This blog was authored by Suzi Kerr, Senior Advisor, Economics and Carbon Pricing, EDF and Juan Pablo Hoffmaister, former AVP, Global Engagement and Partnerships, EDF.
Last November at COP29 in Baku, countries agreed on the New Collective Quantified Goal (NCQG) and set a target of mobilizing $1.3 trillion annually by 2035, including a commitment of at least $300 billion from developed countries. This decision was a turning point for the climate finance conversation—allowing us to move the conversation from “how much” to “how effectively” these funds can be deployed.
New research from EDF’s Economics team and partners show that to close the gap, we need to revolutionize our approach to climate finance. With innovative and diversified approaches, we can repair the fragmented and roadblock-riddled finance system currently in-place – while putting developing countries in the driver’s seat to design solutions that meet their needs.
Environmental Defense Fund’s research on quality climate finance highlights three critical dimensions that must be addressed: concessionality, access, and impact. Our new research adds important nuance by illustrating the multiple pathways needed, and available, to close the climate finance gap. This analysis, visualized in the compelling graph below, demonstrates that no single source of finance can meet the enormous need:
As we can see from the visualization, the 2022 baseline (panel a) shows a massive gap between current finance levels and what’s needed. The ‘Business As Usual’ scenario for 2030 (panel b) still leaves a significant shortfall even with expanded public and private finance. By integrating international carbon markets (panel c) and achieving higher leverage ratios through holistic strategies (panel d), we could come closer to bridging the gap.
This layered approach resembles what Kerr and Hu call the “mitigation avocado” framework, where effective climate finance requires:
- Diversified funding sources – Public finance, private capital, international carbon markets, and domestic carbon pricing must all grow substantially and be used in complementary ways to meet climate goals.
- Enabling environments – Host countries must take the lead in creating holistic national plans that align climate action with development priorities and provide the regulatory certainty investors need.
- Leverage ratios – Together, more effective combinations of capital sources, clear incentives through carbon pricing and strong enabling environments can mobilize more private capital for each dollar of public or carbon market financing.
All those engaged in negotiating and providing climate finance must embrace a multifaceted approach to blended finance while ensuring quality considerations remain central. Climate finance isn’t effective if it creates unsustainable debt burdens, fails to reach those who need it most, or doesn’t deliver measurable climate impacts.
While carbon markets offer substantial potential, they are not a silver bullet or simple fix—rather, true progress demands innovative blending mechanisms that catalyze private sector investment and domestic resource mobilization through carefully designed policy frameworks tailored to local contexts.
It is unfortunate that the current climate finance landscape remains so fragmented and riddled with barriers. We urgently need creative financing solutions that genuinely empower developing countries to craft pathways that work alongside their unique economic realities, governance structures, and development priorities rather than forcing them to conform to external terms.
As work progresses towards the Baku to Belém Roadmap to 1.3T,, developing country Parties should be in the driver’s seat of transition planning. This requires moving beyond traditional donor-recipient relationships toward true partnership models where climate and development goals are pursued together.
The future of climate finance depends not just on hitting numerical targets, but rather on ensuring every dollar mobilized works harder and smarter to deliver real climate action while supporting sustainable development.
