The Economic Implications of Tied Aid and Local Content Requirements for Climate Finance

Abstract

The Paris Agreement states that from 2020 developed countries will mobilize at least USD 100 billion per year to support climate action in developing countries. The attainment of this objective involves decisions by donor countries about the channel and destination of climate finance disbursements. This paper explores how the spending conditions associated to different disbursement options can affect the opportunities for donors to expand their exports. In particular, using a Multiregional Input-Output Model, it finds that donors have an economic incentive for choosing bilateral channels that enable to tie aid to the detriment of multilateral ones, such as the Green Climate Fund. On the other hand, local content requirements imposed by recipient countries do not substantially affect donors’ exports, since they do not reduce intermediate exports, which represent a relevant share of the total exports generated by the mitigation and adaptation actions analysed.

Climate-Related Development Finance, Energy Structure Transformation and Carbon Emissions Reduction: An Analysis From the Perspective of Developing Countries

“…Regarding the allocation of climate financing, the directional flow of climate-related funding is not only related to the economic and geographical distribution (Román et al, 2016) but also to political factors (Purdon, 2017;Geddes et al, 2020) and the strategic economic considerations of donor countries (Román et al, 2019). Developed countries from different regions have different methods of allocating climate-related funding to developing countries.…”