4. Sovereign Incentives
The benefits of cutting emissions are global and the costs national, so incentives for national climate policy have to come from outside. Cash transfers on the scale needed are politically impossible. This section of papers argues that the international system should instead reward governments with what it can supply cheaply and they value highly: cheaper borrowing, delivered through guarantees and collateral. A guarantee saves the borrower the full credit spread but costs its provider only expected loss and the carry on a buffer, so on the development banks’ own sovereign loss record each dollar of donor cost delivers about 80 dollars of interest saving, and 2.7 in a stress case where a new facility does not inherit their preferred-creditor status. Net of the default option the borrower gives up, the country’s gain is about 27 per dollar (1.9 in the stress case), and the ratios fall when the guarantor’s capital carries a cost or calls must be met in cash, so the institution behind the guarantees matters. Three instruments follow: a notional capitalized value that turns a country’s carbon stock into guarantee capacity, debited for every tonne emitted above an allowance; a Climate Investment Trust that holds the capital behind those guarantees instead of spending it; and codified sustainability-linked lending, which delivers the reward but is too small on its own. Capacity that declines as clean technology gets cheaper pays a premium for acting now.
Section overview (pdf) → · Series slides (pdf) →
4.1 Reward the Stock as Well as the Flow: Notional Capitalized Value and Guarantee-Based Climate Incentives
Turning carbon stocks and low-emission paths into cheaper borrowing
Climate finance pays for tonnes avoided against baselines nobody can observe, and almost nothing for carbon stocks never released. This brief proposes crediting each country with a notional capitalized value: a balance opened by its carbon stock, debited for every tonne emitted above an agreed allowance, and used as guarantee capacity on green borrowing rather than paid out. A guarantee is worth the full spread to the borrower but costs only the expected loss, so on the development banks’ record each dollar of expected loss buys about 80 dollars of interest saving (2.7 in a stress case). For a forest country with Guyana’s stock, a $5 billion balance prices emissions at about $30 a tonne.
Policy brief → · Working paper → · Slides (pdf) → · Policy brief (pdf) → · Working paper (pdf) →
4.2 The Climate Investment Trust: Hold Capital, Lend Its Strength
A buffer fund that insures policy guarantees, invests in clean energy and holds national climate accounts
International rewards for national climate policy fail because donors will not vote for large cash transfers and governments cannot borrow against promises. This brief proposes a Climate Investment Trust that holds capital instead of spending it. One pool stands second behind the guarantees that reward policy, earns fees by co-investing in clean energy, and holds national accounts that countries pledge as collateral now and draw after 2050. On the development banks’ sovereign loss record, each donor dollar delivers about 80 dollars of interest savings; without their preferred-creditor status, 2.7. Holding the cautious buffer, the Trust grows on its own yield if losses follow the banks’ record.
Policy brief → · Working paper → · Slides (pdf) → · Policy brief (pdf) → · Working paper (pdf) →
4.3 Codify Sustainability-Linked Sovereign Lending, Then Give It Scale
Standard indicators, verification and pricing, and why the reward must be bigger than an interest margin
Sustainability-linked debt lowers a government’s interest rate when it meets agreed climate targets, but it remains rare, bespoke and small: Uruguay’s 2023 World Bank loan, the first of its kind, can save the country at most $12.5 million. This brief proposes codifying the instrument, with standard indicators, verification from published data and a published price per tonne. The reward should come from outside, through an intermediary, because a bond whose coupon moves with results makes the government pay for its own reward. Even then an interest margin is too small to pay for major reforms. Guarantee capacity as the reward gives it scale.
Policy brief → · Working paper → · Slides (pdf) → · Policy brief (pdf) → · Working paper (pdf) →
Sustainability-Linked Intermediated Debt Instruments (SLIDIs)
Earlier paper · with Marcello Estevão and Nils Zimmermann
Lowering developing countries’ cost of borrowing while rewarding their governments for agreed environmental, social and governance progress, through sustainability-linked debt issued via an intermediary.