

Understanding the bioeconomy

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Key points:

  • The term ‘bioeconomy’ refers to the use of natural resources to support economic growth, environmental health and social well-being. It includes activities that deliver finance and those that do not, such as the implementation of policies for conservation of nature. 
  • It is a broad term with different interpretations, some focusing on developing biotechnology and scaling up bio-product value chains, and others prioritising environmental sustainability and social equity.
  • The bioeconomy has been positioned as a way to channel much-needed finance towards the protection of nature, while also meeting sustainable development targets. However, if the concept remains poorly defined it could be misappropriated and worsen existing inequities. 
  • The concept has received more attention at national and international levels in recent years, as governments grapple with how to bring economic growth to biodiversity-rich but fiscally-poor regions. 
  • Brazil is leading the charge: in December 2023 Brazil launched the Initiative on Bioeconomy (GIB) as part of their G20 presidency, which aims to create overarching principles to guide global work on the bioeconomy. 
  • The Brazilian Bioinnovation Association (ABBI) calculates that “the implementation of new technologies linked to the bioeconomy” could generate USD 592.6 billion per year in Brazil by 2050 and reduce the country’s emissions by 29 billion tonnes CO2eq between 2020-2050 – equivalent to a 65% reduction in emissions compared to current levels. 
  • Examples of successful initiatives give an idea of what investing in the bioeconomy could look like, such as projects to share the benefits of genetic materials and provide payment for ecosystem services, like the protection of forested areas.

What is the bioeconomy? 

In its most fundamental sense, the bioeconomy is the interaction between nature and society: the dependence of people, economy and society on biodiversity, and the impacts of human activities on biodiversity. The term is used to refer to the use of natural resources to support economic growth, environmental health and social well-being, including activities delivering finance and those that do not, such as the implementation of policies for the conservation of nature.

The bioeconomy is a broad concept with varying interpretations in different contexts. A review of academic literature identified three main approaches:

  • The biotechnology approach aims to create economic growth and new jobs through research, innovation and commercialisation of biotechnology. ‘Biotechnology’ refers to products and services that use biological processes. For example, using genetic engineering and other biotechnological approaches to develop vaccines, pharmaceuticals, new crop varieties and other bio-based materials, such as biofuels and biodegradable materials.
  • The bio-resources approach aims to innovate products based on biological raw materials and scale up biomass-based value chains for economic and environmental benefit. Here, the focus is more on developing new technologies and less on positive environmental impact.
  • In the bio-ecology approach sustainability is the primary concern, above economic growth and job creation. This approach aims to address ecosystem health and sustainability issues by, for example, prioritising the protection of biodiversity and implementing circular systems and agroecological practices that benefit local and rural economies.

Although the concept of a bioeconomy is not new, it has recently gained more traction. Already at least 50 countries have put in place a national bioeconomy strategy or policies that are focused on developing a sustainable bioeconomy. A 2024 position paper from The World Bioeconomy Association and World BioEconomy Forum to EU Member States highlights that the area has “witnessed dynamic shifts” since 2022: 

Each country has its own interpretation of bioeconomy which translates to different strategic priorities. While the focus in China, the US and India has been on developing biotechnology, the EU’s bioeconomy strategy, which has been in place since 2012, focuses more on bioresources and bioecology, which prioritises the sustainable use of natural resources and is closely associated with the circular economy.

The global bioeconomy is currently estimated to have a total value of USD 4 trillion, according to the World Bioeconomy Forum, with some projections calculating that the value will increase to USD 30 trillion by 2050 – equivalent to “a third of the global economic value.” 

The Inter-American Development Bank warns that approaches to the bioeconomy that prioritise economic growth and biotechnology, which often come from North America, Western Europe and bodies such as the OECD, are not necessarily shared with – or appropriate for – all regions. The report finds that in the Amazon region, understandings of the bioeconomy are focused on sustainability and equity, particularly for small-scale farmers, Indigenous peoples and local communities. These different interpretations between potential funders in the Global North and countries in the Global South “could impede access to vital investment, funding and support.“

Brazil is leading the bioeconomy push

Brazil has been leading much of the recent focus on bioeconomy. The Brazilian Bioinnovation Association (ABBI) calculates that “the implementation of new technologies linked to the bioeconomy” could generate USD 592.6 billion per year in Brazil by 2050 and reduce emissions by 29 billion tonnes of CO2eq between 2020 and 2050 – equivalent to a 65% reduction in emissions compared to current levels. The report also found that practices that promote bioeconomy could recover 117 million hectares of degraded land in Brazil. Achieving Brazil’s target of recovering 12 million hectares of deforested land by 2030 would create more than five million jobs “from the implementation and management of forest areas”, according to a study from Brazilian sustainable development think tank Instituto Escolhas.

For Brazil and other countries with forest-based economies, growing the bioeconomy is seen as a way to meet both sustainable development and environmental targets. Investment in the bioeconomy has also been positioned as a solution to finance the protection of nature. This potential is particularly important for those in forest-based countries who are not fairly compensated for their role as stewards of the environment and biodiversity – the countries that are home to the Amazon capture just 0.17% of the global bioeconomy market’s potential. The need for funding is becoming even more relevant as the future of other nature-based revenue streams, such as credits from carbon offsetting projects, is becoming more uncertain following increasing scrutiny.

As the 2024 president of the G20, Brazil launched the Initiative on Bioeconomy (GIB) in December 2023, which aims to agree on a set of overarching guidelines, or “High-Level Principles”, on how the bioeconomy should be implemented. The proposal will be discussed by G20 members to define what sorts of activities fall under the bioeconomy. If an agreement is reached, the principles will feature in the final declaration by G20 leaders when they meet in Rio de Janeiro in November 2024.

Brazilian President Luiz Inácio Lula da Silva aims to use the GIB initiative to attract investments into the bioeconomy. At a meeting in Belém in March 2024, Lula and French President Emmanuel Macron launched an investment plan to raise 1 billion euros (USD 1.08 billion) in public and private investments over the next four years for the Amazon, including parts of the rainforest in neighbouring French Guiana. The fund represents efforts to ramp up investment in the bioeconomy and will be financed by state-run Brazilian banks and France’s investment agency, alongside additional private resources. 

Brazil also recently announced a decree to define a national Bioeconomy strategy, which defines bioeconomy as a model for production and economic development “based on values of justice, ethics and inclusion” and involving “the sustainable use, regeneration and conservation of biodiversity, guided by scientific and traditional knowledge.”1Translated from original: “Para fins do disposto neste Decreto, considera-se bioeconomia o modelo de desenvolvimento produtivo e econômico baseado em valores de justiça, ética e inclusão… com base no uso sustentável, na regeneração e na conservação da biodiversidade, norteado pelos conhecimentos científicos e tradicionais e pelas suas inovações e tecnologias…” Priorities include encouraging activities that promote sustainable use and conservation of ecosystems, including the sustainable management of forests, regenerative agriculture and biomass production; expanding innovation, bioindustry and professional training; reducing inequalities and upholding Indigenous rights. The decree sets out the creation of a National Bioeconomy Commission, which was due to draft a National Bioeconomy Development Plan in September 2024.2The Decree, published on 5 June 2024, states that the National Bioeconomy Commission will be created within 30 days of the publishing of the Decree, and that the National Bioeconomy Development Plan will be drawn up within sixty days of the establishment of the National Bioeconomy Commission. This means the National Bioeconomy Development Plan was due to be drafted by September 2024.

Proceeding with caution

Growing the bioeconomy could present a way to support people and nature, but the concept also has the potential to be misappropriated and exacerbate other issues, such as existing inequities and environmental degradation. Currently, the proposed High-Level Principles on Bioeconomy lack details that will need to be defined if they are to be adopted by the G20. This must be done in a way that prioritises the rights of those directly responsible for the protection of nature, including local communities and Indigenous people.

Risks of prioritising profit over people and the environment

Due to the varied interpretations of the bioeconomy, there are concerns that the concept could be used to further commodify nature for profit and perpetuate existing power imbalances. The stocktake on global bioeconomy writes that “there is no guarantee that the bioeconomy will be equally beneficial to all groups in society; and it may even reinforce or deepen existing gender and social inequalities.” For example, well-intentioned policies to promote the harvest of forest products such as Brazil nuts, açai berries and rubber could “backfire” and result in an increase in environmentally-damaging monoculture farming, while smallholder farmers struggle to keep up with bigger operations.

Research from 2023 found a misalignment in discussions on bioeconomy in Brazil between those who advocate for “new paths for national economic development based on scientific and technological advances and industrialization,” and those who “emphasize the need to prioritize social objectives, recognize traditional knowledge, and develop alternative forms of economy in which capitalist profit is not a priority.”

Additionally, competition between the production of food and biofuels could “trigger food insecurity” if there are no clear guidelines on what constitutes bioeconomy-related activities, according to a global review of bioeconomy strategies produced for the G20 GIB. Although this is currently not a problem in Brazil, large-scale biofuel production could pose risks in other countries.

An inclusive approach will ensure equitable outcomes

Growing the global bioeconomy in an inclusive way will involve taking into account existing inequalities, such as gender, ethnicity, class, religion and age, and transforming the structures that maintain these inequalities to be more equitable and sustainable. This requires the active involvement of all relevant stakeholders in decision-making processes, from Indigenous and local communities to businesses, academia and government, to ensure equitable outcomes. 

To overcome the differing views on what the bioeconomy is, some scholars have suggested that the concept of ‘sociobioeconomy’ could be used instead. This term takes into account the human and biological diversity of the forest economy and prioritises equity and the protection of the rights of Indigenous people and local communities. This view is shared by the Scientific Panel for the Amazon, which writes that “Amazonian sociobioeconomies are economies based on the restoration and sustainable use of [forests and rivers] in a way that supports the well-being, knowledge, rights and territories of Indigenous Peoples and Local Communities (IPLCs), as well as all residents of the Amazon and the global community.”3Translated from original: “Sociobioeconomias amazônicas são economias baseadas na restauração e no uso sustentável de florestas em pé e rios fluindo saudáveis de modo a apoiar o bemestar, o conhecimento, os direitos e os territórios dos Povos Indígenas e Comunidades Locais (IPLCs, da sigla em inglês), assim como de todos os residentes da Amazônia e da comunidade global.” The approach avoids monoculture production, and addresses power asymmetries to ensure that the economy is not just controlled by multinational actors or domestic elites, who have profited from the clearance of forests in the past. 

What could the bioeconomy look like in practice?

The concept of a bioeconomy has been applied in many countries, particularly those with a large proportion of forest coverage. Due to the breadth of its definition and the range of perspectives on what constitutes a bioeconomy, there are many approaches to implementing its principles. 

Payment for the protection and sharing of genetic resources

The Nagoya Protocol, which was signed by 16 out of 20 G20 countries and came into force in October 2014, is an international agreement to share the benefits of the use of genetic resources in a fair and equitable way. It aims to ensure that those responsible for the protection of nature and owners of traditional knowledge are compensated when biological materials from plants or animals are used to develop new products, such as pharmaceuticals or foods. 

Many countries have already established a legal framework for this: in Brazil, it is mandatory to register all research or product development projects that use Brazilian species in a database – the National System for the Management of Genetic Heritage and Associated Traditional Knowledge, known as SisGen. When a commercial product is developed from resources listed in the database, 1% of the annual income from retail sales must be given to the local community or paid into a National Benefit Sharing Fund. This fund “is intended to support actions and activities designed to enhance… genetic heritage and associated traditional knowledge and promote its sustainable use.” As of August 2024, access to genetic plant material has been registered on the SisGen database more than 16,000 times since the start of the year and roughly USD 1.6 million has been collected for the fund.

Sharing the benefits of digital sequence information (DSI) – genetic information stored in a digital form – is being considered at the meeting of the Convention on Biological Diversity (CBD) in October 2024, known as COP16. Currently, companies can use genetic information from online databases without paying. Representatives from the UK and Malawi, who are leading negotiations on the DSI, noted that the “sectors that depend most on DSI generate ‘one to a few trillion dollars annually’” and therefore that just 0.1% of this channelled into a global fund could yield USD 1 billion, which could be given to those who have helped preserve the species. At COP16, countries will aim to conclude negotiations on who should pay, when and how much they should pay, and whether it should be mandatory or voluntary. Wealthy countries who host many pharmaceutical companies, such as Japan and Switzerland, would prefer a deal that encourages companies to contribute to a fund, without the legal obligation to do so. Following the outcomes of the CBD, it will be up to countries to enforce it, by putting in place their own national regulations and systems to collect payments.

Payment for ecosystem services

Payment for ecosystem services programmes are schemes which enable landowners who conserve or restore nature to receive payment for their actions. For example, Mexico’s National Payments for Ecosystem Services Programme offers financial incentives for landowners to conserve forests, protect water basins and promote sustainable land practices. While the programme provides modest grants to communities – around USD 2,400 per km2 of land registered, with a cap of 30 km2 – a recent evaluation found that those participating took on “significantly more forest management activities”, such as patrolling against deforestation, building fire breaks and preventing soil erosion. Funding from the programme is sourced through taxes on water use, government budget allocations and private sector contributions. 

In Costa Rica, the Pago de Servicios Ambientales (Payment of Environmental Services) programme, implemented by the environmental ministry, has protected 13,000 km2 of forest via over 19,000 contracts with landowners since 1997. The programme helped Costa Rica become the “only tropical country in the world to have reversed deforestation” according to the World Bank, which has enabled ecotourism to boom.  As of 2023, there were around 5,500 landowners involved in the programme, covering 3,500 km2 of land. The programme’s annual budget of between USD 20-25 million is predominantly funded by 3.5% of a sales tax on fossil fuels, as well as from water usage fees and other initiatives.

Payment for ecosystem services programmes can also collect payments from companies who use the services. For example, Vietnam’s Payments for Forest Ecosystem Services scheme mandates that companies, primarily hydropower companies, pay into a state-managed fund for forest restoration upstream. Similarly, Ecuador has the Fondo para la protección del Agua (FONAG) scheme whereby corporations who need regulated and purified water pay land managers upstream for forest restoration and conservation via a trust fund.

International financing for the bioeconomy

Several funding mechanisms have been established or proposed in the past few years as additional measures to finance the bioeconomy. The Amazon Bioeconomy Fund, first implemented in September 2022 and worth just under USD 600 million, has allegedly already avoided 123.4 million tonnes of CO2 emissions. The fund promotes sustainable agroforestry (tree-based agriculture), community-led nature tourism, native species cultivation and aquaculture (growing aquatic animals and plants for food). In September 2023, Banco do Brasil signed a letter of intent to launch a USD 250 million bioeconomy and climate action financing programme with the Inter-American Development Bank. This aims to “support the development of bio-enterprises and rural producers that are part of the Amazon’s bioeconomy value chains”. According to the Finance for Biodiversity Initiative, only 3-6% of overseas development assistance (ODA) provided by Multinational Development Banks, around USD 4-9 billion out of a total of USD 150 billion, was spent on activities that “directly lead to biodiversity conservation and restoration”.4These figures refer to expenditure between 2015-2017 sourced from the OECD.

At COP28, Brazil shared a proposal for a Tropical Forest Finance Facility (TFFF) which aims to financially reward countries for preserving tropical forests. The facility would invest funds from rich countries, multilateral development banks and institutional investors, with the returns used to compensate countries for preserving and restoring their tropical forests. Many details still need to be ironed out, with a more detailed design set to be presented at COP29 and a formal launch foreseen at COP30.

  • 1
    Translated from original: “Para fins do disposto neste Decreto, considera-se bioeconomia o modelo de desenvolvimento produtivo e econômico baseado em valores de justiça, ética e inclusão… com base no uso sustentável, na regeneração e na conservação da biodiversidade, norteado pelos conhecimentos científicos e tradicionais e pelas suas inovações e tecnologias…”
  • 2
    The Decree, published on 5 June 2024, states that the National Bioeconomy Commission will be created within 30 days of the publishing of the Decree, and that the National Bioeconomy Development Plan will be drawn up within sixty days of the establishment of the National Bioeconomy Commission. This means the National Bioeconomy Development Plan was due to be drafted by September 2024.
  • 3
    Translated from original: “Sociobioeconomias amazônicas são economias baseadas na restauração e no uso sustentável de florestas em pé e rios fluindo saudáveis de modo a apoiar o bemestar, o conhecimento, os direitos e os territórios dos Povos Indígenas e Comunidades Locais (IPLCs, da sigla em inglês), assim como de todos os residentes da Amazônia e da comunidade global.”
  • 4
    These figures refer to expenditure between 2015-2017 sourced from the OECD.

Finding economic value in nature beyond carbon

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Key points:

  • Rates of biodiversity loss and nature degradation are alarming, with regions around the world at risk of long-term economic instability, worsened climate change and weakened natural systems.
  • Though hard to quantify because of the complexity of natural systems, ecosystem services – the benefits humans receive from nature, such as food and climate regulation – are estimated to be worth more than USD 150 trillion a year, or around one and a half times global GDP. 
  • Biodiversity loss is currently costing the global economy more than USD 5 trillion a year. USD 5 trillion is roughly the same amount it would cost Europe to transition to renewable energy by 2050.
  • Economies around the world are highly dependent on nature. China, the EU and the US have the highest absolute GDP exposed to nature loss – a combined USD 7.2 trillion.
  • Conservative estimates suggest that nature loss could cost the global economy at least USD 479 billion per year by 2050.
  • The negative consequences or costs associated with the destruction of nature can be greater than any economic benefits or value added from activities causing the destruction.  
  • The destruction of nature in one region can ripple across natural systems, with far-reaching consequences beyond local borders. For example, deforestation causes droughts and elevates temperatures far beyond the site of deforestation, threatening food security and economies in other regions.  
  • Nature adds ‘free’ value to society by providing essential ecosystem services that support life and economic activity without direct costs. For example, conserving  natural habitats near farms boosts production.
  • Fortunately, estimates suggest that conserving biodiversity and ecosystems is much more affordable than destroying them.
  • Restoring and preserving biodiversity is substantially less expensive than building a net-zero emissions energy system – the required annual investment in biodiversity is only 15% of that needed for energy system transition.
  • The funding gap for biodiversity conservation is approximately USD 830 billion per year, comparable to the size of the global tobacco market. 

Human societies are fundamentally dependent on nature 

Nature provides a host of valuable ‘ecosystem services’ – the benefits humans receive from natural ecosystems, such as food, medicine, resources, clean air, climate regulation, climate change mitigation and disease control. These services are essential for sustaining life. 

Biodiversity – the variety of species, genes and ecosystems on earth – is key to supporting nature’s ecosystem services and the value they bring. Biodiversity helps maintain ecosystem balance by supporting species interactions that regulate nutrient cycling, water filtration and climate regulation. It ensures resilience to environmental changes, since diverse ecosystems are better able to recover from disturbances such as extreme weather events. Biodiversity is also important for preserving the genetic diversity that is crucial for the adaptation and evolution of species.

Rates of biodiversity loss and nature degradation are alarming – 50% of natural ecosystems are in decline, over 85% of wetlands are lost, and 25% of species are at risk of extinction. More than three-quarters of essential ecosystem services have decreased over the past 50 years. Additionally, there has been a significant decline in per person ‘natural capital’ – the world’s stocks of natural assets. The stock of natural capital per person declined by almost 40% between 1992 and 2014, while produced capital per person doubled over the same period.

Nature-related risks like deforestation, habitat destruction and resource depletion can lead to long-term economic instability, worsened climate change and weakened natural systems resilience. For example, the diversion of rivers for cotton farming has depleted the Aral Sea in Central Asia, causing an economic crisis as well as increased local and regional temperature extremes due to the impact on the sea’s climate regulating function. 

Nature-related risks are interconnected, meaning that a disruption in one area can amplify risks in other areas. For example, moisture from the Amazon helps generate rainfall in the region and in surrounding areas. Deforestation reduces this function, causing drought in neighbouring regions and impacting agriculture, water availability and overall climate stability across most of South America.
Five human-caused drivers are responsible for 90% of nature loss over the last 50 years: land- and sea-use change, climate change, natural resource use and exploitation, pollution and alien invasive species.

It pays to protect nature

Financial value of nature 

Though hard to quantify because of the complexity of natural systems, ecosystem services globally are estimated to be valued at more than USD 150 trillion a year, or at least one and a half times global GDP in 2023. The ocean economy alone has a value of up to USD 3 trillion a year, or 3% of global GDP. 

The knock-on effects of current biodiversity loss are costing the global economy more than USD 5 trillion a year. USD 5 trillion is roughly the same amount of investment needed for Europe to transition to renewable energy by 2050. Conservative estimates suggest that a collapse of essential ecosystem services, including pollination, marine fisheries and timber provision in native forests, could result in annual losses to global GDP of USD 2.7 trillion by 2030.1This model includes various tipping points, which are changes in an ecosystem that push it into an entirely different state, such as the transition of forests into savanna due to land degradation and climate change, with potentially catastrophic changes for global climate regulation. The model baseline is a scenario where these services do not collapse. Similarly, biodiversity loss is believed to be costing the global economy 10% of its output every year.   

The global economic costs of eroded ecosystem services between 1997 and 2011 alone resulted in up to USD 20 trillion in annual losses to the value of these services due to land-use change, and as much as USD 11 trillion in losses due to land degradation. 

A World Economic Forum (WEF) analysis suggests that USD 44 trillion of economic value generation – just under half the GDP of the world – is moderately or highly dependent on nature and its services and is therefore highly vulnerable to nature loss. Construction, agriculture, and food and beverages are the three largest sectors that are highly dependent on nature, the report said. These sectors generate a total of USD 8 trillion in gross value added (GVA) – about twice the size of the German economy.

Analysis of industry-wide GVA at national or regional levels reveals the extent to which economies depend on nature. In some of the world’s fastest-growing economies, such as India and Indonesia, around one-third of GDP is linked to nature-dependent sectors, while Africa generates 23% of its GDP from these sectors. Globally, larger economies including China, the EU and the US have the highest absolute GDP exposure to nature loss – a combined USD 7.2 trillion.

Cost of nature destruction exceeds value of exploiting it

The negative consequences or costs associated with the destruction of nature are in many cases greater than any economic benefits or value added from the activities causing the destruction. For example, deforestation for palm oil production was a key driver of fires in Indonesia in 2015, which on some days released more carbon emissions than the entire US economy. These fires cost the economy USD 16 billion – more than the value added from Indonesia’s palm oil exports in 2014 (USD 8 billion), and more than the entire value of the country’s palm oil production in 2014 (USD 12 billion). 

In Europe, fertiliser runoff is one of the most pressing environmental challenges, with nitrogen pollution from agricultural runoff estimated to cost the EU between EUR 70 billion and EUR 320 billion annually. This is more than double the estimated value that fertilisers add to EU farm income.      

Commodity supply and demand can trigger different environmental impacts in different regions, where extraction might lead to deforestation in one area while consumption worsens pollution in another. In the Netherlands, much of the feed for intensive livestock systems comes from soy, predominantly sourced from Brazil, including from regions linked to deforestation. 

Demand for soy puts immense pressure on the Amazon’s ecosystems, driving deforestation, which leads to biodiversity loss and a reduction in the forest’s ability to capture and store carbon. This not only disrupts local ecosystems but has global consequences, as the loss of the carbon-sequestering capacity of forests accelerates climate change, while the degradation of biodiversity undermines global ecosystem stability. The environmental and health impacts of livestock farming in the Netherlands are estimated to cost EUR 9 billion a year – making the damage by the sector three times higher than its added value. This estimate does not account for environmental impacts outside of the Netherlands.

Costs of inaction

Highly conservative estimates suggest that a reduction in six essential ecosystem services – namely pollination, coastal protection, water yield, timber, fisheries and carbon sequestration – could cost the global economy at least USD 479 billion per year by 2050, or cumulatively almost USD 10 trillion,2Between 2011 and 2050. with a 0.67% drop in global GDP every year.3This is under a ‘Business-as-Usual’ scenario, which is a high-emissions scenario aligned with the RCP8.5 pathway used in the IPCC’s Sixth Assessment Report. The economic model does not include impacts from tipping points, such as the collapse of rainforests or pollination. Land degradation, desertification and drought are anticipated to cost the global economy USD 23 trillion by 2050. 

Global GDP could contract by USD 2.7 trillion as early as 2030 if the timber, pollination and fisheries industries partially collapse as a result of environmental destruction.4As the analysis only considered a narrow set of risks, the authors of the report warn that this estimate should be viewed as a lower bound. Credit rating firm Moody’s also identifies eight sectors, including protein and agriculture, with ‘high’ or ‘very high’ inherent exposure to natural capital and with almost USD 1.6 trillion in rated debt. Increasing environmental pressures will erode the capacity of these sectors to pay their debts.

Companies involved in nature destruction face increasing financial risks. For instance, a palm oil company was fined USD 18.5 million for fires that destroyed forested land on its concession in Borneo in 2015. Similarly, the world’s largest meat company JBS received USD 7.7 million in fines in 2017 for sourcing cattle from deforested areas in the Amazon. 

New regulations and shifts in demand as societies respond to climate change could mean that 40 of the world’s largest food and agricultural firms, together worth more than USD 2 trillion, lose up to 26% of their value by 2030. This equates to a loss to financial institutions connected to these firms of USD 150 billion – comparable to the value of financial institution losses following the 2008 financial crisis. A 2023 report found that the total financial impact of deforestation for 1,043 companies that disclosed their deforestation risks in 2022 is nearly USD 80 billion, emphasising the need for urgent and effective management of deforestation risks.

Nature has value beyond carbon

Natural systems, such as forests, are often valued primarily for their role in carbon capture and storage – global forests are estimated to be worth at least USD 150 trillion, almost twice the value of global stock markets and over 10 times the worth of all the gold on Earth. While carbon sequestration accounts for a substantial portion of this value, forests are invaluable beyond this.

Global human health is intricately tied to tropical rainforests, which host an immense variety of plant species, many with medicinal properties. Between the 1940s and 2006, almost half of anti-cancer pharmaceutical drugs originated from products of natural origin. 

It is estimated that every new pharmaceutical drug discovered in tropical forests is worth USD 194 million to a pharmaceutical company and USD 927 million to society as a whole. With almost 90% of pharmaceutical drugs originating from tropical forests still yet to be discovered, the total value to society could be as much as USD 303 billion.5Values have been adjusted from 1995 values to 2024 values based on the Consumer Price Index and have not taken into account any industry-specific changes such as changes in market dynamics or production costs.

In the cosmetics sector, the supply of shea butter, used in various topical products, comes from a tree that is threatened by deforestation and pollinator loss.

The value of nature extends beyond the extraction of goods. Mangrove forests, which are valued for their vast carbon sequestration ability, also offer significant economic benefits from flood protection, including for the US, China, India and Mexico. It is estimated that mangroves reduce damage to property from floods by more than USD 65 billion per year and protect more than 15 million people.

The costs of nature destruction transcend borders 

The destruction of nature in one region can ripple across natural systems, with far-reaching consequences beyond local borders. Deforestation in the Amazon, Congo and Southeast Asia has been linked to significant reductions in both local and regional rainfall. This can negatively impact agriculture and hydropower generation, posing threats to food security and energy generation beyond local borders.  

Deforestation in Brazil and Bolivia has altered regional rainfall patterns, exacerbating droughts in neighbouring regions. In Colombia, the 2015-2016 megadrought was intensified by these disruptions in moisture recycling. This drought caused a national energy crisis as hydropower – responsible for over 70% of Colombia’s energy – became unreliable due to plummeting river water levels. As a result, energy prices soared nearly tenfold, showcasing how environmental damage in one country can exacerbate economic consequences in another. 

The impacts of deforestation go beyond drought. In Southeast Asia, logging and the conversion of forests to palm oil plantations causes soil erosion and results in increased soil sediment in rivers. This sediment is carried downstream and is eventually released into the ocean where it settles on coral reefs, threatening their survival. An estimated 41% of coral reefs globally are impacted by sediment export. 

Coral reefs provide a wealth of ecosystem services, such as coastal protection, food and recreation. By reducing wave energy by up to 97%, they protect up to 5.3 million people on coastlines and USD 109 billion in GDP per decade from flooding and erosion impacts. Coral reefs are an important food source, with global reef-associated fisheries valued at USD 6.8 billion.6 In 2010. Additionally, coral reef tourism is valued at USD 36 billion a year, which is more than 9% of total coastal tourism value in the world’s coral reef countries. 

Forests keep people and the atmosphere cool both locally and regionally by providing shade and releasing water vapour, acting as a natural air conditioner and alleviating heat illness. In the Amazon, deforestation can increase temperatures by up to 4.4°C7Note that absolute temperature change can be expressed in Kelvin (K). A change of 1°C is equal to a change of 1 K. as far as 100 km away. Similar estimates have been made for other forested regions around the world. 

Pollution, such as fertiliser and animal waste runoff from unsustainable farming, can have widespread impacts on nature. Runoff from agricultural fields flows into water bodies, leading to excessive nutrient levels, which depletes oxygen in water and harms aquatic life. The Gulf of Mexico’s dead zone – an area of low to no oxygen that can kill marine life – occurs every summer and is mostly caused by nutrient runoff from excessive fertiliser application and livestock on Midwestern US farms, carried to the gulf via the Mississippi River and its tributaries. In August 2024, the dead zone reached approximately 6,705 square miles – an area almost the size of Kuwait – potentially making 4 million acres of habitat unavailable to marine species. 

The yearly costs of the dead zone to fisheries and the marine environment were estimated at up to USD 2.4 billion between 1980 and 2017. Studies have found that the dead zone reduces the size of large shrimps relative to small shrimps, with prices for large shrimps driven up as a consequence, impacting consumers, fishers and seafood markets.

Pollinators ensure our food security 

The agriculture and food and beverage sectors are highly dependent on pollination – a critical ecosystem service of immense economic value that is essential for human well-being through its impact on agricultural production and food security. Pollinators impact about 35% of global crop production by volume, with 87 out of 115 major crops worldwide depending on pollination by animals, such as insects, birds and bats, to some extent. The contribution of pollinators to global agricultural production and food security is estimated at USD 235 billion to USD 577 billion annually. In the UK alone, the value of pollination services from nature is GBP 430 million.8In 2011.

Pollinators are facing a significant threat from habitat loss, pesticide use and land-use changes. More than 40% of insect pollinators worldwide are facing extinction. In the short-term, the costs of a ‘pollinator collapse’ are valued at a mid-point range of USD 1 trillion or around 1-2% of global GDP. 

Native bumblebees in North America are critical pollinators of blueberries. The value of fresh cultivated and wild blueberry exports from the US in 2023 exceeded USD 127 million, with key export markets in Canada, Taiwan, Japan and South Korea. Yet bumblebees are in decline in North America due to habitat loss, pesticide use and climate change, posing a threat to blueberry production.

Pollinator loss is anticipated to continue on an upward trend in the future, with projections indicating that pollinator decline could cause annual crop production losses of more than USD 50 million for the US, around USD 125 million for Brazil, and around USD 225 million for China by 2050.

Nature adds ‘free’ value 

Nature adds ‘free’ value to society by providing essential ecosystem services that support life and economic activity without direct costs. These services are often overlooked in economic calculations, yet they are fundamental to human well-being and environmental sustainability. The destruction of these natural systems can lead to significant financial costs in the long run as humans are forced to replace or mitigate these services.

In Northern California, wild bee species were found to significantly increase tomato production both in terms of size and numbers. Tomatoes are able to self-pollinate, meaning they don’t rely on pollinators to produce fruit, but this example demonstrates the added value from pollination services in nature. 

In Costa Rica, pollinators from forests increased coffee yields by 20% within 1 km of forests and improved coffee quality by reducing poor-quality berries by 27%. The study estimated that pollination services from two forest patches generated around USD 62,000 per year for a single coffee farm, representing approximately 7% of its total income. For both the coffee and tomato examples, simply being in close proximity to forested or natural habitats benefitted production on farms.

The natural flood control function of wetlands offers another example. During Hurricane Sandy in 2012, which devastated the Caribbean and east coast of the US, wetlands are estimated to have saved more than USD 625 million in avoided flood damage.

Solutions and distractions

Conserving biodiversity and ecosystems is estimated to be much more affordable than destroying them. By 2030, an estimated USD 996 billion9In 2021 USD. annually will be required to sustainably manage biodiversity and maintain ecosystem integrity. This represents less than 1% (0.7-0.9%) of global GDP in 2023. It is also substantially less than the amount spent annually on subsidies that accelerate the production or use of natural resources or that undermine ecosystems, which are estimated at USD 1.8 trillion to USD 6 trillion – or around 6% of global GDP. Nature-smart policy interventions, which already have demonstrated success and could achieve further impact and value, can substantially reduce the risk of ecosystem services collapse by 2030, with economic gains of up to USD 150 billion.

Protecting and restoring biodiversity is crucial to achieving net-zero goals – it enhances ecosystem resilience, supports agricultural systems and increases carbon sequestration. At the same time, estimates suggest that restoring and preserving biodiversity is substantially less expensive than building a net-zero emissions system – the annual funding needed to protect and preserve biodiversity is only 15% of the investment needed to transition to a net-zero emissions energy system.

Biodiverse ecosystems like forests, wetlands and grasslands store significant amounts of carbon, helping to offset emissions. They also provide critical services such as regulating the water cycle, supporting pollination and improving soil health, all of which are necessary for sustainable agriculture and climate resilience. It is estimated that a transition to deforestation-free operations, entailing a 75% reduction in deforestation rates by 2025 and the restoration of 300 million hectares of forests, could result in an economic gain of USD 895 billion by 2030 through a reduction in annual environmental costs of USD 440 billion.

Closing the funding gap

The funding gap for biodiversity conservation is approximately USD 830 billion per year, comparable to the size of the global tobacco market in 2022. About 73% of the funding is needed to manage productive landscapes and seascapes, with a significant focus on transitioning agriculture to sustainable practices. 

There are various financial mechanisms for closing this funding gap for biodiversity conservation. Public finance presently plays a significant role, with government budgets and tax policies supporting biodiversity projects. It is estimated that 80% of biodiversity financial flows – around USD 133 billion per year10Value is from a 2022 report. – are from domestic and international public finance.

The private sector contributes around USD 29 billion per year to biodiversity through various sustainable debt products. The largest contributor is payments-for-ecosystem services, where financial incentives are given to landowners or resource managers to adopt practices that conserve or enhance ecosystem services that derive value from nature. These schemes contribute around USD 9.8 billion a year. However, they are often vaguely defined and suffer from issues such as payment volatility and high project costs. 

Debt-for-nature swaps allow countries to cancel portions of their foreign debt in exchange for committing to fund local conservation projects. Estimates suggest that as much as a third of the USD 2.2 trillion of developing country debt could be eligible for debt-for-nature swaps. However, the impact of this on debt levels has been very small: between 1987 and 2023, these swaps offset only ​​around 0.11% of debt payments by low- and middle-income countries. Critics also argue that these swaps sometimes commodify nature and could undermine the sovereignty of local communities if not properly managed.Carbon offsets and credits aim to compensate for greenhouse gas emissions and environmental impacts by investing in projects that reduce or remove carbon from the atmosphere, such as reforestation or afforestation. However, they have been criticised for allowing companies to continue emitting carbon while relying on offset projects that may not always deliver long-term or verifiable climate benefits.

  • 1
    This model includes various tipping points, which are changes in an ecosystem that push it into an entirely different state, such as the transition of forests into savanna due to land degradation and climate change, with potentially catastrophic changes for global climate regulation. The model baseline is a scenario where these services do not collapse.
  • 2
    Between 2011 and 2050.
  • 3
    This is under a ‘Business-as-Usual’ scenario, which is a high-emissions scenario aligned with the RCP8.5 pathway used in the IPCC’s Sixth Assessment Report. The economic model does not include impacts from tipping points, such as the collapse of rainforests or pollination.
  • 4
    As the analysis only considered a narrow set of risks, the authors of the report warn that this estimate should be viewed as a lower bound.
  • 5
    Values have been adjusted from 1995 values to 2024 values based on the Consumer Price Index and have not taken into account any industry-specific changes such as changes in market dynamics or production costs.
  • 6
     In 2010.
  • 7
    Note that absolute temperature change can be expressed in Kelvin (K). A change of 1°C is equal to a change of 1 K.
  • 8
    In 2011.
  • 9
    In 2021 USD.
  • 10
    Value is from a 2022 report.

Reforming climate finance: Addressing bias in sovereign credit ratings

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Key points:

  • Changes in sovereign credit ratings influence a country’s borrowing costs from international capital markets. Downgrades in particular can have severe repercussions for a country, making it difficult to source financing for climate mitigation and adaptation.
  • Researchers have raised concerns around countries in the Global South being subject to different standards in rating decisions, and around credit rating agencies (CRAs) potentially exacerbating economic crises. 95% of credit rating downgrades were applied to Global South countries during the Covid-19 pandemic, despite these countries experiencing milder economic contractions than countries in the Global North.
  • Critics of the current rating system have also raised concerns about a lack of transparency in rating methodologies and the potential for conflicts of interest.
  • Climate change could increase annual interest payments on sovereign debt by USD 22 billion–33 billion by 2100, even if global temperature rise is limited to below 2°C. CRAs have started to incorporate climate-related risks in sovereign ratings. However, this has largely had a negative impact on emerging markets, many of which are vulnerable to climate change.
  • The United Nations (UN) has called for the development of ratings that account for long-term factors on a country’s debt sustainability such as climate change and demographic trends, and that positively reflect developing countries’ investments in climate mitigation.
  • Global regulation of CRAs could ensure rating comparability, enforce transparency and evaluate analysts’ expertise. 
Finance will be key at COP29 and biodiversity COP16

Climate finance is set to be a central topic at the United Nations Biodiversity Conference (COP16) and the UN Climate Change Conference (COP29) this year, with Global South countries seeking accountability in financial pledges and access to finance on equitable terms.

This series of reports, titled ‘Reforming climate finance’, illustrates the influence of global financial institutions on high debt burdens and limited access to climate finance in the Global South. The reports examine the financial tools and institutional changes being discussed in international forums to address these challenges.

The series includes briefings on debt-for-nature swaps in Latin America and the Caribbean,  the impact of sovereign credit ratings on highly indebted countries, the inconsistencies between the International Monetary Fund’s (IMF’s) climate policies and conditionalities imposed on debtor countries, and transition finance in Asia.

Sovereign credit ratings influence countries’ borrowing costs

Credit rating agencies (CRAs) play a key role in determining a country’s cost of debt through the issuance of sovereign credit ratings – which measure a government’s ability to repay its debt. Sovereign ratings are used as a benchmark for investors to assess the risks of investing in government bonds. Changes in ratings, such as upgrades and downgrades, affect a country’s borrowing costs from international capital markets and generate market reactions such as price and interest rate adjustments.

Just like corporate and municipal bonds, sovereign credit ratings fall into two main categories: investment and speculative grade. An investment grade rating means a low risk of default (not being paid back), while a speculative grade indicates a higher risk of default.

  • Investment grade: Ratings in this category signal stable economic conditions and sound financial practices. Countries with investment-grade ratings from leading CRAs generally borrow at lower costs, as investors accept lower returns due to the lower risk involved.
  • Speculative or ‘junk’ grade: These ratings indicate a higher risk of default. Countries with speculative-grade ratings face higher borrowing costs because investors demand higher yields to compensate for the increased risk. This can result in higher interest payments on government bonds and potentially affect the country’s economic stability.

Sovereign assessments by the top three CRAs – Fitch, Moody’s and S&P – typically focus on eight key variables: per capita income, GDP growth, inflation, fiscal balance, external balance, external debt, economic development and default history. However, while the CRAs disclose their approach to sovereign credit ratings and these key determinants, these ratings are also based on qualitative factors such as political risk. The qualitative judgments made by the rating committee is a subjective interpretation of softer, less tangible information, and the public has a limited understanding of how this process unfolds. CRAs may also use additional factors that are not explicitly accounted for in the public scorecard. And while the three agencies use similar methods, they operate independently, which can result in differences in approach and rating outcomes for particular sectors or products, even when evaluating the same information.

Sovereign ratings also frequently act as a country-level baseline for corporate ratings. That means that firms cannot receive a higher rating than governments in the country they are based. One study found that this ceiling creates a barrier for private firms and can limit economic growth in regions, as downgrades in sovereign ratings lead to an increase in borrowing costs for companies, even if their financials are strong.

Impact of sovereign downgrades

Several studies have examined the impact of downgrades, many of them focused on emerging markets. The main findings are that downgrades increase borrowing costs, limit a country’s access to international finance markets, have spillover impacts across global markets, and generate financial instability. 

Climate finance

Sovereign credit rating downgrades raise borrowing costs through higher interest rates on government debt, adding to fiscal pressure and potentially limiting a country’s ability to access credit. In emerging markets with “relatively weaker economic fundamentals”, financial stability could become strained following a downgrade, as high debt burdens make them more vulnerable to capital outflows, currency depreciation and inflation. In order to avoid this, governments may adopt policies to address the immediate concerns of private investors, even when these policies conflict with their long-term sustainable development objectives.  

Downgrades may also discourage public investments in renewables and climate mitigation and adaptation due to high interest rates and limited access to credit. Without climate spending, climate impacts such as nature loss worsen. A University of Cambridge study shows that nature loss can trigger further rating downgrades, creating a self-perpetuating cycle. Attracting private finance for climate is also made more difficult due to “the lack of investment grade sovereign credit ratings for many EMDEs [emerging and developing economies]”, according to the IMF.

Sovereign spreads 

One study found a negative relationship between sovereign spreads and credit ratings in emerging markets, with higher ratings being associated with lower spreads, a relationship that has strengthened over the years.1The sovereign spread is the difference between the interest rate on a US treasury bond and a similar bond of another country. This measure is related to country risk: A higher spread implies higher perceived risk. When a country’s credit rating increases (indicating lower risk), its bond spreads decrease, indicating that investors demand less of a risk premium. Conversely, a lower credit rating results in higher spreads, meaning investors demand a higher risk premium.

Spillover effects

Several studies have found that sovereign downgrades have spillover effects across countries and financial markets. Even if an emerging economy is stable, negative sentiment following a downgrade elsewhere might lead to higher perceived risks for all emerging markets, causing rating agencies to take a more cautious approach with others.

This leads to a vicious cycle of market stress, downgrades, and reduced investor confidence in emerging markets.

If there is a price response to the credit rating change – for example from bonds – further outflows of capital may occur. One study found that sovereign ratings in emerging economies impact not only rated instruments – like bonds – but also stocks, and rating changes have spillover impacts to other countries, with neighbouring countries most affected. One study focused on the US and euro area countries found that while asset prices react strongest to other domestic asset price shocks, substantial international spillovers occurred, both within and across asset classes.

These knock-on and spillover effects – the magnitude of which depends on the type of announcement, the country experiencing the downgrade, and the CRA issuing the announcement – can destabilise financial markets by affecting institutional demand and market liquidity and acting as triggers for buying or selling.

Disproportionate impacts

Research shows that downgrades have a disproportionate impact compared to upgrades. One study found that government downgrades and imminent negative sovereign credit rating actions have a stronger effect than positive adjustments on the size and volatility of lending in emerging markets. Downgrades often trigger stronger market reactions because they are perceived as a signal of higher risk, especially in emerging markets where economic stability is more fragile. 

Analysis also shows that the top three CRAs tend to be slow to upgrade sovereign credit ratings compared to downgrading, which are usually faster and deeper. CRAs tend to overreact by downgrading sovereign ratings during periods of economic crisis and instability, while underreacting when upgrading during more stable times. One study found that previous downgrades negatively impacted future ratings, and domestic economic variables have limited influence on the ratings path once a country has been downgraded. This means that once a country is downgraded, it is extremely difficult for them to turn things around.

Critiques of CRAs

Bias against poor and emerging economies

Emerging markets were largely excluded from credit rating processes until the 1990s, with only 12 emerging market nations rated by Moody’s in 1993. In 2003, only 10 African countries were rated by the three top CRAs, but by 2021 that number increased to 31. The UN initially pushed for Sub-Saharan African countries to be included in the credit rating process in order to allow poor regions to access investment from the global bond market – crucial for funding development, infrastructure and economic growth. Many international investors tend to favour rated securities over unrated ones, even when both carry similar levels of credit risk.

However, while the same criteria should be applied consistently for sovereign credit ratings across regions, several studies have found that countries in the Global South have been subjected to different standards by CRAs. One study by researchers in Turkey found that CRAs consistently give higher ratings to developed countries regardless of their macroeconomic fundamentals such as government debt, GDP or inflation rates. They found that ratings often don’t consider the improved resilience of emerging markets to external shocks, and place undue weight on external financial pressures from developed economies. Sovereign risk ratings for emerging markets indicate more risk and volatility than what is seen in their actual market performance, which worsens the perception of instability. 

A later study also found that CRA’s assessments of poorer countries often deviate from the ratings suggested by improvements in their economic fundamentals, creating a self-fulfilling prophecy. Due to lower ratings, countries have to borrow at higher costs, which worsens their financial position and, in turn, could increase the risk of a potential default. This bias has significant implications for the Global South – a ‘junk’ rating limits a country’s ability to borrow and access international financial markets, as investors use sovereign ratings as a key benchmark when looking to invest in emerging economies.

Poor countries held to different standards

Zero Carbon Analytics analysed sovereign ratings for the World Bank Heavily Indebted Poor Countries (HIPC), all in the Global South, and the IMF ‘advanced economies’, all in the Global North, with the highest debt-to-GDP ratios. The analysis showed that the HIPC all had junk ratings despite having lower debt-to-GDP ratios than the top 10 indebted Global North countries, indicating that the HIPC countries are more likely to be able to repay their debts. A junk grade for these countries will increase their cost of borrowing and prevent them from accessing global financial markets and investing in climate mitigation. All the Global North countries, apart from Greece, met investment grade, despite having higher debt ratios. While CRAs consider a multitude of other factors when making sovereign rating assessments, the data shows that countries in the Global South are potentially being held to a different standard than countries in the Global North.

Fig. 1: Sovereign ratings for Global North and HIPC countries with highest debt-to-GDP ratios
Lack of transparency and unsolicited ratings

Researchers have also raised concerns over the lack of transparency in the CRA’s method of assigning ratings. One study by Belgian researchers highlighted that CRAs are not fully transparent in how they assign ratings, and their models often rely on incomplete data for emerging markets, leading to biased results. This creates uncertainty and forces countries into lower-rated categories than they may deserve.

Countries in Africa have also faced downgrades in assessments they did not request or pay for, with unsolicited downgrades adding to their financial burdens. Ghana’s government has raised concerns around unsolicited downgrades by Moody’s and Fitch. The country’s finance ministry said it was “gravely concerned about what appears to be an institutionalized bias against African economies.”

Exacerbate fiscal vulnerabilities during crises

The inability of CRAs to foresee the crises of the 1990s and their downgrades of sovereign credit ratings afterwards led some researchers to argue that they may have exacerbated those crises. The Mexican economic crisis in 1994-1995 “produced the sentiment that rating agencies react to events rather than anticipating them and raised questions about how seriously investors should take sovereign ratings on developing countries,” according to the OECD. A group of researchers found that credit rating agencies may have contributed to worsening the East Asian crisis in 1997–1998 by issuing excessive downgrades, which increased borrowing costs for the affected countries and helped to create a self-fulfilling prophecy. 

Covid-19 Pandemic 

During the COVID-19 pandemic, developing countries experienced over 95% of credit rating downgrades. This is despite Global North countries taking on significantly larger increases in debt and their economic output contracting at more than twice the rate of output contraction in emerging markets and developing economies. Fear of potential downgrades may have deterred some developing countries from participating in official debt relief programs during the pandemic, impacting their long-term debt sustainability, according to the UN.

Fig. 2: Share of the three CRA’s portfolio of rated sovereigns downgraded by at least one notch (Jan 31, 2020 – Feb 28, 2021)

In Latin America, 12 of 18 countries that are rated were downgraded during the pandemic, while four were given negative outlooks.2The 18 countries rated sovereigns by Fitch in the region include Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname and Uruguay. 11 out of the 16 climate-vulnerable Small Island Developing States that are rated also experienced a downgrade or a negative credit outlook from at least one of the major CRAs during the pandemic. 

In Africa, downgrades continued to play a role in post-pandemic economic recovery. In the first half of 2023, 13 negative rating actions — seven downgrades and six negative outlook revisions — were applied to 11 African countries. The CRAs attributed their downgrades, among other things, to a shrinking amount of foreign currency or reserves, increasing debt service costs, and rising interest rates on Eurobonds – making it too expensive for African governments to borrow money internationally. The actions reversed optimism among international investors that African economies were recovering from the pandemic.

Lack of competition and conflicts of interest

S&P, Moody’s and Fitch hold more than 95% of the global credit rating market, leaving little room for competition. This near-monopoly makes it difficult for alternative, regional CRAs to gain traction or offer differing perspectives, particularly in the Global South. Moody’s takeover of Global Credit Rating Company, which has operations across Africa, in July further reduced the diversity of rating perspectives in African markets.

According to a study by researchers in Belgium, there are several potential biases stemming from the business models of the top three CRAs:

  • CRAs used to make money by selling assessments to investors or anyone who paid. But as demand grew for them to cover more regions and do assessments more often, this business model became less profitable. The shift from an “investor-pays” to an “issuer-pays” model, which took place in the 1970s, introduced several risks. In the “issuer-pays” model, bond issuers, who are the clients of CRAs, cover the costs of credit ratings. This can create a conflict of interest, as CRAs might feel pressured to issue more favourable ratings to retain these paying clients. Issuers could threaten to switch agencies or demand better terms if they receive negative ratings, incentivising CRAs to provide ratings that are more positive than they should be. 
  • The ownership structure of CRAs adds another layer of potential bias, as the parent companies of CRAs are sensitive to the investment incentives of their major shareholders and bondholders. CRAs and their parent companies might be motivated to issue upward-biased ratings to benefit their key investors, compromising the objectivity of their assessments.

How to make ratings more holistic and equitable

World leaders are rallying behind international financial system reform to make the system fairer for developing countries ahead of the G20 summit in November in Brazil. The current credit rating system puts Global South countries at a disadvantage, and reforms could provide a more level playing field, according to the UN. Looking forward, climate change could increase annual interest payments on sovereign debt by USD 22 billion–33 billion by 2100, even if global temperature rise is limited to below 2°C.

Incorporating climate risks in a just way

Climate change is already impacting sovereign ratings, with CRAs starting to incorporate climate-related risks and environmental, social, and governance (ESG) factors into their rating assessments. For the Global South, climate and environmental considerations are largely having a negative impact on their ratings, since CRAs do not positively account for investments in climate mitigation. In 2020, Moody’s reported that ESG considerations negatively impacted 60% of its sovereign credit ratings for Global South countries. 

S&P said that future modifications in ratings due to climate change factors would be negative in most cases. These downgrades or negative outlooks could make it difficult for countries to invest in climate mitigation, particularly as CRAs tend to exclude the positive impacts of climate resilience investments in their rating assessments. 

In response to these growing risks, the UN has called for the development of ratings that account for long-term factors on a country’s debt sustainability such as climate change and demographic trends. The ratings should positively reflect developing countries’ investments in sustainability or a robust climate mitigation, according to the UN, since investing early in climate mitigation and adaptation can strengthen long-term fiscal stability and reduce borrowing costs for corporations. “Failing to invest in making economies and societies more climate-resilient undermines future growth, wellbeing, and sovereign creditworthiness,” the UN said.

Global and regional regulation of CRAs 

There is currently no global body that regulates CRAs, and the UN has called for the establishment of a global regulator to ensure rating comparability, enforce transparency and evaluate analysts’ expertise. The global watchdog, which would have adequate representation for emerging and developing economies, should complement national regulators, according to the UN. 

The IMF has also said that “well-crafted” regulation of CRAs could increase investor confidence and boost capital flows and economic growth, adding that a regulatory framework across jurisdictions could promote transparency around rating decisions. Regulation that requires CRAs to publicly disclose their criteria and methodologies for assigning and updating ratings could improve investor decision-making and allow them to assess the reliability of an agency’s analysis. Some progress has been made on the national and regional levels, such as the EU’s rules on CRAs adopted in 2009 in the wake of the financial crisis.

Spotlight on Africa

The United Nations Economic Commission for Africa (ECA) said there is a pressing need for African regulators to develop mechanisms to oversee the work of the CRAs within their jurisdictions. This is especially important, as a United Nations Development Programme study suggests that fairer ratings could save African countries up to USD 74.5 billion, aiding in managing debt and allocating resources for development. 

The ECA highlighted a concerning trend: despite positive economic projections, sovereign credit ratings for African countries are deteriorating. “Moody’s, Fitch and S&P continue to make significant errors in their ratings, yet they continue to influence global financing decisions and flow of capital,” the ECA said. The commission suggested increasing the presence of analysts based in Africa who understand the domestic environment – which could help tackle the challenges around foreign-based assessments. S&P has two offices in Africa – in Cape town and Johannesburg, Moodys’ has one – in Johannesburg, while Fitch has none, according to the CRA’s websites. Johannesburg and Cape Town are among the top three African cities with the most wealthy residents. However, having analysts based in these cities does not necessarily provide the on-the-ground approach necessary to fully understand the socio-economic and risk factors across African countries, which often have vastly different characteristics. Research shows that issuers with analysts located in more distant offices tend to receive more conservative ratings than those with analysts located closer.

The African Union is in the process of establishing a regional credit agency which will aim to provide more relevant and detailed ratings tailored to the continent’s unique economic contexts and support the development of domestic financial markets. It is unclear how effective establishing an African credit rating agency would be in attracting capital, as “target investors tend to assign more weight to reports from the established Big Three agencies” despite claims of bias. However, it offers an alternative for the 22 African countries without international ratings that can’t afford the cost of maintaining ratings from one of the international rating companies.

Lending during crises

To address concerns around CRA’s exacerbating crises by issuing “excessive” downgrades, the UN suggested mechanisms to support countercyclical lending. For example, international financial institutions could provide more favorable lending terms during crises, even if CRAs downgrade a country. It also suggested a more nuanced rating grade, that would soften the sharp divide between investment and speculative to reduce the risks of massive outflows of capital when a country is downgraded.

  • 1
    The sovereign spread is the difference between the interest rate on a US treasury bond and a similar bond of another country. This measure is related to country risk: A higher spread implies higher perceived risk.
  • 2
    The 18 countries rated sovereigns by Fitch in the region include Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname and Uruguay.

Four ways climate policy continuity can contribute to a competitive and resilient EU

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Key points:

  • Climate action remains a priority for EU citizens, showing the need for future EU decision makers to continue to take this area forward. A focus on energy security, cost, competitiveness, and social concerns can provide a winning approach.
  • Policies that reduce emissions have been found to increase energy security, with the RePowerEU Plan illustrating how the EU can take decisive action to lower energy dependence and emissions at the same time.
  • Investing in green technology now can increase competitiveness in the long term and provide cost savings for citizens. Investments in wind and solar have saved EU consumers around EUR 100 billion between 2021 and 2023.
  • Social policy, including retraining programmes and social safety nets, will help ensure people benefit from the development of green industry and technology.

While the June 2024 European Parliament election has moved the ideological needle to the right, this does not erase the pride that citizens have in the EU being a frontrunner in climate action. The most recent Eurobarometer public opinion survey on climate change shows that 77% of people in the EU think climate change is a very serious problem, and a pre-election survey showed 68.5% of people listing climate action among their top priorities when voting, highlighting continued public support for action. This briefing lays out how the EU can continue to act on this strong climate sentiment while accounting for energy security, cost, competitiveness, and social concerns.

Climate policies enhance energy security

In today’s complicated geopolitical context, energy security has become a key political priority, which is being supported by renewable energy development.

In the immediate aftermath of Russia’s invasion of Ukraine, the EU worked to cut dependence on Russian gas and oil while also limiting the extent of energy price increases. The RePowerEU Plan was designed to reduce dependence on Russian fuels by increasing the speed of energy system transition. It did this by reducing energy demand, diversifying energy supply and promoting the production of clean energy, particularly through expanding renewable energy capacity.

The impact of RePowerEU has been dramatic. In 2023, the EU imported just 15% of its gas from Russia, compared with 45% in 2021. Fossil fuels now make up only a third of EU electricity generation, while renewables accounted for 44% in 2023. More electricity was generated from wind alone than from gas last year.

The International Monetary Fund (IMF) examined whether Europe’s climate policies can improve energy security for the region both by their contribution to supply security and resilience to economic shocks.1Europe here means the European Union (EU), the UK and European Free Trade Association (EFTA) countries. The full definition of energy security that the IMF uses is the following: “security of supply, which improves as dependence on energy imports falls and/or imports become more diversified, and economic resilience to energy shocks, which is enhanced when the overall weight of energy spending in GDP declines.” It found that policies to reduce greenhouse gas emissions limit Europe’s reliance on imported energy, diversify sources of energy imports and reduce vulnerability to energy shocks. The IMF report finds that a package of climate measures intended to lower emissions in line with the EU’s Fit for 55 package – which aims to reduce emissions by at least 55% by 2030, compared with 1990 levels – would improve energy security nearly 8% over the same period.2The paper considers the following policy measures: increased carbon prices in the EU and UK emissions trading schemes, increased emissions and performance standards for road transport and buildings, improved permitting processes for renewables, public investment in heat pumps in buildings, and removing fossil fuel subsidies. The same measures would also reduce the energy expenditure of firms and households by improving energy efficiency and increasing renewable capacity, thus expanding available energy supply.

Climate action cuts costs for citizens

Climate action has been shown to cut costs for citizens in a number of cases, meaning it can help tackle the cost of living crisis. Going forward, environmental and climate policy can focus on areas with clear cost savings for citizens to build political support.

The cost of renewable energy has fallen dramatically over the last ten years – renewable energy technologies were out-competing fossil fuels globally even before the Russian invasion of Ukraine and the resulting energy crisis. The most dramatic cost declines between 2010 and 2022 were seen in solar PV (89% cost decrease), onshore wind (69%) and offshore wind (59%).3These are presented here as the global-weighted average levelised cost of electricity (LCOE). In 2022, for example, the average cost of power from new onshore wind projects was 52% lower than the cheapest fossil fuel-fired option.

At times of peak generation for wind and solar PV, electricity prices have been driven down in wholesale markets, and have sometimes turned negative. The International Energy Agency (IEA) estimates that electricity consumers in the EU saved around EUR 100 billion between 2021 and 2023 as a result of wind and solar power replacing fossil fuel generation. This could have been 15% higher if renewable generation had increased more quickly.

The benefits of increasing levels of renewable generation are expected to continue into the future. The IEA projects that electricity prices for EU households will be 22% lower in 2030 compared with 2022 if countries achieve the low-carbon measures in its most ambitious Net Zero Emissions scenario. Electricity prices for EU industry would fall by around 14% in the same period.

As both the IEA and the IMF argue, taking early action to transition to a more sustainable energy system would be cheaper for countries than delaying action until the last minute. Early action allows planning and incremental steps while delay means that polices will need to be much more stringent and costly in order to succeed, and as a result energy prices will be higher. For example, a study in the UK compared lost savings from delayed green policies on energy, food, housing and cars, and found that delaying their implementation had cost households as much as GBP 4,350 over the span of two years.

Electromobility is another example where cost savings are there for the taking, as running and maintaining electric vehicles (EV) is cheaper than internal combustion engine (ICE) vehicles. The IEA estimates that electric cars will reach price parity by 2030, and as early as 2026 for medium-sized cars in Europe, a timely change as the EU’s 2035 phase out goal for new ICE vehicles approaches.4In Germany, for example, EVs already have lower net costs than ICE vehicles. European car manufacturers have stepped up to lower costs, and policy support through initiatives like social leasing can help lower-income consumers get access to EVs.

Investing in green technology increases competitiveness

While technological solutions cannot solve every environmental challenge on their own, there are a number of green technology investments that can have big returns and have been receiving political support.

Europe aims to nearly double renewable energy capacity by 2030, reaching 20% of total global capacity. Almost all of the European total comes from within the EU, making the bloc a key global player in decarbonisation, second only to China in its capacity ambitions.

The global market for key net zero technologies is projected to triple from 2023 levels to around USD 650 billion per year by 2030. The IEA highlights the unprecedented investment that is currently taking place in renewable energy: for example, almost twice as much was invested in clean energy than in fossil fuels globally in 2023.5The IEA defines clean energy as renewables, grids and storage, hydrogen, large-scale heat pumps and energy efficiency. It also includes relatively small investments in nuclear power and fossil fuels with carbon capture, utilisation and storage (CCUS). This trend is expected to continue as countries decarbonise their energy systems. In electricity, solar power investment exceeded investment in all other generating technologies combined in 2023.

In response, the leading economies in the net zero transition – China, the US and the EU – have all set out industrial strategies to encourage the growth of renewable energy technology manufacture, as well as targets for deploying the technologies. This reflects a ‘race to the top’ as countries compete to build, export and deploy renewables, electric vehicles and heat pumps. The EU’s Net Zero Industry Act is designed to reduce reliance on imports and promote net zero technology manufacture, with the aim that green technologies produced in the EU provide at least 40% of EU deployment by 2030,6The technologies covered are solar PV and thermal, electrolysers and fuel cells, on- and off-shore wind, sustainable biomass and biomethane, batteries and storage, heat pumps, geothermal, electricity grid technologies, and carbon capture and storage. thereby increasing the EU’s competitiveness and energy independence.

The current EU Green Deal and larger policy framework helps the EU compete on green technology, although more investment is needed to consolidate its green tech industries. Cap and trade policies can also further spur investment in sustainable technologies, as they create an expectation that emissions will need to be reduced. The EU Emissions Trading System (ETS) already covers emissions from the manufacturing and energy industries, maritime transport and aviation, while ETS2 will phase in emissions from buildings and road transport over the next three years.

Putting climate and social action together

The shift to new, clean industries brings with it opportunities to create new jobs. Employment in the clean energy sector increased by more than 5% globally in 2022, largely driven by the solar PV and electric vehicle sectors. In comparison, fossil fuel-related jobs fell by 4% in 2022. Clean energy jobs now outnumber those in fossil fuels globally.

The IEA expects high-skilled energy positions to increase by 6.6% per year in the EU between 2022 and 2030, and medium-skilled jobs to increase by 7.8% per year. Up to 1 million new jobs could be created in green transition industries in the EU by 2030.

One of the critiques leveled at the European Green Deal by trade union groups and researchers was that it was leaving people behind, particularly already-vulnerable groups like women and those on low incomes due to distributive effects or workers in sectors that need to shift course dramatically.

Support for retraining will ensure that people have the skills to take up new green jobs. The EU’s Green Deal Industrial Plan puts forward a course of action and the 2020 European Skills Agenda set ambitious goals to ensure that the region has enough skilled workers to meet the increasing demand in the clean energy sector. This includes reskilling and upskilling workers from fossil fuel sectors to transfer their expertise to new technologies.

In terms of policy to support this, OECD analysts suggest a number of tools including targeted social protection, housing allowances, and compensatory transfers to offset any economic effects on the poorest citizens. Incentives can be put in place to rebuild green employment opportunities in areas where polluting industry jobs are lost, where possible. Other researchers have pointed towards the need for a new social contract that takes into account the reality of the changes to be wrought by climate change – and the effects of those that may occur in mitigating them.

Building the consensus to get it done

This approach to climate policy at the nexus of technology, competitiveness, security and social sustainability creates the opportunity to build up a new, broad coalition in favour of European climate action in the post-election context.

Decision-makers have spoken up in support of this new approach to climate. Current heads of state and government, as assembled in the European Council, agree, writing “We will anticipate potential challenges and seize the opportunities for our Union in the green and digital transitions, in order to ensure the sustainability of our economic model, leaving no one behind.” Platforms of all parties except ECR largely include references to renewables for security and boosting greentech investment. French President Emmanuel Macron (Renew) and German Chancellor Olaf Scholz (Socialists & Democrats) wrote that to take on global geopolitical issues, there is a need to “[strengthen] our global competitiveness and [enhance] our resilience while making the Green Deal and the digital transition a success.”

In the business community, BusinessEurope and the German Chamber for Industry and Commerce have remained firm that they want the climate targets to remain, but stated that there needs to be a bigger emphasis on competitiveness. Furthermore, green businesses have called for a continuation of the Green Deal to maintain regulatory stability and support competitiveness.

EU cities, regions, worker and civil society groups are on board. The European Committee of the Regions, which represents cities and regions in EU policy making, created 29 recommendations, including continuing the Green Deal while reinforcing its competitiveness, inclusivity and social elements. EU civil society, employers, and workers, as represented by the European Economic and Social Committee, have proposed a social deal to go along with the Green Deal 2.0 to make sure that no one gets left behind.

  • 1
    Europe here means the European Union (EU), the UK and European Free Trade Association (EFTA) countries. The full definition of energy security that the IMF uses is the following: “security of supply, which improves as dependence on energy imports falls and/or imports become more diversified, and economic resilience to energy shocks, which is enhanced when the overall weight of energy spending in GDP declines.”
  • 2
    The paper considers the following policy measures: increased carbon prices in the EU and UK emissions trading schemes, increased emissions and performance standards for road transport and buildings, improved permitting processes for renewables, public investment in heat pumps in buildings, and removing fossil fuel subsidies.
  • 3
    These are presented here as the global-weighted average levelised cost of electricity (LCOE).
  • 4
    In Germany, for example, EVs already have lower net costs than ICE vehicles.
  • 5
    The IEA defines clean energy as renewables, grids and storage, hydrogen, large-scale heat pumps and energy efficiency. It also includes relatively small investments in nuclear power and fossil fuels with carbon capture, utilisation and storage (CCUS).
  • 6
    The technologies covered are solar PV and thermal, electrolysers and fuel cells, on- and off-shore wind, sustainable biomass and biomethane, batteries and storage, heat pumps, geothermal, electricity grid technologies, and carbon capture and storage.

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