Finance “Blending” and NDC achievement under the Paris agreement

Abstract

Climate finance, funded by governments of high-income (H) countries, can be used to purchase assets in the international carbon market for offset trading, thus “blending” with such transactions. In this paper it is shows analytically that when there are no distortions in credit markets, finance blending leads to too little greenhouse gas (GHG) mitigation in H countries, and too much in L countries. The offset market is then distorted by climate finance blending, given that all offset credits are attributed to the carbon market participants. This distortion is removed when such “blended” climate finance resources are instead attributed in proportion to their finance shares. Adding climate finance to the carbon market has no impact on global GHG mitigation as long as the trading countries’ targets for emissions reductions (their “climate ambition”) is not changed; higher ambition levels are thus always required for climate finance to contribute to a reduction in global GHG emissions. When L country market participants have limited access to credit markets, blending can increase global greenhouse-gas mitigation by adding climate finance resources to the carbon market, thus facilitating L country market participants’ access to funding of their planned mitigation projects.