Climate Finance: A tool-kit for assessing climate mitigation and adaptation funding mechanism
Updated: Sep 4
The Urgent Need for Climate Finance in 2011
Writing in December 2011, following the critical commitments established at the Copenhagen summit (COP-15), this full report by Dr Stephen Spratt of the Institute of Development Studies and Christina Ashford of Stamp Out Poverty addressed the pressing question of how to finance global climate action. Developed nations had pledged to mobilise $30 billion in fast-track finance between 2010 and 2012, scaling up to $100 billion annually by 2020 to support climate mitigation and adaptation in developing countries. However, the Copenhagen Accord lacked detailed conclusions on exactly where this money would come from. Developing nations, facing the harshest impacts of climate change despite bearing little historical responsibility for greenhouse gas emissions, urgently required these funds to transition to low-carbon development pathways without sacrificing poverty reduction efforts.
A Tool-kit for Assessing Funding Mechanisms
To evaluate how this massive financial gap could be closed, the report developed a rigorous methodological tool-kit designed to rank nine distinct funding proposals. The authors established that mechanisms must first be mapped along two primary spectrums. The first spectrum categorised proposals as either International or Domestic. International mechanisms were heavily preferred as they bypass the domestic revenue problem, wherein funds collected nationally are often diverted to domestic budgets rather than international aid, a risk amplified by the ongoing economic crisis. The second spectrum assessed the incidence of the tax, distinguishing between Diverse and Concentrated mechanisms. A diverse incidence was favoured because spreading the financial burden across a wider economic base minimises the risk of the tax being undermined by concentrated industry lobbying.
Following this mapping, the proposals were scored against a strict set of first-order and second-order criteria. First-order criteria demanded Sufficiency in revenue generation, Predictability, Equity reflecting historical responsibility, Additionality to existing aid commitments, and Verifiability. Second-order criteria rewarded Economic Efficiency, Ease of Implementation, and positive developmental or environmental Co-benefits.
Evaluating the Nine Proposals
The report meticulously applied this tool-kit to nine prominent financing proposals. These included a direct budget contribution of 0.5 to 1 per cent of GDP from developed countries (the China + G-77 proposal), a general carbon tax of $1 per ton of carbon dioxide, and targeted environmental levies of $25 per ton on emissions from the international maritime shipping and aviation sectors. The authors also assessed the redirection of fossil fuel subsidies, the mobilisation of private capital via International Monetary Fund Special Drawing Rights, the international auctioning of national carbon emission permits, and the auctioning of domestic revenue permits through systems like the European Union Emission Trading Scheme. Finally, the tool-kit evaluated the Financial Transaction Tax, particularly a Currency Transaction Tax set at 0.005 per cent.
Through the scoring process, several proposals demonstrated significant weaknesses. For instance, while the China + G-77 proposal offered massive revenue sufficiency, it scored poorly on implementation due to the extreme political obstacles involved in negotiating direct wealth transfers from the global North to the global South. Similarly, the general carbon tax and the European Union Emission Trading Scheme suffered from the domestic revenue problem, as funds would be channelled through national budgets rather than dedicated international agencies.
A Recommended Portfolio for the Future
The comprehensive assessment concluded that no single mechanism could viably deliver the required $100 billion annually. Instead, the report recommended deploying a strategic portfolio of the highest-ranking mechanisms. The international auctioning of national carbon emission permits emerged as a top contender, capable of raising $9 billion annually. A tax on international shipping could generate an additional $10 billion, while a similar tax on aviation emissions could contribute $6 billion. Redirecting developed country fossil fuel subsidies could provide an average of $6.5 billion per year, and the mobilisation of Special Drawing Rights could leverage $7 billion in new private finance annually.
Most significantly, the Financial Transaction Tax stood out as the most powerful individual tool in the portfolio. By taxing the untaxed, highly liquid foreign exchange market at a microscopic rate of 0.005 per cent, the Financial Transaction Tax could independently raise $34 billion a year without distorting market operations. Together, this combined portfolio would reliably generate $72.5 billion annually, moving the international community substantially closer to fulfilling its $100 billion climate finance obligations.
We invite you to download and read the full report below to explore the detailed methodology and scoring used to evaluate these vital climate finance mechanisms.
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