External publications

Climate impact auctions: increasing the effectiveness of global climate finance

Matthey, Max Alexander / Aidan Hollis / Joanes Atela / Clara Brandi / Sachin Chaturvedi / Georg Kobiela / Magdalene Silberberger
External Publications (2024)

IRPP Insight No. 58, Montreal: Institute for Research on Public Policy

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Low- and middle-income countries (LMICs) represent around 72 per cent of global greenhouse-gas emissions, and the proportion is growing. Without action to stem the growth of emissions in those countries, the shared goal of keeping global average temperature increases to well below two degrees above pre-industrial levels will not be achieved.

At the same time, high-income countries — including Canada and Germany — are responsible for the largest share of the emissions that have accumulated in the atmosphere, and have greater financial capacity to invest in actions to reduce emissions. Under the United Nations Framework Convention on Climate Change, high-income countries have committed to mobilize at least US$100 billion annually toward climate action in LMICs, and are poised to set a new collective quantified goal on climate finance at the 29th Conference of the Parties meeting in 2024 in Baku, Azerbaijan.

This paper explains the reasons behind climate finance for low- and medium-income countries, and critically examines how current financial flows are allocated. It finds significant room for improvement in existing programs. For example, processes are lengthy and burdensome, and the proposed use of a significant portion of the funding has a tenuous relationship to climate change. Part of the problem is that climate finance has been developed from existing approaches to development assistance, rather than starting anew from lessons learned about the most effective and efficient approaches for emission reductions. Efforts to reduce emissions in high-income countries rely heavily on financial incentives to achieve their domestic climate goals — such as carbon pricing, reverse auctions for renewable energy or production tax credits. But their financial support to LMICs consists almost entirely of grants and loans, intended to help pay for climate-related projects, for training and conferences, and for other “soft” objectives. We argue that international climate finance should make more use of results-based payments, specifically through reverse auctions for subsidies based on targeted climate outcomes. Reverse auctions solicit bids from potential providers of the desired outcome and select the lowest-cost bids. When outcomes are measurable — as with renewable energy production and payment per kilowatt hour — such subsidies could help achieve the rapid scale-up of investments needed to reduce greenhouse-gas emissions in LMICs. The mechanism could also apply to carbon removal and adaptation projects. The approach, which we label “Climate Impact Auctions,” would have many attractive features for donor and recipient countries: greater cost-effectiveness, improved access to climate finance for small and medium-sized enterprises, and measurable outcomes. This would allow funds provided by high-income countries to stretch further, and target projects that yield the greatest local and global benefit.