"Global welfare is maximized by prioritizing mitigation, since unabated emissions make adaptation impossible"

"Article 6 of the Paris Agreement could foster cli- mate finance in emerging market and developing economies—particularly adaptation finance. The momentum generated by COP26 should be lever- aged to fully implement the international carbon market mechanisms, since there is agreement on the key rules and modalities for their implementation. Both implementation of the bilateral trade of carbon emission reduction among nations (Article 6.2) and global trading of carbon emission reductions (Article 6.4, similar to the Clean Development Mechanism) could significantly reduce the costs of achieving the temperature goals of the Paris Agreement. The global market under Article 6.4 will directly support adaptation finance in emerging market and develop- ing economies by transferring a fixed share of traded carbon to a fund to finance adaptation projects and programs in developing economies (the “Adaptation Fund”). This has the potential to provide a very sig- nificant increase in much-needed adaptation finance. Parties to the UNFCCC as well as MDBs should therefore provide as much support as possible toward timely and full implementation of the UNFCCC international carbon markets. In parallel, specialized public climate funds, such as the Green Climate Fund (also under the auspices of the UNFCCC), should receive sufficient resources to fill the adaptation financing gap. Advanced economies should allocate to such funds a significant share of their annual financing pledges to developing economies under the Paris Agreement. Adaptation finance often cannot generate returns for private investors, but it can yield very large social benefits for the countries most affected by climate change. GLOBAL FINANCIAL STABILITY REPORT: Navigating the High-Inflation Environment 64 International Monetary Fund | October 2022 References Adrian, Tobias, Patrick Bolton, and Alissa M. Kleinnijenhuis. 2022. “The Great Carbon Arbitrage.” IMF Working Paper 22/107, International Monetary Fund, Washington, DC. Basu, Priya, Lisa Finneran, Veronique Bishop, and Trichur Sund- araraman. 2011. “The Scope for MDB Leverage and Innova- tion in Climate Finance.” World Bank, Washington, DC. Berg, Florian, Julian F. Kölbel, and Roberto Rigobon. 2022. “Aggregate Confusion: The Divergence of ESG Rating.” Review of Finance rfac033. https://​doi​.org/​10​.1093/​rof/​rfac033 Berrada, Tony, Leonie Engelhardt, Rajna Gibson, and Philipp Krueger. 2022. “The Economics of Sustainability Linked Bonds.” Swiss Finance Institute Research Paper 22–26, Zurich. Bhattacharya, Amar, Meagan Dooley, Homi Kharas, Charlotte Taylor, and Nicholas Stern. 2022. “Financing a Big Invest- ment Push in Emerging Markets and Developing Econo- mies for Sustainable, Resilient and Inclusive Recovery and Growth.” Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, and Brookings Institution, London. Bolton, Patrick, Xavier Musca, and Frédéric Samama. 2020. “Global Public-Private Investment Partnerships: A Financing Innovation with Positive Social Impact.” Journal of Applied Corporate Finance 32 (2): 31–41. Chapagain, Dipesh, Florent Baarsch, Michiel Schaeffer, and Sarah D’haen. 2020. “Climate Change Adaptation Costs in Developing Countries: Insights from Existing Estimates.” Climate and Development 12 (10): 934–42. Climate"

"- zons, needs for scale, risk profiles, and funding sources, need to be mobilized for mitigation and adaptation purposes. For instance, renewable energy infrastructure and low-carbon technologies (such as carbon capture and storage, batteries, low-carbon hydrogen) will largely require equity finance (IEA 2021a). At the same time, several constraints hold back projects and financing on the supply and demand sides. Investors have noted various reasons for gaps in financing needs related to lack of investable projects (Ehlers 2014; Fouad and others 2021). They point to bottlenecks in project prepara- tion and development. Deficiencies in policy and regulatory frameworks and weaker institutional capacity (related to contract enforcement, property rights, and management of fiscal risks and public investment) make it hard to manage the long-term investments needed in sustainable infrastructure. In addition, investors point to a need for high-quality, reliable, and comparable data. 51 International Monetary Fund | October 2022 CHAPTER 2  SCALING UP PRIVATE CLIMATE FINANCE IN EMERGING MARKET AND DEVELOPING ECONOMIES Central Asia and Eastern Europe Middle East and Africa Latin America and the Caribbean Asia and Pacific 38.89 0.08 Private Public: multilateral development financial institutions Public: others Gap vis-à-vis annual infrastructure investment need (preferred scenario) GDP-weighted average vulnerability score (top scale) Private Public: others Public: multilateral development financial institutions Gap vis-à-vis annual infrastructure investment need (preferred scenario) Greenhouse gas emissions coverage, percent of national greenhouse gas emissions Average price rate across advanced economies as of April 2022 (right scale) Average price rate as of April 2022 (right scale) Figure 2.3. A Deep-Seated Financing Gap for Climate Change Mitigation and Adaptation, Limited Fiscal Capacity, and Carbon Pricing Strategies in Emerging Market and Developing Economies The overall gap vis-à-vis mitigation needs is high across regions ... ... and even more so for adaptation finance, despite the high level of vulnerabilities to climate change. Needs relative to GDP are significant across regions, specifically in Central Asia and Eastern Europe and in Middle East and Africa. However, carbon pricing initiatives remain nascent in those economies, with insufficiencies in coverage and rates. 1. Global Climate Finance Flows in Mitigation and Infrastructure Investment Needs by Region (Billions of US dollars) 3. Annual Infrastructure Investment Needs Relative to GDP (Percent of GDP; billions of 2015 US dollars) 4. National and Subnational Carbon Pricing Initiatives as a Share of National Greenhouse Gas Emissions with Average Price Rate (Percent of national greenhouse gas emissions; US dollars per tCO2e) 2. Global Climate Finance Flows in Adaptation, Infrastructure Investment Needs, and Vulnerability Score by Region (Billions of US dollars, bottom; score, top) 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 Central Asia and Eastern Europe Asia and Pacific Latin America and the Caribbean Middle East and Africa Central Asia and Eastern Europe Asia and Pacific Latin America and the Caribbean Middle East and Africa 0 10 12 4 2 6 8 0 30 40 20 10"