Bridging the Gap How to Finance the Net Zero Transition 2025

Examples of concessional finance include: –Green Climate Fund (GCF) –Climate Investment Funds (CIF) –World Bank’s International Development Association (IDA) More concessional finance is required, particularly in emerging and developing countries. At COP29 in Baku, MDBs announced plans to play a pivotal role in mobilizing concessional finance, estimating that by 2030, they could collectively provide $120 billion annually for climate financing in low- and middle-income countries (of which $42 billion would be dedicated to adaptation) and $50 billion annually for high-income countries, while aiming to catalyse an additional $65 billion annually from the private sector across all regions.95 Subsidies and grants Subsidies and grants can lower the cost of capital for sustainable projects, making them more attractive to private investors and accelerating the adoption of low-carbon technologies. By targeting early-stage innovations and sectors with significant barriers to entry, these tools can help overcome market inefficiencies, thereby driving the transition to a sustainable economy.96 However, subsidies and grants can also create market distortions by encouraging dependence on financial support, which can lead to inefficiencies and reduced incentives for innovation. Additionally, poorly designed subsidies and grant programmes may yield unintended outcomes, potentially diverting resources away from more impactful climate and sustainability initiatives97 and entrenching economically ruinous rent-seeking behaviour. This implies that, while access to incentives is critical for the net-zero transition, the long-term financial and economic viability of beneficiary firms must remain the core factor in the provision of financial support. Thus, factors such as effective lobbying should not play a role in deciding who benefits from incentives. In EMDEs and LDCs, these challenges are often exacerbated by weaker institutional frameworks and limited financial resources, making it harder to design and implement effective subsidy and grant programmes.98 Therefore, subsidies and grants, as with all strategic policy instruments, must be carefully designed to address local needs and align with regional technical capacities. Focus should also be on building technical capacity to aid constructive implementation. Examples of impactful subsidy and grant programmes include: –Caribbean Catastrophe Risk Insurance Facility, a multi-country risk pool providing technical assistance funded by grants alongside climate- related insurance products. –China’s EV subsidies, which have positioned it as a global leader in EV adoption and production. –Brazil Investment Plan (BIP), which addresses drivers of deforestation and forest degradation. –India’s Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) Scheme, aimed at ensuring energy security for farmers. Subsidy and grant financing for the transition to a sustainable future reflects both substantial public sector investment and ongoing challenges related to attracting private sector financing. Governments around the world provide a combined average of $30 billion annually in grants for climate mitigation, with $26 billion allocated to transport subsidies; however, there has been a decline in grant financing for adaptation.99 Paradoxically, fossil fuel subsidies remain high, with $1.3 trillion in explicit subsidies and a further $5.7 trillion in implicit subsidies recorded in 2022 alone.100 This highlights the difficulty in shifting financial support from fossil fuels to sustainable initiatives, although the scientific evidence on the negative effects of fossil fuel on our world has never been more incontrovertible.101 Regulatory reforms By crafting policies that incentivize green investments, enhance transparency and set clear environmental standards, governments can create an environment that attracts capital and drives innovation. Strategic regulatory reforms are particularly relevant to encouraging growth in transition finance as they can provide the necessary framework to ensure that climate financing initiatives are sustainable and impactful. The policy realm in many developed economies is replete with regulatory and policy levers that are essential in driving the transition towards sustainability, each targeting key areas to align economic activities with environmental goals. When these measures are well-implemented, they can help address the fundamental issues driving the gap, such as market failure. Fossil fuel subsidies remain high, with $1.3 trillion in explicit subsidies and a further $5.7 trillion in implicit subsidies recorded in 2022 alone. Bridging the Gap: How to Finance the Net-Zero Transition 14