Abstract
Can the promise of climate finance help secure an international climate agreement that makes all parties better off? This paper shows that incentive compatible, financial transfers are always feasible and can facilitate a globally efficient agreement if they are bounded by the net benefits of avoided climate damages and forgone economic growth. In contrast, climate finance will generally come up short when based on conventional arguments that seek compensation for foregone economic growth, climate damages (i.e., “loss and damage”), or both. Empirical evidence is provided with a calibrated simulation using the C-DICE integrated assessment model.
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