The Green Swap: Disentangling Climate and Development Impact to Mobilize Climate Finance

The world invests almost twice as much in clean energy as it does in fossil fuels but there are major imbalances in investment. Despite rapid growth in energy demand, Emerging Markets and Developing Economies (EMDEs) outside China receive only 15% of global clean energy investments. This is the result of a combination of two factors prevalent in many EMDEs: limited resources seeking maximum development impact, and the high cost of capital that frustrates global financing for clean energy projects. Ongoing investment in fossil fuels in EMDEs, that is locking in carbon-intensive infrastructure, threatens to offset emission reductions achieved in advanced economies. Under current policies, EMDEs will fail to decarbonize and switch to renewables even at the pace necessary to meet their announced pledges, and well short of what is required under the Net-Zero scenario. Addressing this imbalance requires innovative financial mechanisms that bridge the gap between development needs and climate goals. This paper proposes disentangling development and climate impacts as a way to mobilize more financing for green infrastructure in EMDEs. The goal of development investment is to catalyze local economic growth, while the goal of climate investment is to deliver global benefits by reducing greenhouse gas emissions. By clearly delineating the benefits, costs, and risks associated with these two objectives, it becomes possible to create a financing solution that allocates the development component of the green infrastructure project to local and development investors who prioritize socio-economic outcomes, while the climate component is directed to global climate investors seeking measurable emissions reductions and climate benefits. The Green Swap is a financial instrument based on this disentanglement. It leverages the lower global cost of capital to finance the incremental costs of adopting green technologies, leaving local or development resources to fund the development aspects of infrastructure projects. By aligning the financial structure with the distinct objectives of development and climate, the Green Swap makes green investments viable. Furthermore, it fosters collaboration between local and global investors, addressing the dual mandates of development and climate action.