Funding Global Environmental Public Goods Through Multilateral Financial Mechanisms

Multilateral financial mechanisms (MFMs) are becoming increasingly prevalent as a means for addressing global public good problems. MFMs raise funds from member countries through “burden sharing” arrangements, and these funds are disbursed as grants to finance environmental projects around the world. These projects are impure public goods, as they help achieve global (public) objectives like climate change mitigation, and they also generate local (private) benefits for recipient countries. This paper constructs a model of MFMs and explores how impure public goods influence burden sharing arrangements. I design an optimal burden sharing mechanism and show how resultant environmental quality and welfare are affected by the choice of grant allocations. Counterintuitively, grant reallocations can be redistributive, Pareto improving, or immiserating, and these results are shaped by the initial distribution of grants and by substitute and complement relationships between private and public consumption.