At COP29 in Baku in 2024, governments agreed on a new international climate finance goal: to mobilise USD 300 billion annually by 2035, aiming for a total of USD 1.3 trillion from public and private sources. However, no concrete mechanism for raising these funds was defined. The new PIK study explores scenarios in which countries cooperate out of self-interest to impose fossil fuel levies and channel the revenues to low- and middle-income countries, financing measures to reduce fossil fuel use.
The authors highlight the effectiveness of a cooperative approach. If, for example, the EU adjusted levy rates depending on which other countries joined, large importers such as China would have clear incentives to participate. A joint EU-China initiative could quadruple the available climate finance compared to unilateral action. Economically, cooperation would also pay off: investing levy revenues in the energy transition of low- and middle-income countries would lower global fossil fuel demand – and with it, world market prices. This price effect could fully offset potential costs for consumers.
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“Governments worldwide are under increasing fiscal pressure and are asking where the money for international climate protection should come from. Smaller coalitions of states working together on levy models could make a decisive contribution – without creating additional costs for consumers,” explains PIK Director Ottmar Edenhofer, co-author of the report.
Billions for reducing fossile fuel use
For low- and middle-income countries, the benefits would be concrete. In a joint EU-China levy scenario, they could receive USD 66 billion annually for reducing fossil fuel use – including USD 33 billion as net gain. In addition, avoided climate damages are estimated at USD 78 billion, with USD 19 billion in savings from lower energy prices. Such a coalition would also cut more than one billion tonnes of CO₂ per year – exceeding Germany’s total annual emissions.
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The proposed alliance of fossil fuel importers could build on the recently renewed EU-China cooperation on climate protection. Significant potential also lies in pricing emissions from international aviation and shipping, which could generate more than USD 200 billion annually and reduce emissions by around 1.5 billion tonnes of CO₂ per year – about half of Europe’s total emissions.
A model for global public goods
There are already international pioneers. A group of countries – including Antigua and Barbuda, Barbados, Benin, France, Kenya, Sierra Leone, Somalia and Spain – recently announced plans to introduce joint levies on private jets and premium flights to raise funds for climate action and sustainable development. Barbados, France and Kenya also lead an international taskforce on global solidarity levies, exploring new ways to finance global public goods.
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“Our analysis shows clearly: coalitions for financing global public goods are beneficial to all. If revenues are earmarked for international climate finance, the benefits can be distributed fairly worldwide,” says PIK researcher Matthias Kalkuhl.
The study contributes to the project Development Aid in the Mutual Interest of Donors and Recipients, funded by the Gates Foundation and coordinated by the Kiel Institute for the World Economy. (hcn)
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