Editing IPCC:AR6/WGIII/Chapter-12 (section)

=== 12.6.4 Implications of Finance for Cross-sectoral Mitigation Synergies and Trade-offs ===

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Finance is a principal enabler of GHG mitigation and an essential component of countries’ NDC packages submitted under the Paris Agreement ( [[#UNFCCC--2016|UNFCCC 2016]] ). The assessment of investment requirements for mitigation along with their financing at sectoral levels are addressed in detail by sectoral chapters while the assessment of financial sources, instruments, and the overall mitigation financing gap is addressed by [[IPCC:Wg3:Chapter:Chapter-15|Chapter 15]] (Sections 15.3, 15.4, and 15.5). The focus in this chapter with respect to finance is on the scope and potential for financing integrated solutions that create synergies between and among sectors.

Cross-sectoral considerations in mitigation finance are critical for the effectiveness of mitigation action as well as for balancing the often conflicting social, developmental and environmental policy goals at the sectoral level. True measures of mitigation policy impacts and hence plans for resource mobilisation that properly address costs and benefits cannot be developed in isolation from their cross-sectoral implications. Unaddressed cross-sectoral coordination and interdependency issues are identified as major constraints in raising the necessary financial resources for mitigation in a number of countries ( [[#Bazilian--2011|Bazilian et al. 2011]] ; [[#Welsch--2014|Welsch et al. 2014]] ; [[#Hoff--2019a|Hoff et al. 2019a]] ).

Integrated financial solutions to leverage synergies between sectors, as opposed to purely sector-based financing, at international, national, and local levels are needed to scale up GHG mitigation potentials. At the international level, finance from multilateral development banks (MDBs) is a major source of GHG mitigation finance in developing countries ( ''medium evidence, medium agreement'' ) ( [[#World%20Bank%20Group--2015|World Bank Group 2015]] ; [[#Ha--2016|Ha et al. 2016]] ; [[#Bhattacharya--2016|Bhattacharya et al. 2016]] ; [[#Bhattacharya--2018|Bhattacharya et al. 2018]] ) ''.'' In 2018, MDBs reported a total of USD30.165 billion in financial commitments to climate change mitigation, with 71% of total mitigation finance being committed through investment loans and the rest in the form of equity, guarantees, and other instruments. GHG reduction activities eligible for MDB finance are limited to those compatible with low-emission pathways recognising the importance of long-term structural changes, such as the shift in energy production to low-carbon energy technologies and the modal shift to low-carbon modes of transport leveraging both greenfield and energy efficiency projects. Sector-wise, the MDBs’ mitigation finance for 2018 is allocated to renewable energy (29%), transport (18%), energy efficiency (18%), lower-carbon and efficient energy generation (7%), agriculture, forestry and land use (8%), waste and wastewater (8%), and other sectors (12%) ( [[#MDB--2019|MDB 2019]] ). Unfortunately, due to institutional and incentives issues, MDB finance has mostly focused on sectoral solutions and has not been able to properly leverage cross-sectoral synergies. At the national level, applied research has shown that integrated modelling of land, energy and water resources not only has the potential to identify superior solutions, but also reveals important differences in terms of investment requirements and required financing arrangements compared to the traditional sectoral financing toolkits ( [[#Welsch--2014|Welsch et al. 2014]] ). Agriculture, forestry, nature-based solutions and other forms of land use are promising sectors for leveraging financing solutions to scale up GHG mitigation efforts ( [[IPCC:Wg3:Chapter:Chapter-15#15.4|Section 15.4]] ). Moving to more productive and resilient forms of land use is a complex task, given the cross-cutting nature of land use, which necessarily results in apparent trade-offs between mitigation, adaptation, and development objectives. Finance is one area to manage these trade-offs where there may be opportunities to redirect the hundreds of billions spent annually on land use around the world towards green activities, without sacrificing either productivity or economic development ( [[#Falconer--2015|Falconer et al. 2015]] ). Nonetheless, that would require active public support in design of land-use mitigation and adaptation strategies, coordination between public and private instruments across land use sectors, and leveraging of policy and financial instruments to redirect finance toward greener land-use practices ( ''limited evidence, medium agreement'' ) ''.'' For example, the [[#Welsch--2014|Welsch et al. (2014)]] study on Mauritius shows that the promotion of a local biofuel industry from sugar cane could be economically favourable in the absence of water constraints, leading to a reduction in petroleum imports and GHG emissions while enhancing energy security. Yet, under a water-constrained scenario as a result of climate change, the need for additional energy to expand irrigation to previously rain-fed sugar plantations and to power desalination plants yields the opposite result in terms of GHG emissions and energy costs, making biofuels a sub-optimal option, and negatively affects their economics and the prospects for financing.

At the local level, integrated planning and financing are needed to achieve more sustainable outcomes. For example, at a city level, integration is needed across sectors such as transport, energy systems, buildings, sewage and solid waste to optimise emissions footprints. How a city is designed will affect transportation demands, which makes it either more or less difficult to implement efficient public transportation, leading in turn to more or fewer emissions. Under such cases, solutions in terms of public and private investment paths and financing policies based on purely internal sector considerations are bound to cause adverse impacts on other sectors and poor overall outcomes ( [[#Gouldson--2016|Gouldson et al. 2016]] ).

Availability and access to finance are among the major barriers to GHG emissions mitigation across various sectors and technology options ( ''robust evidence, high agreement'' ) ''.'' Resource maturity mismatches and risk exposure are two main factors limiting ability of commercial banks and other private lenders to contribute to green finance ( [[#Mazzucato--2018|Mazzucato and Semieniuk 2018]] ). At all levels, mobilising the necessary resources to leverage cross-sectoral mitigation synergies would require the combination of public and private financial sources ( [[#Jensen--2018|Jensen and Dowlatabadi 2018]] ). Traditional public financing would be required to synergise mitigation across sectors where the risk-return and time profiles of investment are not sufficiently attractive for the business sector. Over the years, private development financing through public-private partnerships and other related variants has been a growing source of finance to leverage cross-sectoral synergies and manage trade-offs ( [[#Anbumozhi--2018|Anbumozhi and Timilsina 2018]] ; [[#Attridge--2019|Attridge and Engen 2019]] ; [[#Ishiwatari--2019|Ishiwatari et al. 2019]] ). Promoting such blended approaches to finance along with result-based financing architectures to strengthen delivery institutions are advocated as effective means to mainstream cross-sectoral mitigation finance ( ''limited evidence, high agreement'' ) ( [[#Attridge--2019|Attridge and Engen 2019]] ; [[#Ishiwatari--2019|Ishiwatari et al. 2019]] ). The World Bank group and the International Financial Corporation have used the blended finance results-based approach to climate financing that addresses institutional, infrastructure, and service needs across sectors targeting developing countries and marginalised communities ( [[#GPRBA--2019|GPRBA 2019]] ; [[#IDA--2019|IDA 2019]] ).

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