COP30: New avenues for cooperation on climate finance

Keeping global warming below 1.5°C in the long run requires global CO₂ emissions to be reduced to net zero by the middle of the century. According to the authors, this will require a much faster ramp-up of investment in CO₂-free energy. While global investment in 2024 is estimated at around 2 trillion US dollars, annual needs are closer to 6 trillion US dollars up to 2050. If the current pace continues, an investment gap of 26 trillion US dollars would accumulate by 2036. In the Global South, investments would have to rise six- to nine-fold compared with current levels.

The paper by PIK and KfW Research highlights three key reasons why financing climate action in the Global South also serves the economic interests of wealthier countries: First, climate investments anywhere help limit climate damages, because the greenhouse effect does not respect national borders. Second, a truly global shift to fossil-free technologies can spur innovation and new industries at home. And third, a shift in the global balance of power away from dependence on oil-exporting countries can strengthen national sovereignty and energy resilience.

Minilateral cooperation as key strategy in geopolitically tense times

CO₂ emissions are currently rising at a particularly rapid pace in middle-income countries. Reversing this trend requires effective mechanisms that create incentives for cooperation and ensure that international climate finance delivers real results. The European Carbon Border Adjustment Mechanism (CBAM), which encourages trading partners to raise their climate ambitions, has great potential in this regard.

Another approach is a funding system that rewards countries based on the actual implementation of climate action. The analysis shows that large fossil fuel-importing economies could benefit from financial cooperation to support the energy transition in the Global South. Model simulations suggest that a “minilateral” coalition between the EU and China as investor countries, for example, could cut global demand for oil, gas and coal while also benefitting coalition partners more than it would cost them. 

Such cooperation therefore not only benefits the planet but also supports national prosperity, due to the so-called terms-of-trade effect – reduced demand for fossil fuels lowers global demand and thus the world market price, which in turn reduces costs for domestic consumers. The avoided climate damage is an additional benefit.

Turning global challenges into new opportunities

“This example illustrates that geopolitical tensions and national interests need not stand in the way of effective global climate protection,” says PIK Director Ottmar Edenhofer, author of the paper.

“Joint action can emerge from national interests if the right incentive structures are in place. The EU’s carbon pricing combined with the new CBAM climate tariffs already illustrate this. Other countries are now introducing CO₂ prices – not out of green idealism, but because it benefits prosperity and growth.”