## anea2023002

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---

### EXECUTIVE SUMMARY — context and imperative
- This decade presents an opportunity to make a breakthrough on both development and climate goals; collective action is required to avert catastrophic climate change while addressing the slowdown in development gains.
- The past decade’s slowdown in poverty reduction was accentuated by the COVID-19 pandemic and Russia’s war in Ukraine, intensifying inflationary pressure and placing additional strain on vulnerable countries.
- High-income countries accounted for 16 percent of the global population in 2019 and 32 percent of total greenhouse gas emissions.
- Climate impacts are deepening development setbacks; adaptation and resilience must complement mitigation, especially for LICs and vulnerable MICs.

### SCALE OF THE INVESTMENT CHALLENGE — key numeric findings
- HLAG held 10 meetings over the past 18 months to develop these insights.
- Aggregate estimates for EMDEs other than China (Bhattacharya et al. (2022)):
  - Gross spending 2019: Total US$ 2,385 billion = 11.3 percent of GDP.
  - Spending needs 2025: Total US$ 3,695 billion = 15.1 percent of GDP (incremental increase of at least $1.3 trillion per year by 2025).
  - Spending needs 2030: Total US$ 5,880 billion = 18.2 percent of GDP (incremental increase of at least $3.5 trillion per year by 2030).
- Climate-related priorities for EMDEs other than China:
  - About $1 trillion per year by 2025 = 4.1 percent of GDP.
  - About $2.4 trillion per year by 2030 = 6.5 percent of GDP.
  - Largest component: energy transformation about $1.5 trillion per year by 2030.
- Global GDP (current US$): $96.1 trillion (World Bank Databank).

### INVESTMENT COMPOSITION — 2030 annual ranges and components (values preserved)
- Total investment needs per year by 2030: $2.0-2.8 trillion.
- Transforming the energy system — Power system:
  - Zero carbon generation: $300-400bn
  - Transmission and distribution: $200-250bn
  - Storage and backup capacity: $50-75bn
  - Early phasing-out of coal: $40-50bn
- Transforming the energy system — Transport system:
  - Low-emission transport infrastructure: $400-500bn
  - Fleet electrification/hydrogen: $100-150bn
- Industry:
  - Energy efficiency: $10-20bn
  - Industrial processes: $10-20bn
- Buildings:
  - Electrification: $20-40bn
  - Energy efficiency and GHG abatement: $70-80bn
- Green hydrogen:
  - Production: $20-30bn
  - Transport and storage: $20-30bn
- Just transition:
  - Targeted programs and safety nets: $50-100bn
- Coping with loss and damage:
  - $200-400bn
- Investing in adaptation and resilience:
  - $200-250bn
- Investing in natural capital:
  - Sustainable agriculture: $100-150bn
  - Afforestation and conservation: $100-150bn
  - Biodiversity: $75-100bn
- Mitigating methane emissions from fossil fuels and waste:
  - $40-60bn

### CURRENT FINANCING — gaps and composition
- Annual average financing for climate change mitigation and adaptation in EMDEs reached about $425 billion in 2019–20; more than 85 percent went to mitigation.
- Adaptation financing for EMDEs reached about $41 billion in 2019–20 (less than 10 percent of mitigation+adaptation financing).
- World Bank Group comparative ranges: LICs and MICs (including China) would need between $1.7 and $3.4 trillion per year by 2030 for mitigation and adaptation.
- Fossil fuel subsidies: $5.9 trillion or 6.8 percent of global GDP in 2020 (IMF 2022a).
- Global agricultural and fuel subsidies: about $1.2 trillion (with $635 billion agriculture and $577 billion in repurposed fossil fuel subsidies noted elsewhere).

### COSTS OF DELAY
- Delaying resilience-enhancing policies in infrastructure sectors could cost an additional $100 billion each year in avoidable disaster impacts in LICs and MICs (Hallegatte, Rentschler, and Rozenberg 2019).
- Clean energy capital needs in EMDEs (excluding China) must expand from less than $150 billion in 2020 to more than $1 trillion in 2030 (IEA 2021a).

---

### FINANCING STRATEGY — three pillars and actionable measures

H3: Pillar 1 — Public financing (domestic resources, fiscal policy, debt)
- A large share of needed financing is expected to come from domestic sources; preconditions include improved domestic resource mobilization and deeper local capital markets.
- Policy levers and measures:
  - Deepen tax reforms: more-progressive taxation, broaden VAT bases, tax capital income, capital gains, and corporate income; greater use of recurrent property taxes.
  - Modernize revenue administration via digitalization.
  - Repurpose inefficient subsidies in food and energy to free up resources; globally governments spend about $1.2 trillion on agricultural and fuel subsidies.
  - Implement carbon taxation to raise revenue and boost clean industry output and employment.
- Immediate debt-related actions:
  - New financing for rollover risk where liquidity pressures exist.
  - Deep debt reduction for countries with solvency issues.
  - Expanded grant and concessional financing, especially for LICs and climate-vulnerable MICs.
  - Strengthen implementation of the G20 Common Framework for Debt Treatment and develop stronger debt-resolution mechanisms.

H3: Pillar 2 — Private sector financing (mobilization and instruments)
- Private sector must scale up investments; International Energy Agency (2021a) estimates about 60 percent of energy transition financing will need to come from private sector.
- Barriers and mitigation:
  - Tackle investment climate constraints, off-taker creditworthiness issues, high up-front costs, and macro-financial risks.
  - Use concessional finance to de-risk private investments, especially for new technologies and high-preparation-cost projects.
  - Align financial system via supervisors and regulators to internalize physical and transition risks and avoid greenwashing.
- Instrument development and market-building:
  - Expand green bond markets, technical assistance (examples: World Bank, IFC programs), and scaling of blended-finance vehicles (example: ILX Fund I valued at $1.05 billion).
  - Address exchange-rate risk, scale risk, and fragmentation of mitigation instruments.

H3: Pillar 3 — MDBs, IMF, and donors (scale, innovations, and commitments)
- MDBs:
  - Met collective 2025 financing goals four years early; commitments reached $58.8 billion in 2021, but gaps remain and balance sheets are insufficient for the scale needed.
  - Recommended actions: expand concessional and nonconcessional financing, explore balance-sheet optimization innovations without affecting credit ratings, deepen diagnostics and policy support, scale up blended instruments and guarantees, and improve reporting and common methodologies.
- IMF:
  - Swift rollout of the Resilience and Sustainability Trust to increase access to financing; the trust channels SDRs from countries with strong external positions to support LICs and MICs.
  - Scale up work on carbon taxation, elimination of fossil fuel subsidies, and analytical work under Article IV and capacity development (Climate Macroeconomic Assessment Programs).
- Donors and advanced economies:
  - Urgently meet and exceed the $100 billion annual pledge to developing countries (advanced economies reached $83.3 billion in 2020).
  - Recommendation: double—at least—mitigation and adaptation financing, including concessional financing, by 2025 compared with 2019 levels, and steadily increase them further by 2030.
  - Greater use of bilateral guarantees from highly rated countries to de-risk exposures and expand MDB leveraging power.
- Philanthropy:
  - Philanthropic climate funding in 2020 estimated at $6 billion to $10 billion (2 percent of global philanthropic giving); flexible, risk-tolerant capital can play a catalytic role, especially in LICs.

---

### ENERGY TRANSITION — just transition, scale, and enabling conditions
- Energy system transformation is central: energy accounted for 75.6 percent (37.6 gigatons CO2e) of greenhouse gas emissions in 2019.
- Required scale:
  - Solar and wind capacity must increase from 1,400 GW today to 17,000 GW by 2040, with two-thirds of new development in EMDEs.
  - Electricity networks need to double in length; annual deployment of energy storage needs to increase 100 times.
- Just transition priorities:
  - Ensure energy access for 733 million people in Sub-Saharan Africa and South Asia lacking electricity and nearly 3 billion lacking clean cooking.
  - Protect affected workers and communities; finance decommissioning, environmental cleanup, and compensations.
- Stranded assets:
  - Early retirement of coal capacity aligned with net-zero by midcentury could strand approximately US$1 trillion in unrecoverable capital; 89 percent of stranded risk is in recently commissioned coal plants in EMDEs.
  - Retiring or repurposing coal by 2040 would cost $1 trillion (World Bank estimate).
- Enabling policies and investments:
  - Strengthened network infrastructure, energy storage availability, affordable financing, utility reforms, carbon pricing, elimination/repurposing of fossil-fuel subsidies.
  - International concessional finance is critical to accelerate energy access and just transition costs.

---

### INNOVATION, DIFFUSION, AND INSTITUTIONS
- Green innovation and diffusion are central to driving sustainable development and differ from degrowth: they support growth and well-being.
- Path dependence implies firms with dirty-technology histories will continue unless incentivized to redirect innovation toward green technologies.
- Public policy must address both pollution externalities (carbon pricing) and knowledge externalities (public R&D and support).
- Governance model: innovation-diffusion triangle linking firms, governments, and civil society.
- Advanced economies dominate high-value innovations; international cooperation, technical assistance, and reforms to investment agreements can promote diffusion to developing countries.
- Monitoring and scenario tools noted: World Emissions Clock and global citizen barometer efforts; by 2030 low-carbon solutions can become competitive in sectors accounting for nearly three-quarters of emissions as tipping points are reached.

---

### COUNTRY PLATFORMS AND PROJECT PIPELINES — Boxed examples and lessons
- Recent country platforms: South Africa JETP, Egypt water-food-energy platform, Indonesia Energy Transition Mechanism, Vietnam JETP.
- South Africa JETP mobilization summary (preserved values in US$, millions):
  - Climate Investment Fund/Accelerating Coal Transition: Grants and technical assistance 50; Concessional loans 2,555; Commercial loans 0; Guarantees 0; Total 2,605
  - European Union/European Investment Bank: Grants and technical assistance 35; Concessional loans 1,000; Commercial loans 0; Guarantees 0; Total 1,035
  - France: Grants and technical assistance 2.5; Concessional loans 1,000; Commercial loans 0; Guarantees 0; Total 1,002.50
  - Germany: Grants and technical assistance 198; Concessional loans 770; Commercial loans 0; Guarantees 0; Total 968
  - United Kingdom: Grants and technical assistance 24; Concessional loans 0; Commercial loans 500; Guarantees 1,300; Total 1,824
  - United States: Grants and technical assistance 20.15; Concessional loans 0; Commercial loans 1,000; Guarantees 0; Total 1,020.15
  - Total (instrument): Grants and technical assistance 329.7; Concessional loans 5,325; Commercial loans 1,500; Guarantees 1,300; Total 8,455.70
  - a $500 million to channel an additional $2.1 billion.
- Design lessons:
  - Mechanisms must be country owned and country led, focused on particular themes, and combine clear government priorities, stakeholder participation, a pipeline of feasible projects, and coordinated financing.

---

### PUBLIC FINANCE REFORMS AND FISCAL FRAMEWORKS
- Fiscal constraints: many EMDEs need sustained investments about 4 percentage points of GDP higher than current levels for climate, health, education, resilience, and nature-based solutions.
- Four levers to increase fiscal space:
  - Mobilize domestic resources (tax reforms, digitalization, excise and carbon taxes).
  - Use government resources efficiently and effectively (repurpose subsidies, reduce procurement waste, improve infrastructure governance).
  - Revamp fiscal rules and broaden debt sustainability analyses (second-generation fiscal rules with a debt anchor, small operational rules, escape clauses, emphasis on expenditure composition).
  - Increase access to low-cost financing (strengthen liquidity management, G20 Common Framework implementation, expand concessional and below-market nonconcessional lending).
- Quantified policy-relevant figures preserved:
  - Emerging markets lose 31 percent and low-income developing countries 39 percent of their resources to inefficiencies in the investment process (Schwartz et al. 2020).
  - Inefficiencies in overall spending estimated at 4.4 percent of GDP in Latin America and the Caribbean (Izquierdo, Pessino, and Vuletin 2018).
  - Nominal market rates on 10-year bonds were less than 7 percent in only 16 EMDEs as of mid-January 2023.
- Financial innovations cited:
  - Catastrophe bonds: MDBs supported 17 catastrophe bonds aggregate value about $3 billion; recent Jamaica bond provides $185 million coverage.
  - Natural disaster clauses in sovereign bonds (example: Barbados 2022 blue bond).

---

### CHANNELING PRIVATE FINANCE — instruments, risks, and governance
- Total private financial flows averaged $12 billion per year for LICs and $800 billion for MICs over the past five years.
- Private climate financing for LICs and MICs is small and concentrated: East Asia and the Pacific received 70 percent of private climate finance to LICs and MICs.
- Barriers: shortage of large investment-grade projects, high transaction costs, macro-financial risk, market failures favoring fossil fuels, lack of climate information architecture.
- Recommended actions:
  - Regulators develop sustainable financial architecture (climate stress tests, sustainable prudential regulation).
  - Private financial institutions in advanced economies commit to allocating portfolios to sustainable investments in EMDEs and increase on-the-ground presence.
  - Governments, DFIs, and private sector develop bankable pipelines with private engagement during project preparation.
  - Use blended-financing solutions to unlock long-term investments.
- Risks to manage:
  - Avoid moral hazard from public credit enhancements that privatize gains and socialize losses.
  - Strengthen state capacity, legal frameworks, and monitoring to protect public finances.

---

### MDB, IMF, AND DONOR ROLES — scale-up and innovation
- MDBs should broaden tool kits, scale concessional and blended instruments, deepen diagnostics, and explore balance-sheet innovations without harming credit ratings.
- World Bank Group is pursuing an Evolution Roadmap to clarify mission and expand resources and operating modalities.
- IMF should:
  - Support G20 Common Framework improvements.
  - Rapidly deploy Resilience and Sustainability Trust financing (special drawing rights channeled to address macro-critical structural challenges).
  - Integrate carbon taxation and subsidy reform work into surveillance and capacity development.
- Donors should:
  - Meet and surpass the $100 billion annual mitigation and adaptation financing commitment (advanced economies delivered $83.3 billion in 2020).
  - Double—at least—mitigation and adaptation financing, including concessional financing, by 2025 compared with 2019 levels, and steadily increase them further by 2030.

---

### BOX — SUMMARY OF RECOMMENDATIONS (ES.1 condensed)
- Strategies and policies:
  - Adopt GRID-focused growth approaches that integrate people, planet, and the economy; launch a major, urgent investment push.
  - Governments set ambitious long-term strategies, enhance utility viability, strengthen infrastructure and institutions, accelerate coal retirement, attract private investment, and compensate losers.
  - Use carbon pricing and regulatory standards; redirect innovation toward green technologies.
- Institutions:
  - Adopt whole-of-government, country-owned coordination mechanisms for focused sectoral transformation.
  - Implement second-generation fiscal rules that include a debt anchor, operational rules, escape clauses, transparency, and emphasis on expenditure composition.
- Integrated finance (five actions preserved):
  - Donors double—at least—mitigation and adaptation financing by 2025 relative to 2019; increase further by 2030; improve access, transparency, and alignment.
  - MDBs and IMF evolve to increase concessional financing and innovate balance-sheet use without affecting ratings; secure additional shareholder resources.
  - Private sector, MDBs, and IMF strengthen partnerships to scale private financing.
  - Support debt restructuring and stronger creditor coordination.
  - Bolster domestic resource mobilization by removing wasteful subsidies, deepening tax reforms, modernizing revenue systems, and enhancing spending quality.

---

### CONCLUSION — urgency, opportunity, and expected benefits
- Urgency: failure to act risks a lost decade for development and compounding harm from climate change.
- Opportunity: a successful big investment push can accelerate recovery, spur innovation, create jobs, and deliver sustainable, resilient, and inclusive growth.
- International solidarity and scaled-up commitments by advanced economies, MDBs, the IMF, donors, and the private sector will be decisive to bridge financing gaps and realize GRID.

*Source: anea2023002 (excerpts).*

### conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (inclu

### EXECUTIVE SUMMARY

### A critical time for development and climate action
- This decade presents an opportunity to make a breakthrough on both development and climate goals.
- The past decade’s slowdown in poverty reduction was accentuated by the coronavirus disease (COVID-19) pandemic and Russia’s war in Ukraine, intensifying inflationary pressure and placing additional strain on vulnerable countries.
- The deepening climate crisis compounds development setbacks and increases the frequency and intensity of shocks.
- High-income countries accounted for 16 percent of the global population in 2019 and 32 percent of total greenhouse gas emissions (World Bank 2023a, 2023b); their policies and financing will be critical to meeting the Paris Agreement goals.
- Collective action is required to avert catastrophic climate change while addressing the slowdown in development gains.

### A big and urgent investment push is needed
- Investments must be rapid, sustained, resilient, and transformational across human, physical, natural, and social capital.
- Investments should be designed to deliver economic growth, social inclusion, environmental sustainability, and resilience.
- Energy is a central system transformation:
  - Energy access, affordability, and security are key considerations for a just energy transition that meets development and sustainability goals.
  - Energy efficiency and renewable energy must be massively scaled up so coal can be phased out as an energy source.
  - The urgent phase out of the existing fleet of coal-fired power stations in high-emitting middle-income countries (MICs) and advanced economies is critical to achieving the Paris Agreement goals for greenhouse gas reduction.
  - Scaling up affordable clean energy lowers operating costs for EMDEs and facilitates removal of fuel subsidies, preserving fiscal space for development spending.
- Adaptation and resilience measures must complement mitigation, especially for low-income countries (LICs) and vulnerable MICs that will be hardest hit by climate impacts despite contributing little to past emissions.

### Estimates of scale and key numeric findings
- The High-Level Advisory Group (HLAG) met 10 times over the past 18 months to develop these insights.
- Conservative estimates presented to the HLAG by Bhattacharya et al. (2022) suggest that EMDEs other than China have aggregate investment and development spending needs:
  - $1.3 trillion per year by 2025
  - $3.5 trillion per year by 2030
- All dollar amounts are US dollars unless otherwise indicated.

### Policies, institutions, and platforms for delivering investment
- Strong country leadership and coordinated action are the starting point for the investment push.
- Countries need well-articulated investment programs anchored in sound and convincing long-term strategies to stimulate recovery and transformation.
- GRID, climate action, and technology innovation and diffusion require enhanced coordination across government branches and among government, firms, and citizens, and at the international level.
- Institutional design must be tailored to country contexts; country ownership is key.
- Policy packages should address structural weaknesses by:
  - Improving regulations and institutions
  - Correcting market failures
  - Reforming state-owned enterprises, particularly in the energy sector, so they become agents of change toward low-carbon alternatives
  - Promoting rapid technological advances and new business models
  - Using public policy to redirect innovation toward green technologies
- International collaboration and coordination to foster new technologies and set clear direction for the private sector will deliver strong gains.
- Coordination mechanisms (country-owned and country-led, focused on particular sectors or themes) can:
  - Set clear strategies and investment programs
  - Tackle binding policy impediments
  - Scale up project preparation
  - Create replicable and scalable financing models

### Financing the big investment push
- EMDEs will require additional financing in the trillions, not the billions, to deliver on the SDGs and climate goals.
- The report emphasizes the need for:
  - Enhanced domestic resource mobilization and efficient, effective public spending
  - Expanded access to low-cost concessional financing and timely debt treatments, including improved implementation of the Group of Twenty’s Common Framework for Debt Treatment
  - MDBs to increase financial capacity by optimizing balance sheets, securing additional concessional funds, and leveraging increased donor resources
  - International financial institutions to better catalyze private financing
  - Support from the broader donor community to be imperative

### Energy transition and enabling conditions
- A shift to renewables can help EMDEs catch up on development if accompanied by:
  - Strengthened network infrastructure
  - Availability of energy storage
  - Affordable financing
  - Strengthened policies and institutions (including off-takers)
- Failure to act promptly risks widening the gap between dirty and clean technologies and increasing future costs of change.

*Source: Executive Summary and related sections from the HLAG report as provided in the supplied content.*

### 2030. These figures far exceed existing financing, and they will be magnified further if the interventions

### anea2023002 - 2030. These figures far exceed existing financing, and they will be magnified further if the interventions

### Financing challenge and needs
- 2030. These figures far exceed existing financing, and they will be magnified further if the interventions are delayed or performed in an inefficient way or if policies are inadequate.
- Different sources of financing will be needed given the different types of investment required:
  - Private sector, including institutional investors, will finance bankable investments.
  - Projects with elevated risks, high preparation costs, or both require de-risking, technical assistance, or grants from concessional resources.
  - Public-goods investments will need more highly concessional resources.
  - Social investments and compensations must be financed through public resources, including concessional or grant support, particularly in LICs.
  - Public resources will also be needed to maintain some of the new assets created.
- Concessional financing for public goods in MICs needs to be additional and not come at the expense of the huge needs of LICs.
- Concessional resources for LICs are already under strain and need increasing as these countries deal with setbacks to poverty reduction and growth prospects resulting from the pandemic and the food and energy price crisis associated with Russia’s invasion of Ukraine.

### Constraints on access and the need for an integrated strategy
- An integrated debt and financing strategy is needed to overcome constraints to financial access, particularly for climate financing, and mobilize the necessary scale and mix of financing for GRID.
- Two channels by which the difficult macroeconomic context in EMDEs constrains access to financing:
  - Deteriorated macroeconomic context and perceived higher risks for mitigation and adaptation investments reduce attractiveness of climate projects in EMDEs relative to advanced economies.
  - Depleted fiscal space reduces domestic public resources available for climate action as governments face pressure to respond to other pressing development challenges.
- The HLAG’s work provides a first attempt at a debt and financing strategy to draw needed financing from domestic and international sources, public and private, on both concessional and nonconcessional terms, focusing on raising climate financing for mitigation and adaptation based on three pillars.

### Pillar 1 — Public financing
- A large share of needed financing for GRID can be expected to come from domestic sources.
- Preconditions:
  - Improved domestic resource mobilization for public investment and services.
  - Scaled up and deepened sustainable local capital markets in EMDEs.
- Repurposing inefficient subsidies in food and energy sectors could free up resources; globally, governments spend about $1.2 trillion on subsidies in the agricultural sector and those for fuel.
- Some repurposed funds would need to be used to ensure reforms do not disproportionately affect vulnerable groups.
- Carbon taxation would raise government revenue while boosting clean industry output and employment.
- A more supportive international environment that reduces tax evasion and tax optimization would be helpful.
- Immediate challenge: address debt vulnerabilities and bring down the cost of capital for new investments in EMDEs through country-specific responses:
  - New financing to address rollover risk in countries facing short-term liquidity pressures.
  - Deep debt reduction for countries facing solvency issues.
  - Expanded grant and concessional financing, especially for LICs and climate-vulnerable MICs.
- International partners need to strengthen implementation of the Group of Twenty Common Framework for Debt Treatment and collaborate on developing stronger mechanisms for resolving debt difficulties.

### Pillar 2 — Private sector financing
- Great potential and need for a sizable stepping up in private investment and financing.
- The private sector can undertake a growing proportion of sustainable investments in EMDEs (example: commercial-scale solar and wind).
- The International Energy Agency (2021a) estimates that about 60 percent of energy transition financing will need to come from private sector.
- To open up private capital pipeline, governments must tackle binding constraints to the investment climate, including barriers to foreign investment and policies that distort competition.
- Private-sector-led initiatives to scale up financing for sustainable investments in EMDEs need to partner proactively with countries, MDBs, and the IMF to tackle policy impediments.
- Concessional finance to de-risk private investment will be needed at scale for:
  - Investments in new technologies whose costs are still high but will fall with large-scale adoption.
  - Public-goods investments that produce national or global public benefits but yield relatively lower private returns.
  - Low-income and fragile nations where macroeconomic risks may outweigh commercial returns.
- Aligning the financial system with climate and development objectives:
  - Supervisors and financial regulators should ensure physical and transition risks do not materialize and help avert a disorderly transition.
  - Strengthen incentives for private financial institutions to align portfolios with net-zero emissions while avoiding greenwashing.
  - Shift flows to EMDEs where investment needs for GRID are highest and disclose volume and scope of contributions in a timely and transparent way.

### Pillar 3 — Financing from MDBs, the IMF, and donors
- Although MDBs met collective 2025 financing goals for climate change mitigation and adaptation four years early and have significantly stepped up commitments, the gap between financing and investment needs remains large and growing.
- MDBs’ comparative advantages and roles:
  - Help countries integrate climate and development and scale up investment; adjust tool kits and build on country focus to support global coordination.
  - Expanded use of concessional financing, including grants, and blended financing in LICs and MICs to incentivize public-goods investments or investments with elevated risks/high preparation costs.
  - Enhance private capital mobilization through enabling environments and instruments like guarantees and insurance products.
  - Explore financial innovations with shareholders to use balance sheets more without affecting credit ratings.
  - Need greater shareholder financial support to significantly expand financing—particularly concessional financing—given the gap between needed scale and current balance sheets.
- IMF role:
  - Do more to support efforts, including stepped up work with the Group of Twenty to improve the Common Framework for Debt Treatment with the World Bank.
  - Swift rollout of support through the Resilience and Sustainability Trust to increase access to financing in members; this trust channels special drawing rights from countries with strong external positions to help LICs and MICs create an enabling environment for complementary MDB and private sector financing and address longer-term macro-critical structural challenges, including climate change and pandemic preparedness.
  - Scaled-up focus on carbon taxation and elimination of fossil fuel subsidies as part of Article IV work and increased analytical work on policy design to arrest emissions and ways to mobilize domestic and foreign private sector financing for mitigation and adaptation.
- Donor actions needed:
  - Advanced economies must address the shortfall in commitment to provide and mobilize $100 billion per year to developing countries for climate mitigation and adaptation financing and go far beyond it.
  - Donors should double—at least—mitigation and adaptation financing, including concessional financing, by 2025 compared with 2019 levels, and steadily increase them further by 2030.
  - Overall development financing must increase significantly.
  - Improve alignment with countries’ climate and development goals and reduce fragmentation in concessional financing.
  - Increase use of bilateral guarantees from highly rated countries to de-risk loan exposures and help release capital.
  - Greater use of MDBs’ capacity to leverage each dollar of funding to mobilize additional resources compared to direct donations and trust funds for common public goods like climate mitigation, pandemic preparedness, and response to fragility and conflict.

### Coordination, urgency, and opportunity
- The urgency, complexity, and transnationality of challenges require coordinated action by governments, donors, MDBs, IMF, and the private sector with agreed roles and responsibilities.
- Actions required:
  - EMDEs undertake far-reaching policy reforms.
  - Advanced economies provide quality financing at scale.
  - Private sector supply investments and technologies.
  - MDBs, the IMF, and donors update their vision for development financing and delivery.
- Coordinated efforts can maximize synergies and enhance impact, unlocking opportunities for growth-enhancing investments, technological advances, and collective action despite fractured geopolitics.

### Box ES.1 — Summary of Recommendations
- Strategies and policies
  - Policymakers and development partners adopt an effective approach to growth and development that eschews damaging past ways, considers interlinkages among people, the planet, and the global economy, and seizes technological opportunities to promote strong, resilient, inclusive, and sustainable growth.
  - Countries urgently initiate a major investment push to transform energy systems, adapt and build resilience to climate change, protect and restore natural capital, promote development, avert the rising cost of climate inaction, and seize opportunities in the new global green economy.
  - Governments create demand for energy transition projects through ambitious long-term strategies underpinned by sound planning; enhance financial viability of power utilities; strengthen network infrastructure; set the framework for a just transition away from coal; provide an enabling environment for clean investments; accelerate coal plant retirement; attract the private sector; and compensate losers as needed, particularly the most vulnerable.
  - Stakeholders at global and country levels adjust the policy environment to correct systemic failures: develop long-term investment strategies, undertake reforms to improve the investment climate, deepen financial markets, and tackle political economy, governance and market failures. Carbon pricing, appropriate standards and regulations, or both, are key elements. Regulators and supervisors develop a supportive international sustainable financial architecture that creates incentives, tools, and information to enable financial institutions to internalize climate-related physical and transition risks.
  - Governments promote green technological innovation and diffusion with support from the development partner community; provide policy certainty to encourage firms to redirect innovation toward green technologies; avoid beggar-thy-neighbor policies; and explore multicountry mechanisms to support technological breakthroughs in clean technologies for diffusion to emerging markets and developing economies.
- Institutions
  - Governments adopt a whole-of-government institutional approach to address fragmentation, develop new skills within government, and facilitate coordinated action across branches and among government, firms, and citizens, as well as internationally.
  - Governments set up or strengthen country-led and country-owned coordination mechanisms to accelerate investments in green, resilient, and inclusive development and transform key systems, bringing together stakeholders to tackle binding policy constraints and mobilize necessary financing.
  - Governments adopt second-generation fiscal rules to improve fiscal policy and rebuild fiscal space to support critical investments in a fiscally sustainable way; these rules should be comprehensive, use a debt anchor, include a small number of operational rules and simple escape clauses, provide enhanced transparency, and place more emphasis on expenditure composition. MDBs, the IMF, and other development partners provide technical assistance as needed.
- Integrated finance
  - An integrated financing strategy is adopted at the country and global level, employing complementary strengths of different pools of finance and supported by five actions:
    - Donors double—at least—mitigation and adaptation financing, including concessional financing, by 2025, compared with their 2019 levels, and steadily increase them further by 2030; improve access and transparency; align support behind country priorities; and bolster support for multilateral funds. Overall development financing will also need to increase significantly.
    - MDBs and the IMF are supported in evolving in the face of multiple crises, increasing their provision of technical expertise and financial assistance, particularly concessional financing, through innovative solutions (including MDB balance sheet optimization) that do not affect their credit ratings, as well as additional financial resources from their shareholders.
    - The private sector, MDBs, and the IMF help scale up private sector financing for climate and development through an enhanced partnership between the private sector, MDBs, and the IMF and an active role for the private sector.
    - Stakeholders support debt restructuring, including deepening common understanding of debt-restructuring challenges and enhancing creditor coordination.
    - Governments bolster domestic resource mobilization by removing wasteful fuel and agricultural subsidies and redirecting resources; increase fiscal space by deepening tax reforms, modernizing revenue systems, strengthening tax administration, and enhancing the quality of spending.

*Source: anea2023002 (excerpts).*

### 1. INTRODUCTION

### 1. INTRODUCTION

### Background: EMDE growth, shocks, and lost momentum
- Emerging markets and developing economies (EMDEs) experienced high potential output growth during 2000–09.
- In 2010–19 a broad-based slowdown in potential output growth occurred due to a slowing global economy and growing structural weaknesses.
- Slower total factor productivity growth accounted for almost half of the decline in global potential output growth in 2010–19, weaker capital accumulation just over one-quarter, and slower labor supply growth the remainder.
- The slowdown contributed to markedly slower progress in poverty reduction and shared prosperity.
- The coronavirus disease (COVID-19) pandemic and war in Ukraine:
  - sharply constrained EMDEs’ policy space and worsened growth prospects;
  - led to sharp falls in growth and investment across EMDEs;
  - created a debt overhang from elevated pandemic-related public spending combined with capital flight from EMDEs, worsening debt, fiscal, and financing conditions;
  - produced a slower pace of recovery in EMDEs compared with advanced economies and reversed development gains, intensified by a spike in food and fuel prices.
- The short- and medium-term macroeconomic context remains challenging, with countries facing elevated and rising debt, high inflation, and tightening financial conditions.
- Projected outcomes and financing gaps:
  - 7 percent of the world’s population will likely still struggle in extreme poverty in 2030, falling far short of the global goal of reducing that to 3 percent (World Bank 2022a).
  - IMF (2022c) analysis estimates that $440 billion in additional financing is needed to enable low-income countries (LICs) to resume and accelerate convergence of their incomes with those of advanced economies in 2022–26, with an additional $57 billion required in 2022–23 owing to the war in Ukraine.
- Global GDP (in current US dollars) is $96.1 trillion, based on data from the World Bank Databank.

### Climate change: risks, underestimated costs, and human impacts
- Climate change is delivering more frequent climate-change-related crises and higher risk of such crises, with effects already evident across regions (Pacific Island nations, Pakistan, the Sahel).
- Recent estimates suggest that climate change has reduced agricultural productivity growth by 21 percent, with the greatest decreases in Sub-Saharan Africa (Ortiz-Bobea et al. 2021).
- Diminishing water supplies and water-related losses in agricultural and other output could slow growth in some regions by as much as 6 percent of gross domestic product (GDP) by 2050 (World Bank Group 2016).
- Unchecked climate change could cause more than 216 million people to migrate within their own countries and millions of others to migrate internationally.
- Carbon-intensive growth risks stranding industries and jobs when polluting sectors are rapidly retired.
- Deloitte (2022) estimates:
  - insufficient action on climate change could cost the global economy $178 trillion over the next 50 years in net present value terms;
  - appropriate action to reach net-zero emissions by midcentury would expand the global economy by $43 trillion over that same time period in net present value terms.
- Climate change has exposed interdependences among the planet, its people, and the economy.

### Climate action as opportunity: GRID and development co-benefits
- Climate action delivers on managing risks and on realizing opportunities; it requires a new approach to growth and development: green, resilient, and inclusive development (GRID).
- Climate action, coupled with significant scaling up of investments in human, physical, natural, and social capital, is presented as the only path to high growth that is sustainable, resilient, and inclusive.
- Evidence and expected benefits:
  - World Bank Group Country Climate and Development Reports (CCDRs) indicate greenhouse gas emissions could be reduced by 70 percent by 2050 in the more than 20 countries covered so far, without any negative impact on economic growth; in many of these countries, climate action would even accelerate growth.
  - Climate action can boost economic recovery after COVID-19 and the war in Ukraine by providing immediate demand impetus, creating millions of jobs and opportunities for training and investment.
  - Over the medium term, it can spur innovation and foster new ways of producing and consuming that drive stronger and more sustainable development.
  - It can lift many millions out of poverty, reduce income inequalities, and deliver environmental cobenefits (improved health, resilience, preserved natural wealth).
- GRID departs from previous strategies by promoting economic growth in tandem with environmental goals and social inclusion, addressing risks to people, the planet, and the economy in an integrated manner tailored to country needs.

### Investment, financing, and institutional requirements for GRID
- Realizing GRID requires a sizable investment and innovation push, supported by strong policies, institutions, and the right kind of financing.
- Climate action will require large up-front investments, particularly in the energy sector, which needs to transition to greener energy sources.
- Materializing these investments requires an integrated debt and financing strategy to tackle debt vulnerabilities and use complementary strengths of different financing pools.
- All sources of financing—official and private, bilateral and multilateral, domestic and foreign—need to be mobilized; financial access needs to be improved for countries and firms; private sector and financial institutions should be involved in mobilizing green financing.
- Roles and reforms for multilateral institutions:
  - Multilateral development banks (MDBs) and the International Monetary Fund (IMF) will need to evolve to help countries integrate climate and development, strengthen private capital mobilization, and greatly expand financing to both LICs and MICs.
  - Beyond mobilizing financing, efforts should focus on aligning the financial system with climate and development objectives and ensuring the transition is orderly, just, and affordable, considering country circumstances and socioeconomic impacts.
- Policy design must:
  - provide incentives for, investment in, and financing for transition;
  - recognize that climate action will involve dislocation and ensure benefits and opportunities are shared widely and the most vulnerable are protected.

### Need for shared strategy, coordination, and the High-Level Advisory Group (HLAG)
- Practical, strong action is required now, shaped by a clear, shared, and purposeful strategy and global coordination.
- A shared vision among stakeholders (developed and developing countries, MDBs, the IMF, the private sector) and identification of purposeful actions are needed.
- The High-Level Advisory Group (HLAG) on Sustainable and Inclusive Recovery and Growth was launched in 2021 and is jointly led by Mari Pangestu, Ceyla Pazarbasioglu, and Nicholas Stern.
  - Composed of experts from research institutions, the private sector, governments, and senior World Bank Group and IMF staff members.
  - Aims to propose ideas for national and global action that contribute to strong economic recovery and a path to GRID.
  - Over one and a half years HLAG held 10 meetings assessing the scale and nature of investment and financing needed and identifying actions for governments, MDBs, the IMF, and donors to facilitate needed financing, with focus on channeling private capital.
- This report summarizes insights from HLAG meetings and supporting reports, limited to the most salient topics: the need for urgent investment at scale (particularly in energy) and the required institutional support and financing.
- The HLAG’s insights have been mainstreamed into international forums including the Group of Twenty (G20), Group of Seven (G7), COP26 and COP27, Network for Greening the Financial System, and Glasgow Financial Alliance for Net Zero.
- Report structure (as described in this section):
  - Section 2: makes the case for a big investment push for EMDEs and assesses the magnitude and composition of such investment.
  - Section 3: presents actions needed for an energy transition.
  - Section 4: examines the role of innovations and state capacity in facilitating GRID.
  - Section 5: proposes actions to mobilize domestic and external financing at the large scale needed.
  - Final section: concludes.

*Source: anea2023002 - 1. INTRODUCTION (IMF analytical note).*

### 2. AN INVESTMENT PUSH TO DELIVER ON DEVELOPMENT

### 2. AN INVESTMENT PUSH TO DELIVER ON DEVELOPMENT

### Rationale and scope
- Many EMDEs face slow growth, low investment and public spending, rising debt service burdens, and weak resilience; a big-push investment strategy across human, physical, natural, and social capital is proposed to deliver sustained and resilient development and climate mitigation.
- EMDEs will account for the vast preponderance of new physical capital in the coming three decades; how investments are undertaken will determine whether countries reach GRID, avoid a lost decade on development, reach net-zero emissions by midcentury, build resilience, restore natural capital, and achieve the SDGs.
- World population projected increase and human capital: the world population is projected to increase by 1.9 billion between 2020 and 2050, with more than 80 percent of the increase taking place in EMDEs; investing in human capital in EMDEs is critical for poverty reduction, global prosperity, and peace.
- Key systems requiring transformation (collectively accounting for more than 90 percent of greenhouse gas emissions): energy, agriculture, food, water, land, cities, transport, and manufacturing.
- Complementary actions for resilience and adaptation:
  - Rapid and inclusive development, especially poverty reduction and broad access to infrastructure and social services.
  - Whole-of-society approach to resilience and adaptation to ensure climate risks are considered in all decisions and investments.
  - Targeted sectoral interventions covering human capital, infrastructure, and economic sectors.

### Aggregate estimated investment and development spending needs (EMDEs other than China)
- Aggregate baseline and needs (Bhattacharya et al. (2022); totals for EMDEs other than China):
  - Gross spending 2019: Total US$ 2,385 billion = 11.3 percent of GDP.
  - Spending needs 2025: Total US$ 3,695 billion = 15.1 percent of GDP (incremental increase of at least $1.3 trillion per year by 2025).
  - Spending needs 2030: Total US$ 5,880 billion = 18.2 percent of GDP (incremental increase of at least $3.5 trillion per year by 2030).
- Table 2.1 figures by category (US$, billions; percent of GDP):
  - Human capital: 2019 = 1,470 (7.0 percent of GDP); 2025 = 2,000 (8.2 percent of GDP); 2030 = 3,065 (9.5 percent of GDP).
  - Sustainable infrastructure for growth and mitigation: 2019 = 730 (3.5 percent of GDP); 2025 = 1,160 (4.8 percent of GDP); 2030 = 1,840 (5.7 percent of GDP).
  - Adaptation and resilience: 2019 = 35 (0.2 percent of GDP); 2025 = 180 (0.7 percent of GDP); 2030 = 325 (1.0 percent of GDP).
  - Agriculture, food, land use, and nature: 2019 = 150 (0.7 percent of GDP); 2025 = 355 (1.4 percent of GDP); 2030 = 650 (2.0 percent of GDP).

### Sectoral priorities for ramping up climate action (Songwe, Stern, and Bhattacharya (2022))
- Three main elements:
  - Transformation of the energy system (electrifying demand, decarbonizing supply, managing just transitions).
  - Responding to growing vulnerability via mechanisms for loss and damage and accelerating investments in adaptation and resilience.
  - Investing in sustainable agriculture to support mitigation, adaptation, development, and natural capital protection and restoration.
- Estimated spending needs for climate-related priorities (EMDEs other than China):
  - About $1 trillion per year by 2025 = 4.1 percent of GDP (compared with 2.2 percent in 2019).
  - About $2.4 trillion per year by 2030 = 6.5 percent of GDP.
  - Largest component: energy transformation about $1.5 trillion per year by 2030.
  - Note: only a fraction of energy transformation spending will be additional from a climate perspective; much adaptation, resilience, and loss-and-damage spending will be additional.

### Breakdown of yearly investment and spending needs for climate action by 2030 (Figure 2.1; values preserved)
- Total investment needs per year by 2030: $2.0-2.8 trillion.
- Transforming the energy system — Power system:
  - Zero carbon generation: $300-400bn
  - Transmission and distribution: $200-250bn
  - Storage and backup capacity: $50-75bn
  - Early phasing-out of coal: $40-50bn
- Transforming the energy system — Transport system:
  - Low-emission transport infrastructure: $400-500bn
  - Fleet electrification/hydrogen: $100-150bn
- Industry:
  - Energy efficiency: $10-20bn
  - Industrial processes: $10-20bn
- Buildings:
  - Electrification: $20-40bn
  - Energy efficiency and GHG abatement: $70-80bn
- Green hydrogen:
  - Production: $20-30bn
  - Transport and storage: $20-30bn
- Just transition:
  - Targeted programs and safety nets: $50-100bn
- Coping with loss and damage:
  - $200-400bn
- Investing in adaptation and resilience:
  - $200-250bn
- Investing in natural capital:
  - Sustainable agriculture: $100-150bn
  - Afforestation and conservation: $100-150bn
  - Biodiversity: $75-100bn
- Mitigating methane emissions from fossil fuels and waste:
  - $40-60bn

### Country-level estimates and heterogeneity (CCDR-derived estimates)
- Achieving resilient low-carbon development (sustainable infrastructure including mitigation, adaptation and resilience, and water resources) average additional investment by 2030:
  - Upper-middle-income countries: additional investment of 1.1 percent of GDP.
  - Lower-middle-income countries: additional investment of 5.1 percent of GDP.
  - LICs: additional investment of 8.0 percent of GDP.
- Caveats:
  - CCDR investment needs in many cases include development needs (e.g., closing infrastructure gaps) and cannot be considered entirely “additional.”
  - Investment needs will increase if interventions are delayed or performed inefficiently or policies are inadequate; infrastructure investment needs can double without appropriate planning and policies.

### Current financing versus needs and financing composition
- Annual average financing for climate change mitigation and adaptation in EMDEs reached about $425 billion in 2019–20 (World Bank Group (2022a)).
  - More than 85 percent of this financing was directed toward mitigation.
  - Public actors provided almost 60 percent of mitigation financing:
    - National development financial institutions: 27 percent.
    - State-owned financial institutions: 11.5 percent.
    - MDBs: 7.5 percent.
- Adaptation financing for EMDEs:
  - Reached only about $41 billion in 2019–20 (less than 10 percent of financing for climate change mitigation and adaptation).
  - Provided almost exclusively by public actors (MDBs 36 percent; national development financial institutions 36 percent).
  - Fragile countries received far less of this financing despite high vulnerability.
- Comparative ranges in other assessments:
  - World Bank Group estimates LICs and MICs (including China) would need between $1.7 and $3.4 trillion per year by 2030 for climate change mitigation and adaptation.

### Costs of delay and urgency
- Scale of investments is large (in the trillions per year) but necessary to deliver development and climate goals; delay risks mounting costs and a shrinking window to act.
- Example quantified cost of delay:
  - In LICs and MICs, delaying resilience-enhancing policies in infrastructure sectors could cost an additional $100 billion each year in avoidable disaster impacts (Hallegatte, Rentschler, and Rozenberg 2019).

*Source: anea2023002 - 2. AN INVESTMENT PUSH TO DELIVER ON DEVELOPMENT (PDF content).*

### 3. ACCELERATING A JUST ENERGY TRANSITION IN EMDEs

### 3. ACCELERATING A JUST ENERGY TRANSITION IN EMDEs

### Rationale and justice dimensions
- Energy consumption is the biggest contributor to greenhouse gas emissions, responsible for 75.6 percent (37.6 gigatons of carbon dioxide equivalent) of these emissions worldwide in 2019.
- A just energy transition must ensure energy access, affordability, and security while supporting development and emissions reduction targets.
- Injustice in the climate context can arise:
  - across generations (emissions damage future generations’ development opportunities),
  - across countries and within communities (richer countries and income groups disproportionately damage opportunities for poorer people and key groups, including women and some ethnic groups),
  - from policies that dislocate and disrupt lives and livelihoods without supporting adjustment.
- Addressing these injustices involves investment in people and places to create opportunity and, where necessary, social support.
- Priority development needs to be reconciled with global public-goods objectives, including meeting the needs of:
  - 733 million people in Sub-Saharan Africa and South Asia lacking access to electricity, and
  - nearly 3 billion people who lack access to clean energy for cooking.

### Scale and components of the transition
- Core elements required:
  - massive increase in energy efficiency and renewable energy,
  - expansion of energy efficiency and demand-side management to reduce investment requirements,
  - rapid increase in solar and wind power generation capacity from 1,400 gigawatts (GW) today to 17,000 GW by 2040, with two-thirds of new solar and wind power development in EMDEs.
- Electricity networks and storage requirements:
  - electricity networks will need to double in length,
  - annual deployment of energy storage will need to increase 100 times.
- Natural gas may remain part of the energy mix for many countries as an intermediate source to ensure power supply reliability and grid stability.
- Green hydrogen and other low-carbon technologies present significant potential; example policy target: the EU aims to build 40 GW of green electrolyzer capacity by 2030.
- Public facilities (schools, hospitals) offer bundling opportunities for energy efficiency projects; example: deployment of more than 366 million LED bulbs in India helped avoid building more than 9.5 GW of new generation capacity and saved the country more than $10 billion.

### Investment, stranded assets, and macro implications
- Early retirement of existing coal-fired electricity generation capacity in line with achieving net-zero global emissions by midcentury could strand approximately US$1 trillion in unrecoverable capital investment, 89 percent of which is in recently commissioned coal plants in EDMEs.
- Retiring or repurposing potentially stranded coal power plants by 2040 would cost $1 trillion (World Bank estimates).
- Clean energy capital needs in EMDEs (excluding China) must expand more than six times by the end of the 2020s:
  - from less than $150 billion in 2020 to more than $1 trillion in 2030 (IEA 2021a).
- Green recovery measures in 21 major EMDEs between 2020 and 2030 could:
  - generate $10 trillion in investment opportunities,
  - generate more than 200 million jobs,
  - reduce greenhouse gas emissions by 4 billion tons (IFC 2021).
- The coal fleet in the developing world is 20 years younger than the global average, which concentrates stranded-capital risk in EMDEs.
- Fossil fuel subsidy context:
  - IMF (2022a) estimate: fossil fuel subsidies stood at $5.9 trillion or 6.8 percent of global GDP in 2020, with more than 90 percent reflecting an undercharging for environmental costs and foregone consumption taxes.
  - UN (UNEP 2021a) called for repurposing $470 billion in agricultural subsidies that it concluded are distorting prices and are harmful to nature and health.
- Investment bottlenecks and constraints:
  - transmission is the biggest bottleneck to renewable-energy uptake in EMDEs, followed by off-takers’ lack of creditworthiness,
  - more up-front capital investments are needed in hydro-, solar-, and wind-power, power storage, vehicle-charging stations, and residential and industrial electric heat,
  - looming mismatch between investment needs and availability of critical minerals (IEA 2021b).

### Role of policy, institutions, and international collaboration
- Governments need long-term decarbonization strategies and enhanced nationally determined contributions anchored in sound planning and institution strengthening.
- Policy measures to unlock private finance include:
  - strengthening regulatory frameworks,
  - pricing policies and utility reforms,
  - elimination of fossil fuel subsidies and introduction of carbon pricing.
- Repurposing current subsidies that sustain carbon-intensive activities as resources supporting climate action can mitigate distributional impacts from reforms.
- Public international action:
  - advanced economies have incentives to contribute to retiring coal in EMDEs because of the global benefits,
  - a major scaling up of private and international development financing is required, including adequate concessional financing to accelerate energy access and just transition costs.
- Trade and global coordination:
  - maintaining a robust, transparent, well-coordinated global trade system is critical to facilitate movement of goods and services needed for climate action (WTO 2022),
  - the January 2023 launch of the Coalition of Trade Ministers on Climate can provide impetus for a “green trade” agenda.
- Balancing technical effectiveness and political feasibility emphasizes the critical importance of a just transition and financing for decommissioning, environmental cleanup, and support for affected people and communities.

### Actionable recommendations
- Governments in EMDEs:
  - create demand for energy transition projects through their nationally determined contributions, underpinned by sound planning,
  - strengthen institutions, enhance the financial viability of power utilities, and set frameworks for a just transition away from coal.
- Development partners:
  - scale up financing for climate change mitigation and adaptation,
  - help EMDEs strengthen implementation plans, create enabling environments for clean investments, accelerate coal plant retirement, attract the private sector, and compensate losers.
- Policy approaches:
  - vary as needed to fit differing country contexts but avoid beggar-thy-neighbor policies, which reduce trade in green goods and services, lower technological transfers, and lead to inefficient resource allocation.
- International collaboration:
  - strengthen cooperation to help establish robust carbon markets to create new revenue streams.

*Source: IMF analytical note — "3. ACCELERATING A JUST ENERGY TRANSITION IN EMDEs."*

### 4.1 Innovation

### 4.1 Innovation

### Green innovation and diffusion: centrality and distinction from degrowth
- Green innovation involves developing cleaner sources of energy, more energy-saving devices for housing and transportation, and new ways of organizing production and consumption.
- Green diffusion involves the adoption of the latest green technologies and helps narrow large per-capita emission differences across countries.
- Thanks to rapid technological advances and diffusion, low-carbon solutions such as solar panels are now less costly than fossil-fuel-based investments across a broad segment of economic activity.
- Structural and systemic change will take a number of decades to play out, but the current decade will be decisive, and artificial intelligence is creating real opportunities for accelerating action.
- Ensuring successful implementation of technology transfer from developed to developing economies, as committed to in the Glasgow Breakthrough Agenda, will be challenging.
- Unlike degrowth, green innovation and diffusion help drive economic development and increase citizen well-being.

### Path dependence, market dynamics, and policy implications
- Empirical evidence shows path-dependence in firms’ choice between clean and dirty innovation: firms that have innovated in dirty technologies generally continue doing so.
- Policy implication: firms need to be actively and urgently provided with incentives to redirect toward green innovation; failure to act promptly will slow adoption and make later change more expensive.
- Financing the energy transition now provides firms and governments with a clear advantage: the longer the delay, the higher the amount of required financing will be.
- Government policy must consider both pollution externalities and knowledge externalities:
  - Pollution externalities can be addressed through carbon pricing.
  - Knowledge externalities require reinforcing public support for clean innovation.

### Public investment, intermediate energy sources, and dynamic effects
- The use of intermediate energy sources (those less polluting than coal but more polluting than renewables) during transition produces two short-term effects:
  - A substitution effect—introducing an intermediate source leads firms and consumers to substitute away from both coal and renewables.
  - A scale effect—introducing an intermediate source can increase aggregate energy supply, make energy cheaper, encourage more energy consumption, and therefore increase pollution.
- Example: In the United States the shale gas revolution reduced carbon dioxide emissions in the short term, as the substitution effect dominated the scale effect.
- Long-term risk: introduction of intermediate sources tends to divert research resources from renewables toward the intermediate source, which is detrimental in the long term.
- Policy implication: reinforce public support for clean innovation when intermediate sources are introduced to ensure their role is temporary.

### Governance and the innovation-diffusion triangle
- Successful facilitation of clean innovation and diffusion requires a whole-of-society approach linking three vertices of the innovation and diffusion triangle:
  - Firms (innovators and adopters)
  - Governments (which redirect firms’ innovation and adoption toward clean technologies)
  - Civil society (which monitors government behavior and exerts social pressure on firms)
- Energy innovation efforts will likely be concentrated in advanced and emerging market economies, which are better positioned to bear costs and risks of innovation.
- Piloting of almost-mature technologies will have a greater impact than piloting remote technologies.
- Promising areas: long-distance energy transmission, batteries, green steel, cement substitutes, greener mining practices, drought-resistant and low-carbon agricultural practices.
- A combination of supply-side innovation support and demand-side support to create niche markets and start dissemination can facilitate innovations, as happened with solar energy in the EU.

### Role of advanced economies, international cooperation, and investment rules
- Germany, Japan, Korea, and the US have accounted for most of the high-value innovations in this area in recent decades.
- Advanced economies should share knowledge with developing countries through technical assistance and capacity building to spread benefits for climate adaptation and mitigation.
- Proposed reforms to the International Investment Agreement regime (Sharm El Sheikh Guidebook for Just Financing) could promote green innovation and diffusion in developing countries by:
  - Limiting or eliminating prohibitions of performance requirements in regard to green technologies to encourage local technological capacities.
  - Promoting and facilitating investment in clean technologies, including through limiting or excluding high-emission investments.
  - Recognizing investors’ responsibility to contribute to the green transition.
  - Applying various standards of corporate social responsibility to foreign investors.
- Sovereign funds are a promising tool for diffusing knowledge from developed to developing countries while compensating innovators.
- The successful role of national agencies like the Defense Advanced Research Projects Agency in the US could be replicated at the multilateral level.
- Further research is needed on how best to deliver technological diffusion while avoiding greenwashing.

### Adaptation of diffusion to developing-country circumstances
- Diffusion of technologies needs to be adapted to the varying circumstances in developing countries; for instance, simple technological approaches to warn populations of forthcoming shocks have been successful in countries like Bangladesh.

### Monitoring, data, and scale of diffusion scenarios
- Examples of monitoring and scenario tools:
  - London School of Economics and Political Science working with Gallup to establish a global barometer across 140 countries to monitor citizen knowledge and behavior on climate action.
  - World Data Lab’s World Emissions Clock presents estimates of all emissions (across 5 sectors and 24 subsectors) for all countries in three scenarios (business as usual, nationally determined contributions, 1.5 degrees) until 2050.
- Footnote finding: as sectors move toward tipping points where low-carbon solutions can outcompete legacy high-carbon businesses on price, by 2030 the former can become competitive in sectors accounting for nearly three-quarters of emissions.

### Actionable recommendations
- Governments establish clear public policies to provide a strategic direction for the private sector and also provide incentives to firms to redirect innovation toward green technologies.
- Development partners explore multicountry mechanisms to support technological breakthroughs in clean technologies for their diffusion to EMDEs.

*Source: anea2023002 - 4.1 Innovation (https://www.imf.org/-/media/files/publications/analytical-notes/2023/english/anea2023002.pdf)*

### Box 4.1. Recent Examples of Country Platforms across Regions: South Africa, Egypt, Indonesia, and Vietnam

### Box 4.1. Recent Examples of Country Platforms across Regions: South Africa, Egypt, Indonesia, and Vietnam

### South Africa — Just Energy Transition Partnership (JETP)
- Launched at COP26 in November 2021 by the government of South Africa and an International Partners Group (EU, France, Germany, the UK, the US), and the Climate Investment Fund Accelerating Coal Transition Investment Program led by the World Bank in partnership with the African Development Bank and International Finance Corporation.
- Partners committed to mobilizing $8.5 billion over three to five years across multiple sources to support South Africa’s decarbonization with a strong focus on a just transition.
- Country context and priorities:
  - High vulnerability to climate change, strong dependence on carbon-intensive industries (particularly coal), and abundance of natural resources for renewable energy.
  - Country-led investment plan prioritizes decarbonizing the energy system while protecting affected workers and communities; financing the shift through mine repurposing and technological innovation such as green hydrogen and electric vehicles.
  - In 2022: South African Green Finance taxonomy launched; cabinet adopted a Just Transition Framework; energy sector reforms to promote renewable technologies.
- Identified investment needs: $98 billion over the five years of the program.
- Financing mobilization and complementarities:
  - International Partners Group finance includes more than $5 billion in concessional loans.
  - Engagement with philanthropies and international and domestic private sector organizations to address remaining needs.

- Sources and type of financing announced for JETP (US$, millions) — Table B4.1.1 (preserved exactly):
  - Climate Investment Fund/Accelerating Coal Transitiona: Grants and technical assistance 50; Concessional loans 2,555; Commercial loans 0; Guarantees 0; Total 2,605
  - European Union/European Investment Bank: Grants and technical assistance 35; Concessional loans 1,000; Commercial loans 0; Guarantees 0; Total 1,035
  - France: Grants and technical assistance 2.5; Concessional loans 1,000; Commercial loans 0; Guarantees 0; Total 1,002.50
  - Germany: Grants and technical assistance 198; Concessional loans 770; Commercial loans 0; Guarantees 0; Total 968
  - United Kingdom: Grants and technical assistance 24; Concessional loans 0; Commercial loans 500; Guarantees 1,300; Total 1,824
  - United States: Grants and technical assistance 20.15; Concessional loans 0; Commercial loans 1,000; Guarantees 0; Total 1,020.15
  - Total (instrument): Grants and technical assistance 329.7; Concessional loans 5,325; Commercial loans 1,500; Guarantees 1,300; Total 8,455.70
  - Source note: UK Foreign, Commonwealth, and Development Office (2022).
  - a $500 million to channel an additional $2.1 billion.

### Egypt — Country Platform for Nexus of Water, Food, and Energy
- Launched in July 2022 alongside Egypt’s National Strategy for Climate Change 2050.
- Platform objective: mobilize financing for mitigation and adaptation and private investments around the nexus of water, food, and energy.
- Announced concessional development funding: about $15 billion total, including:
  - $10 billion for energy
  - $1.35 billion for water
  - $3.35 billion for agriculture and food security
- Project priorities include replacing thermal power plants with renewable energy, just transition to clean energy, small farmers’ adaptation, increasing crop yields and irrigation efficiency, resilience for vulnerable regions, developing desalination capacity, climate risk early-warning systems, and modernizing farming practices.
- COP27 commitments:
  - Consortium including Denmark, the European Commission, France, Germany, the Netherlands, the UK, and the US issued a declaration supporting the energy pillar: installation of 10 gigawatts of solar and wind energy by 2028 and retirement of 5 gigawatts of inefficient fossil fuel capacity by 2025.
  - European Bank for Reconstruction and Development: key partner for the energy pillar.
  - International Fund for Agricultural Development: key partner for the food pillar.
  - African Development Bank: key partner for the water pillar.
  - Egypt’s Ministry of International Cooperation announced nine joint development cooperation agreements with Germany worth €160 million.

### Indonesia — Energy Transition Mechanism Country Platform
- Launched at the G20 meetings in Bali in November 2022 to coordinate delivery of Indonesia’s NDC commitment to a 43.2 percent emissions reduction by 2030 and to support a just and affordable transition from fossil fuels to clean energy.
- Mechanism leverages blended finance and is supported by grant partners (mainly philanthropies), financing partners (MDBs, national development banks, private financial institutions), knowledge/technical partners, and the Indonesia Investment Authority as investment partner.
- Priorities and commitments:
  - Early retirement of more than 15 gigawatts of coal-fired power plants.
  - $500 million in concessional funds already committed.
  - Concessional funding intended to mobilize more than $4 billion to accelerate the retirement of up to 2 gigawatts of these plants.
  - Estimated emissions reductions: 50 million tons of carbon dioxide by 2030 and 160 million tons by 2040.
  - Memorandum of Understanding with the Asian Development Bank to accelerate retirement of Cirebon-1, a 0.66 gigawatt coal-fired power plant in West Java.

### Vietnam — Just Energy Transition Partnership
- Launched in December 2022 with an International Partners Group (Canada, Denmark, the EU, France, Germany, Italy, Japan, Norway, the UK, and the US).
- Partners announced intention to mobilize at least $15.5 billion over the following three to five years, split equally across public and private sector financing.
  - Public financing to be offered on more attractive terms than available in capital markets; private financing supported through catalytic public sector finance.
- Mobilized financing to partly address Vietnam’s investment needs for the transition to be outlined and adopted in a Just Energy Transition Partnership Resource Mobilization Plan by November 2023.
- Complementary measures: policies to improve regulatory frameworks to expand public and private investment, particularly in renewable energy, energy efficiency, and strengthening the electricity grid.

### Lessons from past country platforms and design principles
- Mixed results indicate that coordination mechanisms must be country owned and country led to ensure trust and legitimacy, and focused on a particular theme or sector to avoid diluting efforts.
- Successful mechanisms should:
  - Be driven by government priorities, based on a well-defined structure with balanced responsibilities, and include relevant stakeholders.
  - Help governments discuss investment programs, coordinate program financing, and line up policy reforms around a coherent, outcomes-driven, and evidence-based framework with clearly delineated priorities to facilitate program monitoring and course corrections.
  - Reduce transaction costs and match investment opportunities with financing to accelerate progress toward GRID and global climate goals.
- Roles and responsibilities:
  - Government: know the type of financing available, level of access to technical assistance, and private sector requirements; establish clear focal points for coordination; tailor mechanism design to market depth, financial development, and development challenges.
  - Development partners and private sector: coordinate under government leadership to align assistance with country priorities, identify key policy and institutional reforms, define a pipeline of feasible investment projects and potential financing sources, and help mobilize resources by identifying policy constraints and desirable reforms.
- Use of existing country diagnostics:
  - MDB diagnostics (e.g., World Bank Group’s CCDRs and Country Private Sector Diagnostics) and IMF Climate Macroeconomic Assessment Programs can support dialogue linking policy reforms to development and climate actions.
  - Private sector assessments and initiatives (e.g., Country Private Sector Diagnostics pilots; Glasgow Financial Alliance for Net Zero involvement) are deepening engagement on impediments to green investments.

### Actionable recommendations
- Governments develop long-term investment strategies, step up institutional frameworks that enhance country coordination, and enhance staff expertise with support from development partners, particularly for vulnerable and low-capacity states.
- Governments establish or strengthen country-led and country-owned coordination mechanisms to accelerate investments in support of GRID and the transformation of key systems; such mechanisms should bring together governments, private sector, foreign investors, MDBs, the IMF, and donors to tackle binding policy constraints, enhance coordination, and mobilize necessary financing.

### Types of project investments and financing implications
- Bankable project investments:
  - Private returns exceed costs; should be financed by the private sector.
  - MDBs can assist by improving the business environment and facilitating matching of projects with private financing (including support for coordination mechanisms).
- Riskier project investments:
  - Attractive to private investors but entail elevated risks, high preparation costs, or both; require de-risking, technical assistance, or grants from concessional resources.
  - Technical assistance and grants for feasibility studies and master plans are important.
  - Existing trust funds and financial-intermediary funds (e.g., Global Infrastructure Facility, climate investment funds, Energy Sector Management Assistance Program, City Climate Finance Gap Fund, Global Facility for Disaster Reduction and Recovery, Public-Private Infrastructure Advisory Facility) provide such support but in insufficient amounts and must be scaled up.
- Public-goods project investments:
  - Generate public goods and are not commercially viable on private benefits alone (e.g., electricity grids or storage enabling private renewable investments).
  - Require public investment; global public goods require global public investment and monetization through domestic or international subsidies.
  - Funds and facilities cited: Green Climate Fund; World Bank’s Global Partnership for Sustainable and Resilient Landscapes (PROGREEN), PROBLUE, Climate Emissions Reduction Facility; grant components of financial-intermediary funds and climate investment funds (e.g., Forest Carbon Partnership Facility, World Bank’s Global Concessional Financing Facility, IBRD Global Public Goods Fund).
  - Carbon markets may eventually provide complementary financial benefits; World Bank’s SCALE multidonor fund deploys results-based climate finance and grant payments to lower greenhouse gas emissions and help countries build a track record to unlock private sector funding through international carbon markets.
- Social project investments:
  - Provide compensation to support a just transition; have no commercial benefit and must be financed through public resources including concessional or grant support, particularly in LICs and some MICs.
  - Include explicit liabilities (e.g., renegotiation of power purchase agreements, compensations to asset owners) and implicit liabilities (e.g., social expenditures for workers and communities affected by closures of carbon-intensive activities).

### Financing scale: estimates and targets
- Estimated incremental financing needed:
  - Bhattacharya et al. (2022) estimate EMDEs other than China will need at least $1.3 trillion in incremental financing through 2025 to implement a subset of GRID investments (human capital; sustainable infrastructure and acceleration of energy transitions; adaptation and resilience; restoration of natural capital).
- Proposed increases in financing sources to meet $1.3 trillion incremental needs by 2025 — Table 5.1 (preserved exactly):
  - Domestic resource mobilization:
    - 2019 gross financing (2019 US$, billions): 5,311
    - 2025 incremental financing target (2019 US$, billions): 653
    - 2025 gross financing target (2019 US$, billions): 5,964
    - Increase needed by 2025 relative to 2019: Additional 2.7 percentage points of EMDE country GDP
  - Private financing:
    - 2019 gross financing (2019 US$, billions): 377
    - 2025 incremental financing target (2019 US$, billions): 395
    - 2025 gross financing target (2019 US$, billions): 772
    - Increase needed by 2025 relative to 2019: Doubling of 2019 lending
  - Bilateral and multilateral official development assistance:
    - 2019 gross financing (2019 US$, billions): 192
    - 2025 incremental financing target (2019 US$, billions): 96
    - 2025 gross financing target (2019 US$, billions): 288
    - Increase needed by 2025 relative to 2019: 50 percent increase
  - Multilateral development banks nonconcessional:
    - 2019 gross financing (2019 US$, billions): 63
    - 2025 incremental financing target (2019 US$, billions): 126
    - 2025 gross financing target (2019 US$, billions): 189
    - Increase needed by 2025 relative to 2019: Tripling of 2019 lending
  - Bilateral nonconcessional lending:
    - 2019 gross financing (2019 US$, billions): 35
    - 2025 incremental financing target (2019 US$, billions): 35
    - 2025 gross financing target (2019 US$, billions): 70
    - Increase needed by 2025 relative to 2019: Doubling of 2019 lending

- Additional context:
  - Current financing flows for climate change adaptation measures are estimated to be one-fifth to one-tenth of developing countries’ needs (UNEP 2021a).
  - EMDEs face macroeconomic constraints—indebtedness, exchange rate volatility, elevated borrowing costs, and depleted fiscal space—that limit access to financing and reduce attractiveness of mitigation and adaptation investments.
  - Institutional capacity constraints and lack of funding for project preparation limit development of robust project pipelines.
  - Determining and securing the right debt and financing strategy is dynamic, with financing composition shifting as technologies mature and sustainable financing assets scale up.

*Source: Box 4.1, anea2023002 (analytical note).*

### 5.1 Public Financing: Domestic Resource Mobilization, Efficient

### 5.1 Public Financing: Domestic Resource Mobilization, Efficient and Effective Public Spending, and Debt

### Overview: fiscal constraints and investment needs
- EMDEs face large investment needs and limited fiscal space; many have run up public indebtedness in response to the global recession induced by COVID-19.
- Many EMDEs are in debt distress, or at high risk for it, and are not able to finance critical investment in public goods like climate change mitigation and adaptation, pandemic preparedness, food security, and conflict and fragility.
- Many developing countries require sustained investments at levels about 4 percentage points of GDP higher than the current ones to support climate mitigation and adaptation objectives, health and education systems, resilience, nature-based solutions, and agriculture, forestry, and land use (Bhattacharya et al. 2022).
- In the absence of increased international support, improved domestic revenue mobilization, and expenditure efficiency measures, accumulation of debt will lead to a fiscal crisis, undermine growth, and depress incomes.
- Development spending favors economic growth, but access to lower-cost long-term financing is essential for such spending to take place.

### Heterogeneity across EMDEs and tailored priorities
- Country-specific emphases are required given variation in debt and growth:
  - Economies with unsustainable debt that need to restructure their debt (for example, Sri Lanka and Zambia) should give priority to debt restructuring.
  - Economies with low growth (38 EMDEs—for example, South Africa—have estimated or projected growth rates below 3 percent for 2022–27) should emphasize structural reforms and improving governance.
  - Economies with large fiscal deficits (36 EMDEs had deficits above 6 percent in 2022) that cannot readily expand fiscal spending (for example, countries of the Sahel, small-island developing states, Egypt, India, and Kenya) should emphasize fiscal consolidation or fiscal neutrality, complemented by international support so priority spending can take place.
  - Economies experiencing high interest rates (nominal market rates on 10-year bonds were less than 7 percent in only 16 EMDEs as of mid-January 2023; Brazil, Colombia, Pakistan, and Uganda face double-digit rates) should identify ways to ease the cost of borrowing, including strengthening policies and frameworks, expanding official financing, and using official flows to de-risk private financing.

### Four key measures to increase fiscal space
- Mobilization of domestic resources.
- Efficient and effective use of government resources.
- Revamping fiscal rules and broadening debt sustainability analyses.
- Increasing access to low-cost financing.
- These measures should be applied with differing intensity based on country circumstances and designed within an integrated green, resilient, and inclusive development (GRID) approach.

### 5.1.1 Mobilization of domestic resources — findings and policy options
- Bold reforms to mobilize domestic resources are critical; building tax capacity is vital for state capacity, growth, development, and future debt repayment.
- Policy measures to deepen structural tax reforms include:
  - Modernizing revenue administration systems, including greater digitalization.
  - Strengthening tax policy frameworks to raise revenues without hurting the poor.
  - More-progressive taxation of income and wealth; broader taxation of capital income, capital gains, and corporate income; greater use of recurrent property taxes.
  - Broadening VAT bases and removing poorly targeted concessionary tax rates, while compensating the most vulnerable households with cash transfers (World Bank 2022a).
  - Increased use of excise taxes on fossil fuels (including carbon taxes), alcohol, tobacco, and sugar-sweetened beverages; use cash transfers to offset distributional impacts.
  - More effective taxation of natural resources.
- International corporate tax system weaknesses harm developing countries: lower-middle-income countries lose an estimated $200 billion per year to tax avoidance (profit shifting) by multinational companies—more than they receive in official development assistance (OECD 2020).
- Digitalization of revenue administrations will enhance taxpayers’ access to services and improve tax compliance and enforcement.
- Broader institutional reforms are needed: evidence shows positive correlation between predictability of revenues, tax administration effectiveness, and quality of governance.

### 5.1.2 Efficient and effective use of government resources — findings and policy options
- Better assignment of priorities in public spending can create fiscal space and accelerate progress toward development and climate objectives.
- Review spending programs to distinguish expenditures aligned with development and climate objectives from those no longer a priority or that have adverse impacts (examples: ineffective investment incentives; energy subsidies adverse to low-carbon transition).
- Reallocation and repurposing of inefficient subsidies in food and energy sectors could free up resources.
  - Globally, governments spend about $1.2 trillion for subsidies in the agricultural sector and for fuel ($635 billion in the agriculture sector and $577 in repurposed fossil fuel subsidies).
  - Efficient fuel pricing would reduce global carbon dioxide emissions by 36 percent below baseline levels in 2025, increasing net economic efficiency gain by 2.1 percent of global GDP (Parry, Black, and Vernon 2021).
- In the current context of elevated inflation, ensure reforms do not disproportionately affect vulnerable groups; use targeted transfers as needed.
- Significant opportunities exist to enhance spending efficiency:
  - Emerging markets lose 31 percent and low-income developing countries 39 percent of their resources to inefficiencies in the investment process (Schwartz et al. 2020).
  - Inefficiencies in overall spending are estimated at 4.4 percent of GDP in Latin America and the Caribbean (Izquierdo, Pessino, and Vuletin 2018).
  - Reducing leakages in transfers, procurement waste, wage bill inefficiency, and improving infrastructure governance can allow countries to do more with less.

Actionable recommendations at the country level:
- Governments increase fiscal space by deepening tax reforms in a progressive and fair manner, modernizing revenue systems and enhancing the quality of spending.
- Governments strengthen the credibility of public finances.
- Governments repurpose fuel and agricultural subsidies for more productive and sustainable investment, using some of the fiscal savings for targeted transfers to compensate vulnerable losers.

### 5.1.3 Revamping fiscal rules and broadening debt sustainability analyses — findings and policy options
- Many fiscal rules were set aside during the pandemic; escape clauses are now expiring (for example, the EU’s general escape clause for the Stability and Growth Pact was suspended only through 2022).
- Fiscal rules help establish credibility but could be revamped to better reflect investment’s contribution to long-term fiscal sustainability.
- Second-generation fiscal rules are advisable: comprehensive frameworks that include a debt anchor, a small number of operational rules guiding annual budgets, simple escape clauses, greater emphasis on expenditure rules, and enhanced transparency to promote compliance (Eyraud et al. 2018).
- Fiscal rules should take into account composition of public expenditure, emphasizing climate investments and development spending that reduce poverty and promote shared prosperity.
- Debt sustainability analyses should adequately emphasize the impact of development and climate spending on the interest rate–growth rate differential and long-term debt dynamics; delaying climate spending will raise future debt costs and lower growth.
- Strengthen analysis of climate change’s impact on growth potential using scenarios; useful tools include Network for Greening the Financial System scenarios, Intergovernmental Panel on Climate Change scenarios, and the IMF’s Debt Sustainability, Public Investment, and Natural Resource model.

Actionable recommendations at the country level:
- Governments repurpose fuel and agricultural subsidies for productive and sustainable investment and use fiscal savings for targeted compensation to vulnerable groups.

Actionable recommendations at the global level:
- Development partners and MDBs provide technical assistance on comprehensive second-generation fiscal rules (including a debt anchor, small number of operational rules, simple escape clauses, enhanced transparency, and more emphasis on expenditure) that incorporate increased investments in support of GRID in a fiscally sustainable way.
- Long-term growth projections used in debt sustainability analyses adequately consider the growth yield from development and climate investments.

### 5.1.4 Increasing access to low-cost financing — findings and policy options
- Affordability of financing is a challenge: of financing for climate change mitigation and adaptation delivered in LICs and MICs in 2019–20, 60 percent was in the form of debt, including 40 percent as project finance debt at market rates, from national development financial institutions (25 percent), commercial financial institutions (6 percent), and private sector arms of MDBs (5 percent) (World Bank Group 2022a).
- EMDEs face significantly higher market rates than advanced economies, creating negative incentives for development and climate investments.
- Strengthening liquidity management and tackling debt overhang are key to accessing lower-cost financing; liquidity risks largely account for higher spreads.
- Strengthening implementation of the G20 Common Framework for Debt Treatment and opening the framework to all EMDEs, not just those eligible under the Debt Service Suspension Initiative, is advisable.
- Political and macroeconomic risks contribute to risk premiums; reforms in debt management, fiscal sustainability, and debt transparency, and clear policy communication are important to build fiscal trust.
- Financial innovation can reduce countries’ vulnerability to climate shocks:
  - Catastrophe bonds and other insurance-linked securities can provide immediate funds after disasters; MDBs have supported 17 catastrophe bonds for an aggregate value of about $3 billion.
  - Example: most recent catastrophe bond provides Jamaica with $185 million in insurance coverage for severe hurricanes, financed with donor funds from Germany, the UK, and US.
  - Natural disaster clauses in sovereign bond issuance (pioneered by Barbados with its 2022 blue bond) can allow deferral of coupon payments when natural disasters occur.
- Scaling up nonconcessional lending at below-market rates could reduce borrowing costs and provide a large payoff: in one simulation (Kharas and Rivard 2022), if investment rises by 4 percent of GDP with half financed by external debt, the debt-to-GDP ratio rises by 10 percentage points, but income increases by 30 percent, solvency improves, and a larger share of official debt in the total mitigates rollover risk.
- Expanding availability of nonconcessional official loans is essential to reduce borrowing costs and provide project financing private markets cannot supply.
- Concessional financing remains low relative to the gap in financing for adaptation and resilience, nature and biodiversity, support for poor and vulnerable countries, and loss and damage.
- Complementary actions, like participation in voluntary carbon markets, can help reduce the cost of borrowing.

Actionable recommendations at the global level:
- Stakeholders support debt restructuring by deepening common understanding of debt-restructuring challenges via the Global Sovereign Debt Roundtable and strengthening the G20 Common Framework—including by providing greater clarity on steps and processes—and by enhancing creditor coordination for non–G20 Common Framework debtor countries.
- Bilateral creditors consider, where appropriate, debt-for-climate-and-sustainable-development transactions and facilitate donor-financed tripartite swaps that are additional and complementary to G20 Common Framework debt treatment.
- Stakeholders support the development of standards for third-party participation in voluntary carbon markets (debt-free financing).

Actionable recommendations at the country level:
- MDBs support development of infrastructure for local bond markets to support capital market depth and liquidity, and support issuance of green, social, and sustainability bonds and sustainability-linked bonds.
- Bilateral official creditors and private creditors consider debt initiatives in the context of the G20 Common Framework for Debt Treatment, including scope for reprofiling of repayments falling due, at reasonable cost and long maturity, to reduce net present value significantly in a timely manner. Debt treatments could be linked to a program of reform or to a time slice of incremental investments.
- MDBs and bilateral official creditors expand both concessional and nonconcessional financing (potentially with matching, as a way of mobilizing domestic resources) to support a big-push public investment program.

*Source: anea2023002 - 5.1 Public Financing: Domestic Resource Mobilization, Efficient and Effective Public Spending, and Debt*

### 5.2 Channeling Private Financing

### 5.2 Channeling Private Financing

### Overview
- Investments needed to address climate change and set countries on a path toward GRID represent a "tremendous opportunity for private financing" and "the growth story of the century" for the global economy and firms financing it.
- Failure by investors to transition risks missing opportunities and sustaining significant losses from exposure to the old economy and stranded assets; collective failure could lead to systemic exposure to climate-related financial risks and increase global financial instability.
- The planetary window of opportunity is "continuing to close rapidly" while global financial conditions for governments are tightening; COVID-19 has strained public budgets, increased inflation, and led to higher interest rates that tighten borrowing conditions for EMDE sovereigns.
- Despite difficulties, private long-term investors (such as pension funds) continue to search for sustainable and transition-resilient assets, especially in a high-inflation environment.

### Turning momentum into credible pledges (5.2.1)
- Interest in green private financing is increasing, reflected in:
  - initiatives by governments, central banks, MDBs, and development financial institutions;
  - growing issuance of sustainable assets such as green bonds;
  - private sector statements of ambition.
- At least one-third of the world’s publicly traded companies have pledged to reach net-zero emissions by 2050 or sooner.
- Institutions representing more than $130 trillion in assets have committed to aligning with net-zero emissions by 2050 through membership in the Glasgow Financial Alliance for Net Zero.
- Other initiatives include the Climate Finance Leadership Initiative, the Global Investors for Sustainable Development Alliance, the Sustainable Markets Initiative, and the Climate Policy Initiative’s Finance to Accelerate the Sustainability Transition—Infrastructure.
- The focus needs to shift rapidly from ambition to implementation and scaling up sustainable asset classes across all financing instruments, emphasizing integrity and impact.
- Recommendations from the UN Secretary-General’s High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities provide guidance to ensure pledges are credible and entities accountable, and to safeguard financial instruments’ quality, integrity, and sustainability credentials.

### Managing risk and cost of capital (5.2.2)
- Total private financial flows (including climate- and non-climate-related activities) have averaged only $12 billion per year for LICs and $800 billion for MICs over the past five years.
- Private financing for climate change mitigation and adaptation for LICs and MICs remains very small and largely concentrated in East Asia and the Pacific, which receives 70 percent of the flows of private financing for these purposes deployed in LICs and MICs.
- Scaling up private financing decisively and timely requires targeted action to reduce the cost of capital by tackling real and perceived geographic, technology, and project-specific financing risks.
- Identified risks and impediments:
  - shortage of large investment-grade projects and liquid markets;
  - high up-front capital and transaction costs;
  - significant project risk exacerbated by macro-financial constraints;
  - persistent market failures promoting fossil fuel investments;
  - country-level risks due to information asymmetries and uncertainties about future climate policies and technology costs;
  - lack of a strong climate information architecture (data, disclosures, taxonomies).
- Cross-sectional financing risks include:
  - exchange rate risk (infrastructure projects funded in hard currency but delivering revenues in local currency);
  - scale risk (weak pipeline of potential investment projects);
  - fragmentation or lack of mitigation instruments.
- Most financing for climate change mitigation and adaptation in EMDEs currently takes the form of debt, largely project-financing debt at market rates that are substantially higher than advanced economies’.
- To attract private sector investment, innovative financial instruments are needed to reduce the cost of capital, including blended and structured financing and risk sharing, with MDB resources deployed to reduce and mitigate risks.

### Developing market instruments at scale and ensuring whole-of-system alignment (5.2.3)
- Large investors can be attracted if reliable and credible market instruments are developed through standardization (packaging information and liquidity).
- Scaling up issuance of green bonds and similar instruments in EMDEs requires:
  - strengthening awareness and capacity building;
  - technical assistance;
  - aligning opportunities with institutional investor objectives and risk appetite.
- Examples of technical assistance and capacity building:
  - World Bank technical assistance to Colombia for a national green taxonomy, and support for taxonomies in Indonesia, Malaysia, and Vietnam;
  - assistance on three sovereign green bonds issued by Colombia, a sovereign green bond in Egypt, and the Indonesia Infrastructure Finance sustainability bond;
  - IFC initiatives such as the Green Bond Technical Assistance Program and the Green Banking Academy.
- The SDG-Focused Emerging Market Credit Fund (ILX Fund I), launched in 2022 and now valued at $1.05 billion, exemplifies leveraging MDB and development financial institution experience to deliver attractive risk-adjusted returns for institutional investors such as pension funds.
- A supportive international architecture for sustainable financing is critical to incentivize financial-system-wide alignment with green and sustainable development, as committed under Article 2.1c of the Paris Agreement.
- Developing a common language and sustainability standards for green investments can bring coherence; the International Sustainability Standards Board’s work is critical to avert fragmentation while allowing proportional and sequenced implementation.

### Risks of private financing (5.2.4)
- Channeling private financing to sustainable investments brings opportunities but also risks for the global financial system and recipient countries.
- Initiatives must avoid creating moral hazard from inappropriate application of public credit enhancements and de-risking that could privatize gains and socialize losses (IMF warning, Prasad et al. 2022).
- Strong state capacity and legal frameworks, alongside mechanisms to monitor investment projects, will be key to safeguarding de-risking initiatives from fiscal losses.
- Aligning the financial system with climate and development objectives also requires developing and deepening domestic financial markets and banking systems within EMDEs to mobilize domestic resources.
- Developing domestic markets can help minimize balance of payments vulnerabilities that could arise from large external inflows for climate investments.
- MDBs will be particularly critical in providing technical assistance and advising on blended-financing aspects to share risk and build capacity.

### Actionable recommendations
- Regulators and supervisors develop a supportive international sustainable financial architecture that creates incentives, tools, and an information framework to enable financial institutions to internalize climate-related physical and transition risks. Such an architecture will include mainstreaming instruments such as climate stress tests and sustainable prudential regulation.
- Private financial institutions in advanced economies proactively commit to allocating portfolios to sustainable investments in EMDEs. Increasing these institutions’ on-the-ground presence, to improve access to data and information and reduce perceived risk, as well as establishing local partnerships to help identify investment opportunities and jointly mobilize finance, will facilitate this commitment.
- Governments, development financial institutions, and the private sector increase their collaboration to develop a pipeline of bankable projects. Development of such a pipeline must include an emphasis on private sector engagement during the project preparation phase, as well as mechanisms to advance credibility and reduce uncertainty of government commitments, plans, and policies (including offtake risk for renewables).
- Governments employ blended-financing solutions to help unlock financing and address risks for long-term investments.

*Source: anea2023002 - 5.2 Channeling Private Financing*

### 5.3 Role of MDB, IMF, and Bilateral Financing in Supporting

### 5.3 Role of MDB, IMF, and Bilateral Financing in Supporting

### MDB roles, instruments, and technical support
- MDBs provide financing to governments and financial instruments that lower risks to private investors, including loans, de-risking, and blended-financing instruments.
- MDBs promote new multistakeholder initiatives and individually tailored cofinancing facilities that involve public and private first movers.
- MDBs support offtake in green technologies and interventions supporting GRID.
- MDBs leverage domestic and regional financial intermediaries through individually crafted risk-sharing facilities for green infrastructure (example applications: rooftop solar and e-mobility for small and medium enterprises).
- MDBs provide concessional and blended financing to attract private investment in challenging sectors and markets.
- MDBs provide technical expertise and support expansion of capital markets and development of new financial instruments: green, social, and sustainability-linked bonds and loans.
- Examples of MDB project preparation and capacity support include:
  - IFC’s upstream project preparation support.
  - Global Infrastructure Facility’s project preparation support and partnership with project preparation facilities.
  - World Bank support for renewables expansion.
- MDBs support identification of binding constraints to private investment via initiatives and diagnostics such as the Climate Finance Leadership Initiative, Global Infrastructure Facility country pilots, Country Private Sector Diagnostics, and CCDRs.

### Reporting, standards, and market development
- MDBs are promoting more robust methodologies and definitions in reporting financing for climate change mitigation and adaptation to address weaknesses in quality, transparency, and consistency.
- Through private sector arms, MDBs play a standard-setting role for assets related to climate change mitigation and adaptation.
- MDBs have agreed to “Common Principles for Climate Adaptation and Mitigation Finance Tracking” for annual reporting (AfDB et al. 2022).

### MDB performance, scale, and remaining financing gap
- MDBs met their collective 2025 goals for financing climate change mitigation and adaptation four years early (AfDB et al. 2022).
- Commitments by MDBs to financing for climate change mitigation and adaptation reached $58.8 billion in 2021 (AfDB et al. 2022).
- Despite stepped-up commitments, the gap between available financing and investment needs remains large and growing.
- The scale of the challenge clearly exceeds the lending scope of current MDB balance sheets.

### Measures needed to expand MDB impact
- Expand coverage of MDB tool kits and expand use of nonconcessional and concessional financing, including grants and blended financing, in LICs and MICs.
- Deepen diagnostic work and policy research and translate into action via enhanced policy dialogue, capacity building, technical assistance, and policy and investment lending.
- Promote robust methodologies and definitions for reporting climate finance to improve quality, transparency, and consistency; apply international standards globally in a proportionate and appropriate way.
- Expand MDB operating models beyond a country focus to support global coordination and the expansion of capital markets in developing countries.
- Further expand financial instruments available to private sector investors: green, social, and sustainability-linked bonds and loans, guarantees, and insurance products.
- Urgently explore with shareholders financial innovations to optimize use of MDB balance sheets without affecting credit ratings.
  - Example: International Development Association bond issuance beginning in 2018 allowed $23.5 billion in contributions to generate a replenishment package that had reached $93 billion by 2021.
  - The Panel for Independent Review of MDBs’ Capital Adequacy Frameworks (G20-commissioned, 2022) suggested additional innovations under review by MDBs.
- Expand the overall envelope of concessional and nonconcessional financing available through MDBs to reflect that MDBs were capitalized for once-in-a-decade crises rather than compounding crises.

### World Bank Group evolution
- The World Bank Group (led by its Board of Executive Directors) has developed an Evolution Roadmap to better address the scale of development challenges and cross-border challenges (climate change, pandemics, fragility, conflict, and violence).
- The initial draft of the Evolution Roadmap outlines approaches to:
  1. Clarify and expand vision and mission to broaden twin goals and emphasize sustainability and resilience, including global public goods.
  2. Review operating model and consider enhancements to country engagement, analytics, financing instruments, and incentives within a One World Bank Group approach.
  3. Explore options to expand resources and enhance the financial model.
- Work on the Evolution Roadmap is described as very timely and critical for delivering the level of ambition needed to support countries in achieving GRID.

### IMF role and instruments
- The IMF will need to increase support to raise access to financing by countries and help catalyze private sector financing.
- Stepped-up efforts with the G20 to improve the Common Framework for Debt Treatment will help reduce debt pressures and enable countries to perform much-needed investment.
- Swift rollout of support through the newly established Resilience and Sustainability Trust will help increase access to financing for many members.
  - The trust provides financial support to address longer-term macro-critical structural challenges related to climate change and pandemic preparedness that entail risks to countries’ resilience and sustainability.
  - Special drawing rights channeled from countries with strong external positions support the trust.
  - About three-quarters of the IMF’s membership—including all LICs and developing and vulnerable small states, as well as many MICs—are eligible for financing from the trust.
- Reforms supported under the trust (examples: green public financial management and legislative improvements) can help create enabling environments for private sector and MDB financing.
- The IMF should scale up work on carbon taxation and elimination of fossil fuel subsidies as part of surveillance (Article IV consultations and evaluations under the Financial Sector Assessment Program) and capacity development (including Climate Macroeconomic Assessment Programs).
- Expand analysis of ways to mobilize domestic and foreign private sector financing of climate change mitigation as a complement to climate-related policies.

### Donor financing, bilateral guarantees, and philanthropic capital
- Advanced economies committed to deliver $100 billion in financing for climate change mitigation and adaptation (commitment reiterated at G7 Carbis Bay Summit and COP26).
- Advanced economies’ financing to developing countries in climate mitigation and adaptation reached $83.3 billion in 2020, short of the $100 billion target.
- Advanced economies should ramp up assistance significantly, together with other donors, doubling—at least—mitigation and adaptation financing, including concessional financing, by 2025, compared with their 2019 levels, and steadily increasing them further by 2030.
- Overall development financing must also increase significantly.
- Increased use of MDB leveraging power—as compared to direct donations and trust funds—and addressing proliferation, fragmentation, and earmarking in concessional aid would help increase effectiveness.
- International transfers are needed to make adaptation investments affordable for EMDEs, in line with common but differentiated responsibilities.
- Concessional financing or de-risking instruments, including blended financing, may be required for investments not yet commercially viable (new climate-smart technologies, nascent markets).
- Increased use of bilateral guarantees from highly rated countries would help de-risk loan exposures and release capital.
- Philanthropic capital can complement international public financing by deploying flexible, risk-tolerant funding tailored to specific contexts, especially in LICs.
  - Despite recent major philanthropic pledges, only $6 billion to $10 billion in philanthropic capital (or 2 percent of global philanthropic giving) was dedicated to climate mitigation and adaptation in 2020 (Desanlis et al. 2021).

### Loss and damage, carbon markets, and other innovations
- International support is needed for loss and damage in vulnerable countries; addressing loss and damage affects the architecture of international financing for climate mitigation and adaptation.
- Following the COP27 agreement on establishing a Loss and Damage Fund, potential recipient countries can begin developing mechanisms to identify climate-related losses, assess magnitude, and establish monitoring and verification systems.
  - Even though rules and size of the fund remain to be negotiated, establishing such mechanisms is a no-regrets strategy that assists in prevention and management of losses irrespective of the fund’s governing rules.
- Innovative solutions are needed to complement grants:
  - Participation in voluntary carbon markets can help reduce cost of borrowing.
  - The World Bank’s new Scaling Climate Action by Lowering Emissions (SCALE) trust fund will help countries build a track record of projects to unlock private sector funding through international carbon markets.
  - The Energy Transition Accelerator proposal by US Climate Envoy John Kerry could speed energy transitions in developing countries using carbon offsets, but integrity and credibility are prerequisites.

### Actionable recommendations
- Developed countries urgently meet their commitment to deliver $100 billion in financing for climate change mitigation and adaptation and further scale up their contributions, together with other donors, to double—at least—mitigation and adaptation financing, including concessional financing, by 2025, compared with their 2019 levels, and steadily increase them further by 2030.
- Overall development financing will also need to increase significantly.

*Source: 5.3 Role of MDB, IMF, and Bilateral Financing in Supporting — anea2023002*

### 6. CONCLUSION

### 6. CONCLUSION

### Urgency and scale of the challenge
- Sustained global recovery from the COVID-19 pandemic and the compounding impacts of climate change and natural resources depletion require urgent investment at scale and comprehensive and innovative approaches that step up financing and innovation for GRID.
- Failure to act would mean not only a lost decade for development, but great danger for people all around the world over the coming decades.
- There is both great urgency and great opportunity to propel a big investment push to drive recovery and transformation.

### Strategic priorities for a sustained postpandemic recovery
- Invest in all forms of capital.
- Implement macroeconomic and structural policies, strengthen preparedness, and implement institutional strengthening and technological innovation to enable just transitions.
- Mobilize capital at scale, especially from the private sector.

### Financing needs and international cooperation
- Existing public, private, and concessional financing for climate change mitigation and adaptation needs to be deployed in more transformative and catalytic ways—channeling additional capital to bridge the gap between available resources and needs.
- International solidarity—including significantly exceeding the (so far unrealized) aim to provide $100 billion annually in financing to developing countries for climate change mitigation and adaptation—will be decisive.
- Transformative results at the country level will depend on effective cooperation with clients and development partners to maximize financing, promote innovation, implement policy reform, ensure transparency and accountability, and strengthen institutions.
- Strong and sustained commitment by the international community that channels private sector investment and financing will be the most critical determining factor in the years ahead.

### Expected benefits of a successful financing strategy
- If successful, the financing strategy proposed in this report would provide a major boost not just to the development prospects of EMDEs, but to the global economy too, and would help mitigation of and adaptation to climate change.

### Roles for multilateral and international institutions
- MDBs expand concessional and nonconcessional financing for both MICs and LICs through innovative solutions that do not affect MDB credit ratings, as well as additional financial resources from their shareholders, so as to step up engagements to support investments and policy actions for GRID.
- The IMF’s swift rollout of support through its newly established Resilience and Sustainability Trust will help increase access to affordable long-term financing in many of its members to address climate-related challenges.

*Source: anea2023002 - 6. CONCLUSION*

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_Source: https://www.imf.org/-/media/files/publications/analytical-notes/2023/english/anea2023002.pdf_