Bridging the Gap How to Finance the Net Zero Transition 2025

To this end, beneficiary countries must establish strong policy and regulatory environments, which are essential for the provision of clear market signals and for supporting the deployment of emerging technologies.29 The sharing of knowledge does not imply a disregard for the differences in developing and developed country contexts – crucially, the implementation of strategies will need to take into account the specific needs and contexts of individual countries. Nevertheless, tailored strategies to increase external support and strong international cooperation are necessary to ensure that all countries can effectively participate in and benefit from the global transition to a sustainable, low-carbon future. Mobilizing private climate finance in LDCs faces significant challenges, including data gaps, lack of carbon pricing, macro-financial risks and a generally high-risk investment environment. These regions often lack detailed data, particularly outside the renewable energy and transport sectors, making it difficult to accurately assess financing needs and hindering private investment.30 The absence of efficient and liquid carbon pricing mechanisms31,32 and business models for infrastructure projects further discourages investment, as investors rely on these tools to predict potential returns.33 Macro-financial risks, such as concerns over debt sustainability, currency liquidity and market volatility additionally exacerbate these challenges, making it more difficult to attract both domestic and foreign private capital.34 This is concerning given the critical role private capital can play in addressing climate change. Private sector involvement is necessary to complement public sector funding and scale- up investments in sustainable infrastructure and technologies.35,36 Collaborations between public authorities and MDBs can lead to the establishment of well-functioning joint initiatives through capacity building, consequently enhancing the effectiveness of climate finance projects and ensuring that investments are directed towards high-impact areas.37 Customized capacity- building initiatives play a crucial role in cultivating conducive environments for investment, particularly by strengthening policy frameworks and providing technical assistance.38,39 Innovative financing mechanisms, such as guarantees and blended finance vehicles, can de-risk investments. Here, reinforcing the partnerships between MDBs working with LDCs and the private sector can improve the effectiveness of LDCs in mobilizing private investments, aligning MDB financing strategies with the needs and risk profiles of private investors.40 Common but differentiated responsibilities and respective capabilities BOX 1 Common but differentiated responsibilities and respective capabilities (CBDR-RC) is a fundamental principle in global climate policy, asserting that while all nations must address climate change, their responsibilities vary based on historical emissions and current economic capacities.41 This principle is vital for fairness, as it recognizes the greater responsibility of developed countries to lead mitigation efforts while supporting developing nations to meaningfully contribute to the task.42 In essence, equity within CBDR-RC requires wealthier nations to provide financial and technological assistance, helping poorer countries meet climate goals without hindering their development.43,44 This requires international cooperation. Developing countries need significant assistance to contribute meaningfully to the global transition to net zero. Hence, in the absence of effective cooperation, the global response to climate change risks being insufficient and uneven.45,46 However, implementing CBDR-RC faces significant challenges, including disagreements over the differentiation of responsibilities, the adequacy of support from developed countries and the complexity of monitoring and accountability mechanisms.47,48 National interests and capacities further complicate an effective application of the principle.49 CBDR-RC is directly linked to Nationally Determined Contributions (NDCs) under the Paris Agreement, since it allows countries to set climate targets aligned with their unique circumstances. Beyond the principle of CBDR-RC, structured frameworks such as the Green Climate Fund (GCF), adaptation funding initiatives, Article 6 mechanisms and other instruments under the Paris Agreement are strategically designed to facilitate the flow of resources from developed to developing countries, effectively operationalizing the commitments of CBDR-RC.50,51 These frameworks provide essential financial and technological support, helping developing nations to enhance their NDCs and contribute more effectively to global climate goals. However, challenges persist in terms of political will, adequacy of funding and the efficiency of disbursement and implementation, which impact the overall effectiveness of the frameworks.52,53 Therefore, while CBDR-RC remains essential for stimulating global cooperation it continues to be a source of discord among nation groups, and its status as an independent legal principle is a subject of debate. For example, international maritime treaty instruments under the aegis of the International Maritime Organization (IMO) require that all ships be treated equally irrespective of flags (i.e. institutionalizing a principle of equal treatment). Developed countries are keen to respect this principle as it pertains to the sector and argue that regulations that apply to the limiting of emissions in international shipping should be enforceable. Developing countries, however, take the opposing view and demand that the CBDR-RC principle be faithfully applied. This is symptomatic of the existence of conflicting viewpoints regarding whether CBDR-RC is an independent legally enforceable principle or not and the issue continues to plague international rulemaking. Bridging the Gap: How to Finance the Net-Zero Transition 8