Climate Change and Select Financial Instruments:An Overview of Opportunities and Challenges for Sub-Saharan Africa

Abstract

DISCLAIMER: The IMF Notes Series aims to quickly disseminate succinct IMF analysis on critical economic issues to member countries and the broader policy community. The IMF Staff Climate Notes provide analysis related to the impact of climate change on macroeconomic and financial stability, including on mitigation, adaptation, and transition. The views expressed in IMF Staff Climate Notes are those of the author(s), although they do not necessarily represent the views of the IMF, or its Executive Board, or its management. Sub-Saharan Africa (SSA) is the region in the world most vulnerable to climate change despite its cumulatively emitting the least amount of greenhouse gases. Substantial financing is urgently needed across the economy—for governments, businesses, and households—to support climate change adaptation and mitigation, which are critical for advancing resilient and green economic development as well as meeting commitments under the Paris Agreement. Given the immensity of SSA’s other development needs, this financing must be in addition to existing commitments on development finance. There are many potential ways to raise financing to meet adaptation and mitigation needs, spanning from domestic revenue mobilization to various forms of international private financing. Against this backdrop, SSA policymakers and stakeholders are exploring sources of financing for climate action that countries may not have used substantially in the past. Immediate interest has been expressed in exploring four major areas as sources of financing for governments—where, in some cases, these sources of financing could also be used for private sector adaptation and mitigation efforts: (1) concessional financing, particularly through climate funds; (2) debt instruments that are somewhat linked to climate change; (3) international carbon credit schemes; and (4) climate-related insurance schemes. This Staff Climate Note presents some basic information on opportunities and challenges associated with these financing instruments. It is not endorsing the use of any of these instruments or their relative ability to scale up financing for adaptation or mitigation. The choice of instruments should ultimately be considered in the context of a country’s current macroeconomic situation, policy objectives, and the broader mix of financing options and government policies—including carbon pricing and appropriate risk pricing which can, among other things, shape incentives for spending on adaptation and mitigation. While the focus of this Note is on SSA countries, some of the considerations may apply to other low-income countries (LICs) facing similar circumstances.