Editing IPCC:AR6/SR15/Chapter-4 (section)

== Box 4.9 Figure 2 ==

<div id="section-4-4-5-1-block-1"></div>

<span id="box-4.9.-figure-2"></span>
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'''Box 4.9. Figure 2'''

<span id="peak-car-in-beijing-relationships-between-economic-performance-and-private-automobile-use-in-beijing-from-1986-to-2014."></span>
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'''Peak car in Beijing: relationships between economic performance and private automobile use in Beijing from 1986 to 2014.'''
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[[File:8e0eaf110d253a6888eea1931cea7828 box-4.9-fig-2-1024x310.jpg]]

VKT is vehicle kilometres of travel. Source: (Gao and Newman, 2018) <sup>[[#fn:r1360|1360]]</sup> .

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<div id="section-4-4-5-2"></div>

<span id="carbon-pricing-necessity-and-constraints"></span>
==== 4.4.5.2 Carbon pricing: necessity and constraints ====

<div id="section-4-4-5-2-block-2"></div>

Economic literature has long argued that climate and energy policy grounded only in regulation, standards and public funding of R&amp;D is at risk of being influenced by political and administrative arbitrariness, which could raise the costs of implementation. This literature has argued that it may be more efficient to make these costs explicit through carbon taxes and carbon trading, securing the abatement of emissions in places and sectors where it is cheapest (IPCC, 1995, 2001; Gupta et al., 2007; Somanathan et al., 2014) <sup>[[#fn:r1361|1361]]</sup> .

In a frictionless world, a uniform world carbon price could minimize the social costs of the low-carbon transition by equating the marginal costs of abatement across all sources of emissions. This implies that investors will be able to make the right choices under perfect foresight and that domestic and international compensatory transfers offset the adverse distributional impacts of higher energy prices and their consequences on economic activity. In the absence of such transfers, carbon prices would have to be differentiated by jurisdiction (Chichilnisky and Heal, 2000; Sheeran, 2006; Böhringer et al., 2009; Böhringer and Alexeeva-Talebi, 2013) <sup>[[#fn:r1362|1362]]</sup> . This differentiation could in turn raise concerns of distortions in international competition (Hourcade et al., 2001; Stavins et al., 2014) <sup>[[#fn:r1363|1363]]</sup> .

Obstacles to enforcing a uniform world carbon price in the short run would not necessarily crowd out explicit national carbon pricing, for three reasons. First, a uniform carbon price would limit an emissions rebound resulting from a higher consumption of energy services enabled by efficiency gains, if energy prices do not change (Greening et al., 2000; Fleurbaey and Hammond, 2004; Sorrell et al., 2009; Guivarch and Hallegatte, 2011; Chitnis and Sorrell, 2015; Freire-González, 2017) <sup>[[#fn:r1364|1364]]</sup> . Second, it could hedge against the arbitrariness of regulatory policies. Third, ‘revenue neutral’ recycling, at a constant share of taxes on GDP, into lowering some existing taxes would compensate for at least part of the propagation effect of higher energy costs (Stiglitz et al., 2017) <sup>[[#fn:r1365|1365]]</sup> . The substitution by carbon taxes of taxes that cause distortions on the economy can counteract the regressive effect of higher energy prices. For example, offsetting increased carbon prices with lower labour taxes can potentially decrease labour costs (without affecting salaries), enhance employment and reduce the attractiveness of informal economic activity (Goulder, 2013) <sup>[[#fn:r1366|1366]]</sup> .

The conditions under which an economic gain along with climate benefit (a ‘double dividend’) can be expected are well documented (Goulder, 1995; Bovenberg, 1999; Mooij, 2000) <sup>[[#fn:r1367|1367]]</sup> . In the context of OECD countries, the literature examines how carbon taxation could substitute for other taxes to fund the social security system (Combet, 2013) <sup>[[#fn:r1368|1368]]</sup> . The same general principles apply for countries that are building their social welfare system, such as China (Li and Wang, 2012) <sup>[[#fn:r1369|1369]]</sup> or Brazil (La Rovere et al., 2017a) <sup>[[#fn:r1370|1370]]</sup> , but an optimal recycling scheme could differ based on the structure of the economy (Lefèvre et al., 2018) <sup>[[#fn:r1371|1371]]</sup> .

In every country the design of carbon pricing policy implies a balance between incentivizing low-carbon behaviour and mitigating the adverse distributional consequences of higher energy prices (Combet et al., 2010) <sup>[[#fn:r1372|1372]]</sup> . Carbon taxes can offset these effects if their revenues are redistributed through rebates to poor households. Other options include the reduction of value-added taxes for basic products or direct benefit transfers to enable poverty reduction (see Winkler et al. (2017) <sup>[[#fn:r1373|1373]]</sup> for South Africa and Grottera et al. (2016) <sup>[[#fn:r1374|1374]]</sup> for Brazil). This is possible because higher-income households pay more in absolute terms, even though their carbon tax burden is a relatively smaller share of their income (Arze del Granado et al., 2012) <sup>[[#fn:r1375|1375]]</sup> .

Ultimately, the pace of increase of carbon prices would depend on the pace at which they can be embedded in a consistent set of fiscal and social policies. This is specifically critical in the context of the 1.5°C limit (Michaelowa et al., 2018) <sup>[[#fn:r1376|1376]]</sup> . This is why, after a quarter century of academic debate and experimentation (see IPCC WGIII reports since the SAR), a gap persists with respect to ‘switching carbon prices’ needed to trigger rapid changes. In 2016, only 15% of global emissions are covered by carbon pricing, three-quarters of which with prices below 10 USD tCO <sub>2</sub> <sup>−</sup> <sup>1</sup> (World Bank, 2016) <sup>[[#fn:r1377|1377]]</sup> . This is too low to outweigh the ‘noise’ from the volatility of oil markets (in the range of 100 USD tCO <sub>2</sub> <sup>−</sup> <sup>1</sup> over the past decade), of other price dynamics (interest rates, currency exchange rates and real estate prices) and of regulatory policies in energy, transportation and industry. For example, the dynamics of mobility depend upon a trade-off between housing prices and transportation costs in which the price of real estate and the inert endowments in public transport play as important a role as liquid fuel prices (Lampin et al., 2013) <sup>[[#fn:r1378|1378]]</sup> .

These considerations apply to attempts to secure a minimum price in carbon trading systems (Wood and Jotzo, 2011; Fell et al., 2012; Fuss et al., 2018) <sup>[[#fn:r1379|1379]]</sup> and to the reduction of fossil fuel subsidies. Estimated at 650 billion USD in 2015 (Coady et al., 2017) <sup>[[#fn:r1380|1380]]</sup> , these subsidies represent 25–30% of government expenditures in forty (mostly developing) countries (IEA, 2014b) <sup>[[#fn:r1381|1381]]</sup> . Reducing these subsidies would contribute to reaching 1.5°C-consistent pathways, but raises similar issues as carbon pricing around long-term benefits and short-term costs (Jakob et al., 2015; Zeng and Chen, 2016) <sup>[[#fn:r1382|1382]]</sup> , as well as social impacts.

Explicit carbon prices remain a necessary condition of ambitious climate policies, and some authors highlight the potential benefit brought by coordination among groups of countries (Weischer et al., 2012; Hermwille et al., 2017; Keohane et al., 2017) <sup>[[#fn:r1383|1383]]</sup> . They could take the form of carbon pricing corridors (Bhattacharya et al., 2015) <sup>[[#fn:r1384|1384]]</sup> . They are a necessary ‘lubricant’ through fiscal reforms or direct compensating transfers to accommodate the general equilibrium effects of higher energy prices but may not suffice to trigger the low-carbon transition because of a persistent ‘implementation gap’ between the aspirational carbon prices and those that can practically be enforced. When systemic changes, such as those needed for 1.5°C-consistent pathways, are at play on many dimensions of development, price levels ‘depend on the path and the path depends on political decisions’ (Drèze and Stern, 1990) <sup>[[#fn:r1385|1385]]</sup> .

<div id="section-4-4-5-3"></div>

<span id="regulatory-measures-and-information-flows"></span>
==== 4.4.5.3 Regulatory measures and information flows ====

<div id="section-4-4-5-3-block-1"></div>

Regulatory instruments are a common tool for improving energy efficiency and enhancing renewable energy in OECD countries (e.g., the USA, Japan, Korea, Australia, the EU) and, more recently, in developing countries (M.J. Scott et al., 2015; Brown et al., 2017) <sup>[[#fn:r1386|1386]]</sup> . Such instruments include constraints on the import of products banned in other countries (Knoop and Lechtenböhmer, 2017) <sup>[[#fn:r1387|1387]]</sup> .

For energy efficiency, these instruments include end-use standards and labelling for domestic appliances, lighting, electric motors, water heaters and air-conditioners. They are often complemented by mandatory efficiency labels to attract consumers’ attention and stimulate the manufacture of more efficient products (Girod et al., 2017) <sup>[[#fn:r1388|1388]]</sup> . Experience shows that these policy instruments are effective only if they are regularly reviewed to follow technological developments, as in the ‘Top Runner’ programme for domestic appliances in Japan (Sunikka-Blank and Iwafune, 2011) <sup>[[#fn:r1389|1389]]</sup> .

In four countries, efficiency standards (e.g. miles per gallon or level of CO <sub>2</sub> emission per kilometre) have been used in the transport sector, for light- and heavy-duty vehicles, which have spillovers for the global car industry. In the EU (Ajanovic and Haas, 2017) <sup>[[#fn:r1390|1390]]</sup> and the USA (Sen et al., 2017) <sup>[[#fn:r1391|1391]]</sup> , vehicle manufacturers need to meet an annual CO <sub>2</sub> emission target for their entire new vehicle fleet. This allows them to compensate through the introduction of low-emission vehicles for the high-emission ones in the fleet. This leads to increasingly efficient fleets of vehicles over time but does not necessarily limit the driven distance.

Building codes that prescribe efficiency requirements for new and existing buildings have been adopted in many OECD countries (Evans et al., 2017) <sup>[[#fn:r1392|1392]]</sup> and are regularly revised to increase their efficiency per unit of floor space. Building codes can avoid locking rapidly urbanizing countries into poorly performing buildings that remain in use for the next 50–100 years (Ürge-Vorsatz et al., 2014) <sup>[[#fn:r1393|1393]]</sup> . In OECD countries, however, their main role is to incentivize the retrofit of existing buildings. In addition of the convergence of these codes to net zero energy buildings (D’Agostino, 2015) <sup>[[#fn:r1394|1394]]</sup> , a new focus should be placed, in the context of 1.5°C-consistent pathways, on public and private coordination to achieve better integration of building policies with the promotion of low-emission transportation modes (Bertoldi, 2017) <sup>[[#fn:r1395|1395]]</sup> .

The efficacy of regulatory instruments can be reinforced by economic incentives, such as feed-in tariffs based on the quantity of renewable energy produced, subsidies or tax exemptions for energy savings (Bertoldi et al., 2013; Ritzenhofen and Spinler, 2016; García-Álvarez et al., 2017; Pablo-Romero et al., 2017) <sup>[[#fn:r1396|1396]]</sup> , fee-bates, and ‘bonus-malus’ that foster the penetration of low-emission options (Butler and Neuhoff, 2008) <sup>[[#fn:r1397|1397]]</sup> . Economic incentives can also be combined with direct-use market-based instruments, for example combining, in the United States and, in some EU countries, carbon trading schemes with energy savings obligations for energy retailers (Haoqi et al., 2017) <sup>[[#fn:r1398|1398]]</sup> , or with green certificates for renewable energy portfolio standards (Upton and Snyder, 2017) <sup>[[#fn:r1399|1399]]</sup> . Scholars have investigated caps on utilities’ energy sales (Thomas et al., 2017) <sup>[[#fn:r1400|1400]]</sup> and emission caps implemented at a personal level (Fawcett et al., 2010) <sup>[[#fn:r1401|1401]]</sup> .

In combination with the funding of public research institutes, grants or subsidies also support R&amp;D, where risk and the uncertainty about long-term perspectives can reduce the private sector’s willingness to invest in low-emission innovation (see also Section 4.4.4). Subsidies can take the form of rebates on value-added tax (VAT), of direct support to investments (e.g., renewable energy or refurbishment of buildings) or feed-in tariffs (Mir-Artigues and del Río, 2014) <sup>[[#fn:r1402|1402]]</sup> . They can be provided by the public budget, via consumption levies, or via the revenues of carbon taxes or pricing. Fee-bates, introduced in some countries (e.g., for cars), have had a neutral impact on public budgets by incentivizing low-emission products and penalizing high-emission ones (de Haan et al., 2009) <sup>[[#fn:r1403|1403]]</sup> .

All policy instruments can benefit from information campaigns (e.g., TV ads) tailored to specific end-users. A vast majority of public campaigns on energy and climate have been delivered through mass-media channels and advertising-based approaches (Corner and Randall, 2011; Doyle, 2011) <sup>[[#fn:r1404|1404]]</sup> . Although some authors report large savings obtained by such campaigns, most agree that the effects are short-lived and decrease over time (Bertoldi et al., 2016) <sup>[[#fn:r1405|1405]]</sup> . Recently, focus has been placed on the use of social norms to motivate behavioural changes (Allcott, 2011; Alló and Loureiro, 2014) <sup>[[#fn:r1406|1406]]</sup> . More on strategies to change behaviour can be found in Section 4.4.3.

<div id="section-4-4-5-4"></div>

<span id="scaling-up-climate-finance-and-de-risking-low-emission-investments"></span>
==== 4.4.5.4 Scaling up climate finance and de-risking low-emission investments ====

<div id="section-4-4-5-4-block-1"></div>

The redirection of savings towards low-emission investments may be constrained by enforceable carbon prices, implementation of technical standards and the short-term bias of financial systems (Miles, 1993; Bushee, 2001; Black and Fraser, 2002) <sup>[[#fn:r1407|1407]]</sup> . The many causes of this bias are extensively analysed in economic literature (Tehranian and Waegelein, 1985; Shleifer and Vishny, 1990; Bikhchandani and Sharma, 2000) <sup>[[#fn:r1408|1408]]</sup> , including their link with prevailing patterns of economic globalization (Krugman, 2009; Rajan, 2011) <sup>[[#fn:r1409|1409]]</sup> and the chronic underinvestment in long-term infrastructure (IMF, 2014) <sup>[[#fn:r1410|1410]]</sup> . Emerging literature explores how to overcome this through reforms targeted to bridge the gap between short-term cash balances and long-term low-emission assets and to reduce the risk-weighted capital costs of climate-resilient investments. This gap, which was qualified by the Governor of the Bank of England as a ‘tragedy of the horizon’ (Carney, 2016) <sup>[[#fn:r1411|1411]]</sup> that constitutes a threat to the stability of the financial system, is confirmed by the literature (Arezki et al., 2016; Christophers, 2017) <sup>[[#fn:r1412|1412]]</sup> . This potential threat would encompass the impact of climate events on the value of assets (Battiston et al., 2017) <sup>[[#fn:r1413|1413]]</sup> , liability risks (Heede, 2014) <sup>[[#fn:r1414|1414]]</sup> and the transition risk due to devaluation of certain classes of assets (Platinga and Scholtens, 2016) <sup>[[#fn:r1415|1415]]</sup> .

The financial community’s attention to climate change grew after COP 15 (ESRB ASC, 2016) <sup>[[#fn:r1416|1416]]</sup> . This led to the introduction of climate-related risk disclosure in financial portfolios (UNEP, 2015) <sup>[[#fn:r1417|1417]]</sup> , placing it on the agenda of G20 Green Finance Study Group and of the Financial Stability Board. This led to the creation of low-carbon financial indices that investors could consider as a ‘free option on carbon’ to hedge against risks of stranded carbon-intensive assets (Andersson et al., 2016) <sup>[[#fn:r1418|1418]]</sup> . This could also accelerate the emergence of climate-friendly financial products such as green or climate bonds. The estimated value of the green bonds market in 2017 is 155 billion USD ( [[IPCC:Sr15:About:Error-protocol:#errata2|BNEF 2018]] ) <sup>[[#fn:r1419|1419]]</sup> . The bulk of these investments are in renewable energy, energy efficiency and low-emission transport (Lazurko and Venema, 2017) <sup>[[#fn:r1420|1420]]</sup> , with only 4% for adaptation (OECD, 2017b) <sup>[[#fn:r1421|1421]]</sup> . One major question is whether individual strategies based on improved climate-related information alone will enable the financial system to allocate capital in an optimal way (Christophers, 2017) <sup>[[#fn:r1422|1422]]</sup> since climate change is a systemic risk (CISL, 2015; Schoenmaker and van Tilburg, 2016) <sup>[[#fn:r1423|1423]]</sup> .

The readiness of financial actors to reduce investments in fossil fuels is a real trend (Platinga and Scholtens, 2016; Ayling and Gunningham, 2017) <sup>[[#fn:r1424|1424]]</sup> , but they may not resist the attractiveness of carbon-intensive investments in many regions. Hence, decarbonizing an investment portfolio is not synonymous with investing massively in low-emission infrastructure. Scaling up climate-friendly financial products may depend upon a business context conducive to the reduction of the risk-weighted capital costs of low-emission projects. The typical leverage of public funding mechanisms for low-emission investment is low (2 to 4) compared with other sectors (10 to 15) (Maclean et al., 2008; Ward et al., 2009; MDB, 2016) <sup>[[#fn:r1425|1425]]</sup> . This is due to the interplay of the uncertainty of emerging low-emission technologies in the midst of their learning-by-doing cycle with uncertain future revenues due to volatility of fossil fuel prices (Roques et al., 2008; Gross et al., 2010) <sup>[[#fn:r1426|1426]]</sup> as well as uncertainty around regulatory policies. This inhibits low-emission investments by corporations functioning under a ‘shareholder value business regime’ (Berle and Means, 1932; Roe, 1996; Froud et al., 2000) <sup>[[#fn:r1427|1427]]</sup> and actors with restricted access to capital (e.g. cities, local authorities, SMEs and households).

De-risking policy instruments to enable low-emission investment encompasses interest rate subsidies, fee-bates, tax breaks, concessional loans from development banks, and public investment funds, including revolving funds. Given the constraints on public budgets, public guarantees can be used to increase the leverage effect of public financing on private financing. Such de-risking instruments imply indeed a full direct burden on public budgets only in case of default of the project. They could back for example various forms of green infrastructure funds (de Gouvello and Zelenko, 2010; Emin et al., 2014; Studart and Gallagher, 2015) <sup>[[#fn:r1428|1428]]</sup> . <sup>[[#fn:10|10]]</sup>

The risk of defaulting can be mitigated by strong measurement, reporting and verifying (MRV) systems (Bellassen et al., 2015) <sup>[[#fn:r1429|1429]]</sup> and by the use of notional prices recommended in public economics (and currently in use in France and the UK) to calibrate public support to the provision of public goods in case of persisting distortions in pricing (Stiglitz et al., 2017) <sup>[[#fn:r1430|1430]]</sup> . Some suggest linking these notional prices to ‘social, economic and environmental value of voluntary mitigation actions’ recognized by the COP 21 Decision accompanying the Paris Agreement (paragraph 108) (Hourcade et al., 2015; La Rovere et al., 2017b; Shukla et al., 2017) <sup>[[#fn:r1431|1431]]</sup> , in order to incorporate the co-benefits of mitigation.

Such public guarantees ultimately amount to money issuance backed by low-emission projects as collateral. This explains the potentially strong link between global climate finance and the evolution of the financial and monetary system. Amongst suggested mechanisms for this evolution are the use of International Monetary Fund’s (IMF’s) Special Drawing Rights to fund the paid-in capital of the Green Climate Fund (Bredenkamp and Pattillo, 2010) <sup>[[#fn:r1432|1432]]</sup> and the creation of carbon remediation assets at a predetermined face value per avoided tonne of emissions (Aglietta et al., 2015a, b) <sup>[[#fn:r1433|1433]]</sup> . Such a predetermined value could hedge against the fragmentation of climate finance initiatives and support the emergence of financial products backed by a new class of long-term assets.

Combining public guarantees at a predetermined value of avoided emissions, in addition to improving the consistency of non-price measures, could support the emergence of financial products backed by a new class of certified assets to attract savers in search of safe and ethical investments (Aglietta et al., 2015b) <sup>[[#fn:r1434|1434]]</sup> . It could hedge against the fragmentation of climate finance initiatives and provide a mechanism to compensate for the ‘stranded’ assets caused by divestment in carbon-based activities and in lowering the systemic risk of stranded assets (Safarzyńska and van den Bergh, 2017) <sup>[[#fn:r1435|1435]]</sup> . These new assets could also facilitate a low-carbon transition for fossil fuel producers and help them to overcome the ‘resource curse’ (Ross, 2015; Venables, 2016) <sup>[[#fn:r1436|1436]]</sup> .

Blended injection of liquidity has monetary implications. Some argue that this questions the premise that money should remain neutral (Annicchiarico and Di Dio, 2015, 2016; Nikiforos and Zezza, 2017) <sup>[[#fn:r1437|1437]]</sup> . Central banks or financial regulators could act as a facilitator of last resort for low-emission financing instruments, which could in turn lower the systemic risk of stranded assets (Safarzyńska and van den Bergh, 2017) <sup>[[#fn:r1438|1438]]</sup> . This may, in time, lead to the use of carbon-based monetary instruments to diversify reserve currencies (Jaeger et al., 2013) <sup>[[#fn:r1439|1439]]</sup> and differentiate reserve requirements (Rozenberg et al., 2013) <sup>[[#fn:r1440|1440]]</sup> in the context of a climate-friendly Bretton Woods (Sirkis et al., 2015; Stua, 2017) <sup>[[#fn:r1441|1441]]</sup> .

<div id="section-4-4-5-5"></div>

<span id="financial-challenge-for-basic-needs-and-adaptation-finance"></span>
==== 4.4.5.5 Financial challenge for basic needs and adaptation finance ====

<div id="section-4-4-5-5-block-1"></div>

Adaptation finance is difficult to quantify for two reasons. The first is that it is very difficult to isolate specific investment needs to enhance climate resilience from the provision of basic infrastructure that are currently underinvested (IMF, 2014; Gurara et al., 2017) <sup>[[#fn:r1442|1442]]</sup> . The UNEP (2016) <sup>[[#fn:r1443|1443]]</sup> estimate of investment needs on adaptation in developing countries between 140–300 billion USD yr <sup>−</sup> <sup>1</sup> in 2030, a major part being investment expenditures that are complementary with SDG-related investments focused on universal access to infrastructure and services and meeting basic needs. Many climate-adaptation-centric financial incentives are relevant to non-market services, offering fewer opportunities for market revenues while they contribute to creating resilience to climate impacts.

Hence, adaptation investments and the provision of basic needs would typically have to be supported by national and sub-national government budgets together with support from overseas development assistance and multilateral development banks (Fankhauser and Schmidt-Traub, 2011; Adenle et al., 2017; Robinson and Dornan, 2017) <sup>[[#fn:r1444|1444]]</sup> , and a slow increase of dedicated NGO and private climate funds (Nakhooda and Watson, 2016) <sup>[[#fn:r1445|1445]]</sup> . Even though the UNEP estimates of the costs of adaptation might be lower in a 1.5°C world (UNEP/Climate Analytics, 2015) <sup>[[#fn:r1446|1446]]</sup> they would be higher than the UNEP estimate of 22.5 billion USD of bilateral and multilateral funding for climate change adaptation in 2014. Currently, 18–25% of climate finance flows to adaptation in developing countries (OECD, 2015b, 2016; Shine and Campillo, 2016) <sup>[[#fn:r1447|1447]]</sup> . It remains fragmented, with small proportions flowing through UNFCCC channels (AdaptationWatch, 2015; Roberts and Weikmans, 2017) <sup>[[#fn:r1448|1448]]</sup> .

Means of raising resources for adaptation, achieving the SDGs and meeting basic needs (Durand et al., 2016; Roberts et al., 2017) <sup>[[#fn:r1449|1449]]</sup> include the reduction of fossil fuel subsidies (Jakob et al., 2016) <sup>[[#fn:r1450|1450]]</sup> , increasing revenues from carbon taxes (Jakob et al., 2016) <sup>[[#fn:r1451|1451]]</sup> , levies on international aviation and maritime transport, and sharing of the proceeds of financial arrangements supporting mitigation activities (Keen et al., 2013) <sup>[[#fn:r1452|1452]]</sup> . Each have different redistribution implications. Challenges, however, include the efficient use of resources, the emergence of long-term assets using infrastructure as collateral and the capacity to implement small-scale adaptation and the mainstreaming of adaptation in overall development policies. There is thus a need for greater policy coordination (Fankhauser and McDermott, 2014; Morita and Matsumoto, 2015; Sovacool et al., 2015, 2017; Lemos et al., 2016; Adenle et al., 2017; Peake and Ekins, 2017) <sup>[[#fn:r1453|1453]]</sup> that includes robust mechanisms for tracking, reporting and ensuring transparency of adaptation finance (Donner et al., 2016; Pauw et al., 2016a; Roberts and Weikmans, 2017; Trabacchi and Buchner, 2017) <sup>[[#fn:r1454|1454]]</sup> and its consistency with the provision of basic needs (Hallegatte et al., 2016) <sup>[[#fn:r1455|1455]]</sup> .

<div id="section-4-4-5-6"></div>

<span id="towards-integrated-policy-packages-and-innovative-forms-of-financial-cooperation"></span>
==== 4.4.5.6 Towards integrated policy packages and innovative forms of financial cooperation ====

<div id="section-4-4-5-6-block-1"></div>

Carbon prices, regulation and standards, improved information and appropriate financial instruments can work synergistically to meet the challenge of ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’, as in Article 2 in the Paris Agreement.

There is growing attention to the combination of policy instruments that address three domains of action: behavioural changes, economic optimization and long-term strategies (Grubb et al., 2014) <sup>[[#fn:r1456|1456]]</sup> . For example, de-risking low-emission investments would result in higher volumes of low-emission investments, and would in turn lead to a lower switching price for the same climate ambition (Hirth and Steckel, 2016) <sup>[[#fn:r1457|1457]]</sup> . In the reverse direction, higher explicit carbon prices may generate more low-emission projects for a given quantum of de-risking. For example, efficiency standards for housing can increase the efficacy of carbon prices and overcome the barriers coming from the high discount rates used by households (Parry et al., 2014) <sup>[[#fn:r1458|1458]]</sup> , while explicit and notional carbon prices can lower the risk of arbitrary standards. The calibration of innovative financial instruments to notional carbon prices could encourage large multinational companies to increase their level of internal carbon prices (UNEP, 2016) <sup>[[#fn:r1459|1459]]</sup> . These notional prices could be higher than explicit carbon prices because they redirect new hardware investments without an immediate impact on existing capital stocks and associated interests.

Literature, however, shows that conflicts between poorly articulated policy instruments can undermine their efficiency (Lecuyer and Quirion, 2013; Bhattacharya et al., 2017; García-Álvarez et al., 2017) <sup>[[#fn:r1460|1460]]</sup> . As has been illustrated in Europe, commitment uncertainty and lack of credibility of regulation have consistently led to low carbon prices in the case of the EU Emission Trading System (Koch et al., 2014, 2016) <sup>[[#fn:r1461|1461]]</sup> . A comparative study shows how these conflicts can be avoided by policy packages that integrate many dimensions of public policies and are designed to match institutional and social context of each country and region (Bataille et al., 2015) <sup>[[#fn:r1462|1462]]</sup> .

Even though policy packages depend upon domestic political processes, they might not reinforce the NDCs at a level consistent with the 1.5°C transition without a conducive international setting where international development finance plays a critical role. Section 4.4.1 explores the means of mainstreaming climate finance in the current evolution of the lending practices of national and multilateral banks (Badré, 2018) <sup>[[#fn:r1463|1463]]</sup> . This could facilitate the access of developing countries to loans via bond markets at low interest rates, encouragement of the emergence of new business models for infrastructure, and encouragement of  financial markets to support small-scale investments (Déau and Touati, 2017) <sup>[[#fn:r1464|1464]]</sup> .

These financial innovations may involve non-state public actors like cities and regional public authorities that govern infrastructure investment, enable energy and food systems transitions and manage urban dynamics (Cartwright, 2015) <sup>[[#fn:r1465|1465]]</sup> . They would help, for example, in raising the 4.5–5.4 trillion USD yr <sup>−</sup> <sup>1</sup> from 2015 to 2030 announced by the Cities Climate Finance Leadership Alliance (CCFLA, 2016) <sup>[[#fn:r1466|1466]]</sup> to achieve the commitments by the Covenant of Mayors of many cities to long-term climate targets (Kona et al., 2018) <sup>[[#fn:r1467|1467]]</sup> .

The evolution of global climate financial cooperation may involve central banks, financial regulatory authorities, and multilateral and commercial banks. There are still knowledge gaps about the form, structure and potential of these arrangements. They could be viewed as a form of a burden-sharing between high-, medium- and low-income countries to enhance the deployment of ambitious Nationally Determined Contributions (NDCs) and new forms of ‘common but differentiated responsibility and respective capabilities’ (Edenhofer et al., 2015; Hourcade et al., 2015; Ji and Sha, 2015) <sup>[[#fn:r1468|1468]]</sup> .

<span id="integration-and-enabling-transformation"></span>