June 2021 - Under the Paris Agreement, developing countries are confronted with multiple challenges: Developing countries do not only have to decide which of their mitigation options they want to exploit but they must also determine whether to exploit this potential unilaterally or, as an alternative, use carbon markets or climate finance for implementing mitigation activities. A recently published Carbon Mechanisms Research Paper examines, from the perspective of a host country, the factors that need to be taken into account when making such a decision. To this end, the authors first compare the functioning of carbon markets and climate finance in order to identify their commonalities and differences. Although the lines between the two approaches are becoming increasingly blurred, the paper highlights numerous differences between the two approaches: Besides the conditionality in terms of funding disbursement and the associated accounting requirements, both approaches have the potential to involve different types of stakeholders.
In a second step, the authors identify specific features of mitigation options that could influence its suitability for one of the two financing approaches. Whether a particular mitigation should be targeted by climate finance or carbon markets depends, among other things, on whether that mitigation option is covered by the NDC and its conditional or unconditional component, and whether the reductions will be reflected in the national emissions inventory.
The findings of the paper show that especially developing countries need to develop integrated financing strategies to tap their mitigation potentials in order to take advantage of the complementarities of carbon markets and climate finance. This requires both strengthened political coordination of processes and stronger support from the international community.