The ‘optimal and equitable’ climate finance gap

This study employs a number of Integrated Assessment Models to determine what the optimal financial transfers between high-income and developing economies would be if climate mitigation effort, measured as mitigation costs as a share of GDP, were to be divided equally across regions. We find these to be larger than both current and planned international climate finance flows. Four out of six models imply that a North-South annual financial transfer of around US$ 400 billion is required by 2050, while the other two models imply larger sums, up to US$ 2 trillion. The equal effort constraint means that current oil exporting regions – Middle East and Former Soviet Union in particular – would receive relatively large amounts as a share of GDP. However, transfers never exceed 1-2% of GDP for high-income country regions in any model. Some potential sources of funds are reviewed, including carbon markets, public aid, private investment, development banks and special climate-related facilities. At the moment, finance flows through these channels do not appear to be equal to the task. Finally, we draw some policy conclusions, arguing that expanding private investment, if properly managed, could represent the most effective strategy to fill the ‘optimal and equitable’ climate finance gap.