A new survey report highlights the growing appetite for blending the two instruments
As the momentum to curb global warming gathers pace, carbon markets have become recognized as fundamental to scaling up and accelerating the green transition: carbon pricing enables cost efficient capital allocation, drives systemic change, generates additional revenue streams over and above limited public funds, and offers countries the ability to meet their climate targets more flexibly. Today, nearly 23 percent of global emissions are covered through either Emission Trading Schemes or carbon taxes. With the emergence of carbon border adjustment mechanisms, such systems are now also getting a global reach. At the same time, over 5,000 companies worldwide have set net-zero targets, driving growth in the voluntary carbon market, which increased in value towards USD 2 billion in 2021.
However, meeting the Paris agreement goals, and decarbonizing the global economy will require more large-scale investments still. While carbon markets are already proving to be a powerful tool to get more private capital flowing in a cost-efficient way, climate funding, to date, has rarely been used to create the carbon markets in which the private sector and their investments can thrive. More work needs to be done on aligning these two areas so funding for carbon markets becomes a natural part of the toolkit for addressing climate change along with funding from public and private donors for mitigation and adaptation.
A new EBRD survey report, prepared in collaboration with Climate Focus, highlights this need. Summarizing the outcomes of a series of interviews conducted in 2021 and 2022 with multilateral and bilateral funders, overseeing the allocation of climate funding resources, as well as their beneficiaries, it provides a snapshot of their current positions on using climate funding to support the implementation of carbon market activities under the Paris Agreement.
Our new research shows that while the two mechanisms have historically been deployed in a siloed manner, there is growing appetite both in recipient countries and donors for blending the two instruments. And development agencies and the donor community can play a key role in increasing the appetite for the private sector to engage in carbon finance.