Climate Consequences of Rebalancing Official Climate Finance: Analyzing Multilateral Development Banks’ Allocation Practices

Abstract

The transition towards a low-carbon economy requires the fundamental reallocation of financial capital from current technology towards green innovation. The role of public financing of green technological innovation by Multilateral Development Banks (MDB) is a largely unexplored area. In this paper, we provide novel evidence on the climate financing practices of MDBs and their long-term climate consequences. The majority of MDB climate finance is for mitigation projects and is concentrated in a small number of relatively wealthy countries. We show that MDBs’ climate financing is positively correlated with countries' greenhouse gas emissions but not with their vulnerability to climate risks. Our numerical simulations show that moving towards more equal funding of innovative mitigation-adaptation projects can substantially lower global climate vulnerability. We also show that rebalancing MDB funding towards adaptation projects and technologies can reduce vulnerability significantly for an additional 2.5 billion people, without a significant change in the annualized growth rate of emissions.

Keywords: Multilateral Development Banks, Climate Finance, Adaptation, Mitigation

JEL Classification: Q54, Q55, G21